Europe has cut itself off from Russian gas following the destruction of the Nord Stream 1 & 2 pipelines last year, but imports of Russian liquefied natural gas (LNG) have soared as it seeks sources of fuel and has few other options.

EU imports of Russian LNG have surged of 40% since the onset of the Ukrainian conflict, despite attempts to curtail supplies, according to Kpler, a marine and tanker traffic tracking firm. The member states have purchased more than half of Russia's LNG on the market during the first seven months of this year, according to a recent report by the NGO Global Witness. Spain and Belgium have been the pivotal gateways for Russian LNG shipments into the bloc, ranking second and third respectively after China.

However, analysts at Bruegel say that Europe can wean itself off LNG imports as well as piped gas with a concerted effort to reduce demand and through investing heavily into green alternative sources of power.

Europe used to import circa 150bn cubic metres of gas from Russia per year. That fell to 80 bcm in 2022 following the Russian invasion, but last year the Nord Stream pipeline was working as normal for the first half of the year but then supplies started falling in June after Russia’s Gazprom began to experience “technical problems” with the pipelines. The flow stopped completely after a series of explosions destroyed the pipelines in September. This year experts forecast that Russia will deliver some 25 bcm via the remaining gas pipelines running through Ukraine and another 16 bcm via the TurkStream pipeline through South-east Europe.

However, a full energy crisis last year was avoided after LNG imports to Europe ballooned from 80 bcm in 2021 to 130 bcm in 2022, more or less replacing all the missing Russian gas.

0923 EURO EU imports of Russian LNG by source   BRUEGEL

“In 2022, the EU’s imports of LNG increased 66% year on year. The largest proportion of this growth came from the United States, while Russia is currently the second largest provider of LNG to the EU, though far behind the US. In the first quarter of 2023, Russian LNG exports to the EU were 51 TWh, accounting for 16% of LNG supply and 7% of total natural gas imports,” Bruegel said.

The Iberian peninsula is the largest importer of LNG: in the first quarter of 2023, the Iberian peninsula imported 17 TWh of Russian LNG, or one quarter of total LNG supplies to Europe and 20% of total natural gas imports to Spain and Portugal. Russian LNG made up 18% of Spanish gas supply in 2022, 15% of French supply and 10% of Belgian supply.

As winter looms, European countries are looking ahead and the gas tanks have already been filled to 90% full two months ahead of deadline, but much of the gas going into the reserve has been LNG imported via Spain and Belgium. Unlike piped gas, LNG is not subject to sanctions and EU members are free to buy Russian LNG.

In the period between January and July 2023, EU countries procured 22 bcm of Russian LNG, compared with 15 bcm during the same period in 2021. Both Spain and Belgium clarified that the data does not directly reflect their national purchasing preferences but rather highlights their roles as key gateways for the rest of Europe. Spain in particular relies almost entirely on LNG imports and has never bought Russian pipelined gas, which is largely delivered to the countries in the eastern part of the EU via the old Soviet-era pipeline network.

The current increase in LNG imports from Russia could be a consequence of traders storing Russian LNG in Spanish and Belgian facilities, who have also stored 3.5 bcm in Ukraine’s gas tanks on a speculative bet that the price of gas will increase in the autumn as worries about having enough gas for the winter escalate.

Belgium's ports of Zeebrugge and Antwerp serve as critical gateways to 18 markets, sending LNG to neighbouring countries including France and Germany. Approximately 2.8% of gas consumed in Belgium originates from Russia, and the nation exported its full gas capacity to neighbours during the 2022 energy crisis, The Guardian reported.

While Belgium contemplated legal action to halt Russian supplies, the trade was expected to shift to neighbouring countries with readily available gas storage terminals. The effectiveness of EU-wide sanctions was favoured as a means of limiting Russian supplies but has not been implemented and Brussels remains reluctant to slap sanctions on the LNG business, as Europe is now heavily dependent on LNG imports to power its generating plants.

A Spanish source highlighted that limiting Russian LNG imports would require agreements at the European level that would be difficult to obtain. Spain already rebelled at European Commission President Ursula von der Leyen's suggestion last year for a mandatory 15% gas reduction by member states to create reserves to last the winter, as Madrid regards the gas shortages not as a European problem, but a “German problem.”

Get by with less LNG

“Pipeline gas imports have fallen by four-fifths following Russia’s weaponisation of gas supplies. However, Russia’s exports of liquefied natural gas (LNG) to the EU have increased since the invasion of Ukraine. The EU needs a coherent strategy for these LNG imports,” think-tank Bruegel said in a recent report. “Our analysis shows that the EU can manage without Russian LNG.”

