Europe’s Dependence on Russia for Energy

…Europe’s Dependence on Russia for Energy…

President Trump chastised Germany for its reliance on Russian natural gas, and the building of the Nord Stream 2 pipeline.

Germany is highly dependent on imports for its energy, especially as it gets rid of nuclear and coal (lignite).

Russia supplied nearly 40% of Germany’s oil and approximately 35% of its natural gas in 2016. Even 32% of Germany’s hard-coal came from Russia.

Germany is highly dependent on Russia for its energy needs. It’s been estimated by Rice University’s, Baker Institute, that with Nord Stream 2, Germany could become 80% dependent on Russia for natural gas.

Most of Europe is dependent on imports for its energy needs. Only Norway and Rumania are wholly independent for their energy needs. Estonia, while mostly independent, does import natural gas.

Russia has a history of manipulating Europe’s energy supply.

This chart from the Baker Institute’s, Issue Brief, “Russia’s Use of the Energy Weapon in Europe” shows Russian attempts to manipulate oil supplies (in gray) and natural gas supplies (in Blue).

Strategically, Europe could become a large market for U.S. LNG as the U.S. develops its export capabilities. 

Europe currently has 22 LNG import terminals, which, according to King & Spalding of the UK, have an average utilization, in 2017, of only 25%.

The Nord Stream 2 pipeline will likely negatively impact future LNG imports.

Poland and Lithuania, however, are increasing the size of their import facilities and have imported U.S. LNG.

Europe is currently paying around $7.50 per million BTU to Russia for its natural gas.

U.S. exports to the EU have been at a price of around $5 per million BTU, however, this price does not cover full costs, but does help pay for fixed costs. Full cost, including liquefaction and shipping to Europe, is around $7.50 per million BTU.

Current U.S. export capacity is relatively small, at 18 billion cubic meters (bcm) per year, but is forecast, by Charles River Associates, to grow to 90 bcm per year by 2020. Europe consumes around 450 bcm per year, so U.S. export capability in 2020 will represent around 20% of Europe’s consumption.

In addition, Europe’s ability to produce natural gas from European sources will decline as gas fields in the UK, The Netherlands, and Norway decline.

Europe will have a clear choice as to whether to obtain its natural gas from Russia or the United States and could replace Europe’s declining natural gas production with LNG from the United States.

As U.S. export capability increases, the world market for natural gas will become more competitive with the United States competing against Qatar and Australia, and several other smaller producers, for both Asian and European markets.

A wildcard in this equation is whether the EU, especially Germany, persists in its efforts to eliminate the use of fossil fuels so as to cut C02 emissions. If the EU persists in these efforts, it will have to cut back on the use of natural gas, and to the extent possible, eliminate the use of natural gas. 

Meanwhile, Europe could shift some of its natural gas imports to the United States, and reduce Russia’s influence over Europe.

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