Can Europe survive without imports of Russian oil and gas? At a recent Prospect event on that subject Andrew Simms, Myles Allen and I all recognised that we have moved from what was believed to be a short, sharp shock to a drastic change in the west's relationship with Russia. Alongside this, there has been a fundamental rethinking of both political and economic alliances; the possible expansion of Nato is one such example. In this environment, trade relations also change radically. For Europe in particular, a future without Russian oil and gas on which the region is so dependent is suddenly a real possibility.
How easily can one adapt to such a scenario? The rises in oil and gas prices in the last few months, and certainly since the Russian invasion of Ukraine, have been unsettling for us all. Of course, if that encourages a general switch to renewables and the end of fossil fuel investment—which the International Energy Agency (IEA) argues is needed to prevent catastrophic temperature rises—then that may be a good thing. But it doesn't look as if things are going that way. One, the short-term cost is already proving to be difficult for many countries to bear. Second, the UK is about to grant new oil and gas exploration licences in the North Sea. Then there is the distinct likelihood that countries such as India and China will take up the role of the EU as major recipients of Russian energy. So even if Europe invests more in green energy, the increased use of Russian fossil fuels by others could negate this.
Underlying all this is the expectation that world energy demand will continue to rise inexorably over the next few decades. The path may be disrupted by the uncertainties in global GDP growth caused by the war in Ukraine and the repositioning of geopolitics away from the structure we have got used to since the fall of the Berlin Wall in 1989. Nevertheless, and despite considerable energy efficiency improvements over the last few decades, the US Energy Information Administration in Oct 2021 still expected a further rise of 47 per cent in global energy demand by 2050. Most of that would come from emerging economies, with oil still the major source of energy. Renewables would also increase their share to the second highest over that period. But it looks likely that even though net zero targets should be met, fossil fuels will still play a part in the total energy mix.
So how sustainable is the European climate change trajectory as it tries to wean itself off Russian oil and gas? It will be difficult, given the region's 65 per cent energy import dependency. A move to renewables has been rising, helped by subsidies to the new “green” sectors tightening regulations and the Emissions Trading Scheme that has recently started to bite a bit more. But even before the war, the realisation that it would be a long process of disengaging from fossil fuel dependency had resulted in nuclear and gas being designated as “green” in the EU’s latest classification of what constitutes “sustainable” activities, which are deemed to contribute to the EU’s 250 goal for climate neutrality. This designation was understandable, given Europe’s 40 per cent dependency on Russian gas supported by a series of pipelines from Russia—many constructed with EU countries’ blessing and with European banks and European energy firms’ involvement.
The short-term costs are therefore significant, though Russian energy dependency varies greatly among EU countries. The Germans already have a plan for rationing gas and for taking control of energy companies in difficulty, should prices suddenly spike in the event that gas and oil supplies are cut, either as a result of EU bans or Russian action. Other countries, like Hungary, are vetoing plans to ban oil imports from Russia by mid-2022 and all crude petroleum products by the end of the year. There are suggestions that countries likely to suffer most will get compensation for the impact that such a ban, if extended to gas as well, will have on their economies. There are also suggestions that all EU countries should buy as a bloc and cap the price they are prepared to pay for energy. There is an EU requirement now to increase depleted gas reserves to 80 per cent capacity. This may still require, for a while at any rate, a certain amount of Russian gas, as imports of liquefied natural gas (LNG) alone may not be enough to achieve this.
Maybe more can be done. The International Energy Agency has produced its own 10-point plan for the EU to wean itself off Russian energy imports by greater use of heat pumps, better energy efficiency, temperature control and renewables generation to reduce dependency by a third by the end of 2022. Germany is finally intending to build some LNG terminals, which it currently lacks.
All this may have some effect. But it will take time. And although the focus on renewables and nuclear is bound to increase, the cost of living hit without Russian energy is likely to be substantial—in the short and medium term at least. Yes, the Baltic states, flush with LNG terminals and facilities, have stopped importing Russian gas. The transition for Germany, Italy, Slovakia, the Czech Republic and Greece, to just name a few, will be painful and costly. Poland and Bulgaria have already had to deal with having their gas supply cut off unilaterally by Russia.
In this prolonged war scenario and with sanctions multiplying, growth will be negatively affected. So for the moment countries are mostly still buying Russian oil and gas, if they can, with guidance coming out of the European Commission on how to do this without breaking sanctions. Extra oil is sought from the Middle East. LNG purchases are rising. Europe may eventually manage to reduce dependency on Russian oil and gas, but it doesn’t look as if it will wean itself off oil and gas entirely any time soon. And what about the climate targets? For the moment, the need for increased energy security and efforts to contain the cost of living crisis are leading to a change in emphasis. Electricity bills are being subsided, renewable electricity contributions in household energy bills are being scaled back, VAT on energy and fuel has been cut in a number of countries and contracts for gas and oil with new suppliers are being actively sought. Will it derail the net-zero targets? Probably not in the long term. But what is becoming clearer is that oil and gas need to be part of the overall energy mix for some time to come—and we have to find a sensible way to deal with that reality.
