Russia recently cut off natural gas to Poland and Bulgaria and threatened to cut off more European nations. Benchmark natural gas prices in Europe rose by 25 percent before the market on Wednesday on the news, pulled backed but remained significantly higher. In a memo, the state-controlled entity Gazprom said it shut off the countries because they refused to pay in Russian rubles, as President Vladimir Putin demanded. The EU Commission President Ursula von der Leyen called it “yet another attempt by Russia to use gas as an instrument of blackmail.”
If Europe completely cuts off Russian gas, it will immediately drive the 27-nation membership of NATO into recession. European are collectively paying about $40 million a day for Russian gas – the implications of a complete shut off of Russia gas would be devastating to all sides in the Russia/Ukraine conflict. Russia also supplies 34 percent of European oil. There are options for Russia to find new international markets for their oil, but the same options do not exist for gas. Oil is fungible / maneuverable. Russian gas is not. This is not Liquified Natural Gas (LNG) that can be transported on ships to anywhere in the world, this is gas that must be shipped via existing pipelines.
In light of the conflict Germany has cancelled and halted the opening of its Nordstream II gas pipeline. Nord Stream II is a 1,200km pipeline that will transport gas from Russia (near St Petersburg) to Lubmin in Germany. It runs parallel, under the Baltic Sea to an existing gas pipeline, Nord Stream I. Both pipelines could deliver 110bn cubic metres of gas to Europe every year. It constitutes about a quarter of the total gas used annually by the European Union. Many existing pipelines run through the Ukraine and cannot be moved or altered in the near future. So, there is a co-dependency for the interim between Europe and Russia, as Russia supplies 40% of gas to the continent.
Russia in turn is also seeking new markets for Russia energy, as it pertains to oil:
“We need to speed up the execution of infrastructure projects such as railways pipelines ports and so on which would allow within the next few years to redirect deliveries of oil and gas from the west to the promising markets in the south and east. It is also important to see the prospects together with the oil and gas companies outline the plans for expanding export infrastructure to the countries of Africa, Latin America, and the Asia Pacific”, said Putin.
In February, German Chancellor Olaf Scholz announced that the government is planning to build 2 LNG terminals (one in Brunsbuttel and the other in Wilhelmshaven), claiming this short-term move remains in line with their longer-term move to transition to a low-carbon economy.
“Our current short-term needs can dovetail with what is already needed long-term for transformation to succeed,” Scholz said. “An LNG terminal that today receives gas can tomorrow be used to import green hydrogen.”
It would take at least 4 years to build a terminal to process gas into a transportable, liquified form. Once the process is complete, transport and connections to international distribution networks would need to be established – so Germany and the rest of Europe are far away from their goal of weening themselves off of Russian gas. From a Russian perspective, the nation has made a huge investment (in the multi-billions) in building the infrastructure to provide natural gas to Europe. Using the Nordstream II pipeline as an example, construction for this project alone cost upwards of €10bn – 50 percent paid by Russian-state owned Gazprom, and the other half paid by western energy firms like Shell and ENGIE of France.
Like Germany, Russia also currently lacks the infrastructure to ship natural gas outside of Europe. If Russia began today, it would take at least until the latter part of the decade and a huge investment to build sufficient terminals to become a global provider of LNG. There is no short-term solution to this energy supply/source crisis as the economic costs to both parties in this geo-political conflict are too high.
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