The following video by the Financial Times explains Europe's history with Russian gas and the hard choices facing them. It is useful as a sort of "explainer" on how it came to be, what is happening now, and what are the options for Europe to deal with this gas crisis.
Here are my notes from the video.
How it came to be
The reliance on Russian gas was a deliberate move by the EU, as a way to move away from "dirty" fossil fuels such as coal, as gas produces less CO2 emissions. Gas became a sort of "transitional" energy source as they move away from coal and in some cases, nuclear.
Russia has abundant gas reserves and being just next door, it is a convenient source. A number of pipelines were build to transport gas from Russia. The major pipeline amongst these is the Nord Stream 1. The EU consumes 156 billion cubic metres (BCM) of gas a year before the war, and around 55 BCM of that goes through Nord Stream 1.
The European energy market
Before 1990s, power and electricity came from state monopolies, which built infrastructure networks to provide power to the people. As market liberalization took hold, private companies came to play a dominant role. As profit driven entities, their decisions, driven by what is cheapest for the consumer, may not be optimal from a diversification and energy security perspective.
In the UK, they shut down their gas storage facilities, which was in need of upgrading, because they thought they had plentiful sources of gas supplies. Gazprom, the Russian state own company, also acquired storage facilities in Europe.
With all these dependencies, this created a situation where Russia can exert huge pressure on European governments.
There were blind spots on the part of European nations, such as after the annexation of Crimea. Instead of lowering dependency on Russian gas, they actually increased, from about 20% of European gas demand in 2014 to 38% in 2020.
As Russia became a major source of gas supply, it became difficult for European nations to push back politically, where Russian behavior may be construed as bad, but not reaching level of outright war.
What has happened recently
In the spring of 2021, Russia was supplying gas to Europe, as contracts required them to, but not above that level. This resulted in gas storage facilities being under utilized. As European countries entered the winter, they had much lower gas supplies in storage, increasing Russia's influence over European nations.
The EU was determined to cut its use of Russian gas by 2/3s by end of 2022 and to zero by 2027 and this is a fundamental change in their relationship with Russia. Russian gas supplies became increasingly unreliable, resulting in Russia reducing Nord Stream 1 supply to zero by end of August.
Gas supplies are very important to European countries who use it for heating homes in winter. the EU estimates that if it is an "average" winter, there would be a shortfall of 30 billion cubic metres of gas. They further estimated that if gas consumption can be cut by 15%, there would enough for winter.
However, with Russia cutting gas supplies to zero, this created a major problem for Europe. the EU pushed for countries to cut gas consumption between October 2022 to March 2023, in order to avoid severe problems. The burden is expected to fall on industry. This will affect Germany's automotive industries and may cause the economy to go into recession
What options are available
A solution is to find alternatives for gas, such as finding other fuels for power generation now, to conserve gas supplies for winter. Even so, there is some contention around nuclear power. Germany decided to shut down all nuclear power plants after the Fukushima disaster. Other factors include French nuclear power reactors, which are very old, unfortunately needing maintenance just at the wrong time. Germany has also decide to retain usage of coal for power generation, which will set back plans to combat climate change.
Before the war, Europe has started on policies to derive more energy from green and renewable sources, but due to the time it takes from project conception to going live, these are of no immediate help. For example. the electricity grid needs upgrades to be able to transport electricity from green power sources like wind farms.
At the same time, Europe is sourcing for gas from other countries, primarily Liquified Natural Gas (LNG). LNG is super-cooled, and transported on ships, but the problem is Europe does not have a lot of LNG terminals which can convert these super-cooled LNG back to gas and piped to other countries. These LNG also need an extensive and developed pipeline infrastructure to transport gas. For example Spain does have import terminals for LNG, but lack the pipelines to transport it to other parts of Europe.
As Europe sources for more LNG, this has knock-on effects on the LNG market. As they bid for LNG at higher prices, other countries that already depend on LNG may face higher prices.
In conclusion, the causes of this problem has a long history, and the way out will take years.
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