The Impact of the Russian Invasion of Ukraine on the European Gas System and Energy Market

The Russian invasion of Ukraine has turned the European gas system upside down. Natural gas flowed from east to west through European pipelines for decades. After the raid, that image is completely tilted.

Gas expert René Peters of TNO: “The entire system was aimed at getting gas from Russia to western Europe. Now the gas flows from left to right to serve eastern Europe.”

You see that well on the BBL pipeline between the Netherlands and Englandsays Peters. “Russian gas there went from Balgzand near Den Helder to Bacton, but since last year gas has been flowing from the US, for example, from England to the Netherlands, and that then goes to Germany.” Unlike England, that country had no facilities for the transshipment of LNG, liquefied gas, last year.

The fact that the gas can flow in two directions is thanks to European policy dating from 2015. With the 235-kilometre long BBL pipeline, it will only be possible for gas to travel from west to east for four years. “Until then, the compressor stations had only been set for one direction.”

Now that prices are almost back to the old level, the question is whether that frugality has come to an end

The change in the flow direction of European natural gas illustrates the impact of ‘Ukraine’ on energy and climate. Yet much has not changed. “Up to and including 2021, Russia supplied almost 15 percent of the Dutch gas requirement. Now that is still about 10 percent,” says Peters. “Since the war, it has only been about liquefied gas that goes by ship, mainly to western Europe. That LNG is not subject to an embargo from the European Union. That doesn’t make much sense either, because liquefied gas can be shipped all over the world.”

Figures from the Ministry of Economic Affairs and Climate show that in the first quarter 7.5 percent of the LNG transhipped in Rotterdam came from Russia. The rest of the Russian gas comes through pipelines, including from Belgium.

Much less question

Another direct consequence of the war on the European continent is the much lower demand for gas. Dutch gas demand was more than 20 percent lower last year than in 2021. Instead of almost 40 billion cubic meters, more than 31 billion cubic meters were used. Now that prices are almost back to the old level, the question is whether that frugality has come to an end.

“It is difficult to assess what really lasting savings are,” says Olof van der Gaag, chairman of the Dutch Sustainable Energy Association (NVDE). “Last year, the Netherlands insulated its houses for 11 billion euros, which is 40 percent more than in 2021. This ensures structural savings.”

At the same time, some large companies have had to temporarily put production on the back burner. At fertilizer producer Yara, with an annual consumption of 2 billion cubic meters, this immediately makes a big difference. “With households there is of course a difference between being thrifty or no longer being able to pay the bill. The latter is not a saving that will make you happy,” says Van der Gaag.

Dictator

According to him, consciousness has indeed changed. You notice this not only at parties, where energy consumption has suddenly become a normal topic of conversation. “Sustainable energy suddenly became cheaper and more reliable than fossil fuels, and that has also changed the industry,” says Van der Gaag. “Shortly after the raid, I was on a task force on security of supply. Representatives of the oil and gas sector were convinced that energy supplies from Russia would continue as usual. Now they also realize that a dictator can block the gas supply, but cannot turn off the sun and wind.”

Gas consumption may have fallen considerably, but that hardly applies to oil. Last year, the drop in use in the Netherlands was about 4 percent. “The big difference is, of course, that prices have risen, but not as much as for gas,” says Hans van Cleef, energy expert at the Public Affairs consultancy. “Oil is really traded on a world market and then the impact of such a war is less great.”

Read also: Is it a big problem if the supply of Russian gas decreases?

The advantage of oil is that the transport costs are lower than for liquefied gas. “Oil is also less easy to replace than gas. If gas becomes very expensive for a power plant, you can easily use a coal-fired power plant instead. That immediately saves a lot.”

Groningen field

But let’s not pretend that the gas market no longer faces threats, says Van Cleef. A harsh winter can make the weather quite exciting. A situation like that of last year cannot be ruled out. “The biggest challenge is ensuring sufficient low-calorific gas, as it came from the Groningen soil. Households use that.”