Another energy crisis is possible this year, despite the early filling of the storage tanks; however, even if there is a crisis, experts say that it will not be as severe as that of 2022, when prices decupled. But cutting back on Russian gas cannot happen without some pain.

“The regional impact would be most significant for the Iberian Peninsula, which has the highest share of Russian LNG in total gas supply. Meanwhile, the global LNG market is tight, and we anticipate that Russia would find new buyers for cargoes that no longer enter Europe,” says Bruegel.

Rather than a full embargo on LNG, Bruegel calls for an embargo that is designed to allow purchases only if they are co-ordinated via the EU’s Energy Platform, with limited volumes and below market prices. This could be accompanied by the implementation of a price cap on Russian LNG cargoes that use EU or G7 trans-shipment, insurance or shipping services, similar to the current oil price cap sanctions  regime.

Part of the goal of an embargo would be to reduce the amount of money Russia earns from LNG exports.  In the year after Russia’s invasion of Ukraine, LNG exports to the EU were valued at €12bn. Unless there is decisive change from the current situation, the EU could pay up to at least another €9bn to Russia in the second year of the war.

0823 EURO EU imports of Russian energy table March 2022 vs March 2023  BRUEGEL

In March 2023, the European Union started to develop a mechanism to allow member states to block Russian LNG imports by limiting EU countries from booking LNG import infrastructure.

Bruegel suggests four possible plans to deal the problem of Europe’s Russian LNG dependence:

Wait-and-see: the EU would continue to import Russian LNG and would wait to introduce sanctions until the second half of this decade, when LNG markets are less tight;

Soft sanctions: entails a partial effort to reduce imports of Russian LNG without dramatically affecting long-term contracts that form the basis of much EU-Russia LNG trade;

EU embargo: sanctions on Russian LNG would force companies to declare force majeure on long-term contracts and no Russian LNG would enter the EU;

and Bruegel’s preferred solution of

EU embargo with EU Energy Platform offer: where the bloc tears up the existing trade structure and returns to the table as one entity to negotiate via the new EU Energy Platform for joint purchasing of gas, which buys limited amounts of gas and at a discount or capped prices.

In these scenarios if all Russian LNG deliveries were completely halted now then Bruegel says the EU25 will be well able to fill storage facilities over the summer months without any Russian LNG, with the only consequence being a slight postponement of the moment when storage reaches full capacity. While stored volumes will deplete at a marginally faster rate, the EU25 will also not face a substantial additional challenge to manage the winter of 2023-24. However, Iberia would have a bigger challenge and could empty its storage tanks by January, if Spain could not source more gas on the international market or was unable to buy gas via pipeline from Algeria.

For Russia if the EU halted all purchases that would create a headache, as Russia would have to find new customers. In 2022, Russian LNG exports to the EU amounted to 197 TWh, or 44% of Russia’s total LNG exports. Exports to China accounted for a further 20%, and the rest of the world 36%. But LNG markets remain tight and Russia has already shown itself willing to offer its hydrocarbons at deep discount to get sales as the Kremlin is more interested in revenues than the profit margin while the war continues.

However, halting Russian LNG exports completely would entail breaking long-term contracts with Russia’s LNG champion, Novatek.

Exports to the EU from Russia mainly depart from the Yamal LNG terminal, which has an export capacity of 16.5mn tonnes per year of LNG (235 TWh).

The ownership of the terminal is a joint venture between Novatek (50.1%), Total Energies (20%), China National Petroleum Corperation (20%) and the Silk Road Fund (9.9%). Over 90% of the exports from the Yamal terminal are covered by long-term contracts, forcing companies to declare force majeure to exit the existing long-term contracts.

0823 EURO LNG long term contracts with Novatek table BRUEGEL

The better plan, says Bruegel, is to continue to buy Russian LNG but transition to a single energy platform that collectivises all EU purchases via a single body that has more market power and can dictate prices and supplies.

The platform was initiated in April 2022 as a joint purchasing mechanism for the EU. In the first tender, 63 companies submitted requests for a total volume of 120 TWh of natural gas. This becomes a vehicle to co-ordinate purchases of Russian LNG, after terminating the long-term contracts with Novatek.

“This co-ordination mechanism would provide a pathway for the termination of long-term contracts that run post-2027, while smoothing any bumps to the gas market caused by the gradual phase-out of Russian LNG. It would also allow the platform mechanism to distribute volumes to areas of greatest need. There is no guarantee that Russia would wish to engage with such a strategy, and Russia might prefer to refuse any LNG exports to the EU,” says Bruegel. “Russia’s compliance with the oil price cap, following an earlier declaration that it would be ignored, does, however, suggest co-operation may be forthcoming… But pursuing this fourth option must only be done on the basis that the EU is ready for a full termination [of Russian LNG sales to Europe].”