Can Russia cut off gas supplies to Europe?

Can Russia cut off gas supplies to Europe?
If the West imposes "massive sanctions" on Russia, could it retaliate by cutting off gas deliveries to Europe? Analysts say that would be like dropping a nuclear bomb. / wiki
By Ben Aris in Berlin January 28, 2022

With the US threatening Russia with “massive consequences” if it invades Ukraine, Russia has threatened to take “military and technical” action in response. Is cutting Europe off from gas deliveries one of the Kremlin’s options? Some analysts say that would be like detonating a nuclear bomb, with the same mutually assured destruction for both sides.  

Russia’s use of gas as a political weapon has become a common trope following Gazprom’s decision to cut off Ukraine’s gas supplies in the winter of 2009 and there have been at least two less significant episodes since then.  

However, the Kremlin has protested that in the “gas war” with Ukraine in 2009 it was simply shutting down supplies because Ukraine was stealing gas from the pipelines and unable to pay the bill.  

“It was a force majeure situation,” Igor Shuvalov, the first deputy Prime Minister, told bne IntelliNews in an interview at the time. “They couldn't pay their bill, so we cut the supplies. It's a perfectly normal practice.”

Whatever the truth of the matter, the decision to plunge not only Ukraine into darkness, but many EU countries that depend on transit gas for power and heating, did tremendous reputational damage and almost certainly accelerated European efforts to diversify gas supplies, which has since morphed into a drive to switch to renewables.  

But Europe is still heavily dependent on Russian gas, which makes up between 30% and 40% of the energy mix in any given year. Gas in European storage tanks just fell below 40% this week, its lowest level in the last five years. As bne IntelliNews reported, Europe is on course to end the heating season at the end of March with the tanks only 10% full – just enough to scrape through this year, but even if Russian supplies were cut off then Europe would be unable to refill them and would face a major energy crisis next year that would make this year’s gas crisis, caused by a V-shaped market, look like child’s play.  

“Such a crisis… would almost certainly include rolling electricity blackouts as well a massive shortage of heating (gas is directly used for heating in many European homes and business and can’t easily be replaced by other fuels). European consumers would literally be freezing in the dark before being hit with power bills very few could afford to pay,” warns Roland Smith, the senior oil and gas analyst with BCS GM. “The truth is, Europe has no substitute for Russian gas.”

And thanks to the Ukrainian gas clash Europe has already made a great deal of progress in diversifying away from its dependence on Russian gas. When deliveries started in the 1970s Russian gas made up some 70% to 80% of supplies; however, the share has fallen steadily since then and Russian gas currently accounts for just under 35% to the total, but even that is vital to keeping the lights on.  

“The “gas weapon,” to the extent it exists, can be viewed like nuclear weapons: “Too powerful to ever be used” or, for that matter, to even be mentioned directly in negotiations over this or that disagreement between countries,” argues Smith. “Rather, such weapons are best left in the background, with everyone fully understanding that they exist and that by existing, they limit the scope of escalation of disagreements in international relations.”

While shutting off the gas spigot would have enormous and immediate effect in Europe, the long-term consequences for Russia’s gas business make it an extremely unappealing option for Moscow. The problem is that gas deals usually run for decades and so the reputational risks are key to the business. And Russia has over a hundred years worth of gas reserves under the ground in the Yamal complex in the Arctic.  

Part of what has been driving this year’s gas crisis has been Russian President Vladimir Putin's insistence that Russia won’t ramp up gas deliveries beyond its contractual obligations unless Europe signs off on new long-term contracts. Russia has been investing heavily into developing both the fields and also the infrastructure – the controversial Nord Stream 2 gas pipeline specifically connects the Yamal fields directly to Germany, Gazprom’s biggest customer – but needs long-term contracts to make this business profitable and viable. Taking the long-term view, the Kremlin is uninterested in making a few extra bucks from the spot market in Holland during the recent soaring price for gas if it can lock in solid profits for the next 30 years.  

Despite its history with Ukraine, Gazprom and Putin have repeatedly insisted that Russia is a “reliable energy supplier.” Indeed, during this winter Gazprom has scrupulously stuck to the terms of all its supply contracts. And when it transited less than the 65bcm of gas it signed off on in a new transit deal with Ukraine in December 2019 the Russian state-owned company simply paid the transit fees for 2020.  

“Keep in mind that since the start of Soviet-German gas contracts in the early 1970s, the mind-set of the Russian side has been “meet the contract at all costs.” At one point, experiencing some technical problems, the Soviets reportedly even cut Leningrad off [from] gas for a few days in order to make sure the export contract was fully filled,” says Smith. “Times change, of course, and a couple of hiccups have been experienced over the years, but I think this prioritisation is pretty deeply embedded in Gazprom’s corporate culture (although, obviously, decisions of such magnitude would be taken in the Kremlin, not Gazprom headquarters).”

Smith speculates that if Gazprom were to do the 2009 clash with Ukraine over again it would now choose to keep the gas flowing, as the decision to cut Ukraine off has already done significant damage to its business and continues to cause major problems in getting those crucial long-term contracts signed now, 13 years later.  

“I think Russia is extremely unlikely to purposefully cut Europe off from gas,” says Smith. “I think the Kremlin is fully aware that such an action would have long-term consequences for Russia, the cost of which are impossible to calculate but would almost certainly exceed the value of any short-term gains.”

What if war broke out?

While the Kremlin has repeatedly denied it has any intention of attacking Ukraine, what would happen if Russia did invade is neighbour?  

 

There is a high chance that the Druzhba (Brotherhood) gas pipeline would be damaged or destroyed in a Russian onslaught. Even if only a smaller flare-up occurred, contained in the already disputed Donbas region, there is a tangle of gas pipelines nearby that could get caught up in the conflict.  

Given the Kremlin would try and sell this war as a “local conflict” as both the US and Nato have said clearly they will not send troops in to protect Ukraine, then the Kremlin is likely to keep the gas flowing to Europe and make the clear distinction between Planet Business and Planet Politics, as bne IntelliNews has reported on many times.  

That means ramping up supplies via the Yamal-Europe pipeline across Belarus and Poland from near zero now to 100% to help offset the loss of Ukrainian transit. Smith speculates that Gazprom may even simply turn on Nord Stream 2 without regulatory approval, which has been ready to start operations at short notice for months already, as an emergency measure and just pay the fines later. Europe may even accept this decision simply to keep the lights on.  

Could LNG fill the gap? While LNG deliveries provide yet another way to diversify away from Russian piped gas, the LNG business is still too young to make much of a difference. Gazprom sells between 180 bcm and 200 bcm a year to Europe, which is equivalent to a third of the total LNG production. However, many countries in Asia, such as Japan, are entirely dependent on LNG for their gas. Diverting enough of this gas away to supply Europe – about half the total supply – would send LNG prices skyrocketing and cause a major energy crisis in Asia, says Smith.

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