Nitrogen must be added to other gas, such as imported LNG, to make it suitable for the central heating boiler in homes. But the factory that was built for this purpose is still not operational due to all kinds of problems. Van Cleef: “That is also the reason, I think, that the Groningenveld will close on October 1, but will not really be sealed. In case of an emergency, we can still call on it this winter.”

According to him, there are structural consequences for the international energy market. “Because of the European embargo, hardly any investments are made in Russia. International energy companies are gone, and with them a lot of knowledge. Look at what happened to Venezuela: they can’t get the collapsed production back up there.”

Price explosion

Gas prices may be almost back to their old level, but according to Professor of Energy Economics Machiel Mulder, last year’s price explosion will have a lasting effect. “That prices can become so high that this risk exists – I don’t think this realization will disappear. The feeling of dependence has increased. This is reflected in households, and also in companies. Who says it will still be quiet next year or five years from now?”

The prices are an incentive for the fossil industry to focus even more on oil and gas extraction

Olof van der Gaag chairman NVDE

According to the Groningen economist, it has now been proven that even with ‘indispensable’ energy, the price matters. “You need very high prices for that. The demand for gas has decreased by 20 percent, but that required a huge price increase.”

Mulder sees that investments in sustainability are increasing faster, but notes that the recent ‘fossil’ price increase also has consequences. “These prices are an incentive for the fossil industry to focus even more on oil and gas extraction. Because that is much more rewarding: look at the profits of Shell, for example.”

Last month, the group announced that oil production will not decrease until at least 2030. “You therefore need additional government policy,” says Mulder. “Because you don’t want more to be invested in fossil fuels. Then as a cabinet you have to issue fewer licenses and levy extra profit taxes.”

Energy saving obligation

Due to the recent energy crisis, the government has already introduced additional measures. For example, after 2025 it will be mandatory for households to purchase a (hybrid) heat pump. The energy saving obligation for companies has been tightened. Sustainable investments that pay for themselves within five years – that will be seven years – must be made.

For years that duty was a dead letter, but now there is enforcement. “You see that the ministry goes against the lobby of companies,” says Van der Gaag of the NVDE. “I myself attended consultations in which the old industry played the long-playing record that rewarding investments will be made automatically. That’s just not true. You notice that these kinds of arguments are getting worse and worse at the ministry.”

If energy becomes cheap again, everyone who has invested in ‘sustainable’ will feel disadvantaged

Marjolein Demmers director Nature & Environment

Director Marjolein Demmers of environmental organization Natuur & Milieu sees favorable effects of the recent crisis, but also believes that the cabinet has missed an opportunity. “The question is whether those effects are permanent, because that is really important for the energy transition. Why not set a minimum energy price? If energy becomes cheap again, everyone who has invested in ‘sustainable’ will feel disadvantaged.”

She fears that the industry, in particular, will quickly return to normal. “Companies that use a lot of energy have reduced their production when gas prices rose so much. Of course, these are not structural adjustments. The serious investments that are now being made in the industry largely stem from the agreements of the 2019 Climate Agreement.”

Chances

According to Demmers, the Netherlands should therefore ask itself whether this energy-intensive industry should not move to countries where sustainable energy is cheaper. “We were the cheapest with gas in the past, but we will not be in the future.”

A crisis always offers opportunities and a government should not let that go by, says the director of Nature & Environment. “The Hague did everything it could to become independent of energy producer Russia. But a link with the climate problem was hardly made.”

Perhaps the cabinet was hesitant to make that link, thinks Demmers. “This war is terrible, but you can show and stimulate the positive long-term consequences. The same thing happened with the corona crisis; then you should have emphasized much more that working from home also has its benefits for the climate.”

Newsletter NRC Economy

Get a personal selection of the day’s economic news from one of our editors every working day at noon.

A version of this article also appeared in the newspaper on July 21, 2023.
2023-07-20 19:35:37
#effect #war #Ukraine #energy #market