Europe’s dependence on imports of energy commodities from Russia in the context of Russia’s invasion of Ukraine

MONETARY POLICY REPORT | SPRING 2022 (box 1)
(author:  Jan Hošek)

In the context of Russia’s invasion of Ukraine, the possible economic impacts of the sanctions imposed by the EU and potential retaliatory sanctions by Russia are currently being discussed. The energy situation and energy security of European countries is among the most important aspects. This box sums up the main facts essential to these considerations.

As regards fossil energy commodities, the EU has long been most dependent (over 90%) on imports of oil and oil products (see Chart 1). Their share in the EU energy mix was 34.5% in 2020. Natural gas ranks second (23.7%).^[1] The share of gas imports in total gross energy consumption has been rising apace since 2014, driven by growing consumption and falling production in Europe. Only in the case of coal do the EU’s  imports account for less than half of its consumption.

Chart 1 – The EU is dependent on imports for more than half of its energy consumption
share of imports in total gross energy consumption in EU in %; source Eurostat

In 2021, Russia was the EU’s fourth-largest trading partner in terms of EU exports (with a share of 4.5%, worth EUR 89.5 billion). As regards imports to the EU, Russia was the third-largest partner (with a share of 7.9%, worth EUR 158 billion). Energy accounted for almost 63% of total Russian exports to the EU. Table 1 shows Europe’s dependence on energy commodity imports from Russia. Oil and oil products transported by pipeline or sea tanker have the largest share in imports of energy commodities from Russia to the EU (see Table 2). The share of natural gas, which is transported mainly by pipeline, is also significant, but tanker imports in liquefied form (LNG) are not negligible either. Coal accounts for the smallest share of energy imports from Russia. Chart 2 illustrates the importance of fossil fuel imports from Russia to the EU.

Table 1 – More than a third of the oil consumed in the EU is from Russia; for gas the share is even higher
share of exports from Russia in total energy consumption in EU in %; source Eurostat (for EU) and Vox EU (for Germany)

Table 2 – Oil accounted for almost half of Russian exports of energy commodities to the EU in 2020
structure of Russian energy commodity exports to EU; EUR billions and %; source Eurostat

Chart 2 – Coal is the energy source for which the EU is most self-sufficient
share of total EU consumption in %; data for 2020; source Eurostat

If Russian energy supplies were restricted or completely switched off (at the behest of either party), it will be crucial what alternatives there are for securing energy commodity supplies to Europe.

In the case of oil, oil products, coal and LNG, existing trade flows in the global market would probably be redirected to a larger extent. Transport and logistics costs would of course go up as a result. Although no sanctions have been imposed on oil exports from Russia yet, many large Western companies are already voluntarily avoiding new purchases of Russian commodities (for reasons of reputation or financial caution). Russian oil is therefore currently being sold at a considerable discount to Brent (even exceeding USD 25 a barrel), so part of it is likely to find other buyers, from Asia in particular, in the medium term. The IEA has said that supplies of Russian oil and oil products based on long-term contracts and pre-invasion trades were being delivered to the global market in March. In April, however, Russian exports were expected to fall by 1.5 million barrels a day (mb/d), down from a total of 8 mb/d. A drop of as much as 3 mb/d is expected from May.^[2] Capacity sufficient to compensate for a shortfall of Russian oil of that magnitude is currently available in Saudi Arabia and the United Arab Emirates, and possibly Iran (if the nuclear treaty with Western countries is renewed and Iran gains access to world markets). Industrial stocks of oil and oil products in OECD countries are falling further and in January were at their lowest level since April 2014. They would cover around 57 days of expected future consumption, a figure which can be generalised for European countries. The IEA has responded to the decline in Russian oil supplies to world markets by repeatedly releasing stocks from OECD countries’ strategic reserves. This has temporarily eased the upward pressure on prices.

The situation is worse for natural gas exports from Russia to the EU. Restrictions on supplies of Russian gas,^[3][4] which is transported to Europe mainly by pipeline, would lead to a corresponding decrease in the amount of natural gas on the global market. There is no way, even in the medium term, of redirecting Russian natural gas exports to, say, China (the gas field is geographically remote and there are no pipelines) or of making it available as LNG to other customers by sea (Russia’s liquefaction plants have insufficient capacity).

Europe has more or less sufficient LNG import terminal capacity, but whether the existing pipeline network would allow gas to be redistributed from terminals in the south and west of Europe to Central and Northwest Europe is an open question. However, it is almost certain that Europe would have to “compete” for higher LNG supplies with countries such as Japan, South Korea and China, which are also dependent on LNG imports and mostly use long-term contracts with Australia, Qatar and the USA. These countries could increase their current LNG purchases under their contracts and redirect the excess to Europe (under intergovernmental agreements, for instance). However, this would lead to a corresponding decrease in the amount of natural gas available on spot markets and – especially in the event of bad weather – drive the already high prices of gas up even further.^[5]

Europe is critically dependent on natural gas.^[6] This is mainly due to a reduction in electricity production at coal and nuclear power plants and the large-scale phase-in of generation from renewable sources, the output of which is highly weather-dependent. Gas power plants are currently practically the only way of smoothing swings in output sufficiently.^[7] The announced reduction of the EU’s dependence on natural gas will be very difficult to implement, partly because gas is used not only to generate electricity, but also to produce heat in industry and for households. Replacing gas would lead to a huge increase in electricity consumption and a waste of funds previously invested in gas infrastructure.^[8] In the short run, natural gas consumption in the chemical industry, where gas is an input commodity (for the production of ammonia and nitrogen fertilisers, for example) can only be reduced if production is lowered commensurately. The decline in natural gas storage in the EU halted in March 2022 at slightly below 30 billion cubic metres, close to the lower bound of the range observed in 2015–2020. Less than one-third of gas storage capacity is thus filled on average. Refilling should start in April as the heating season ends. Thanks to the mild winter this year the catastrophic scenarios did not materialise, but replenishing storage will be difficult due to high gas prices, which are being signalled for the summer as well.^[9]

^[1] The energy mix also consists of renewable sources and biofuels (17.4%), nuclear energy (12.7%) and solid fossil fuels (10.2%).

^[2] J.P.Morgan analysts estimated that of its total production of 11.05 mb/d in February, Russia exported around 6.5 mb/d (4.5 mb/d as crude oil and 2.0 mb/d as oil products), i.e. roughly 7% of global production. Around 3.6 mb/d went to the European market (1.6 mb/d via the Druzhba pipeline and 2 mb/d by sea tanker), covering roughly 30% of consumption there. The study also says that the situation in Ukraine could lead to a drop in Russian supplies of 1–2 mb/d in the short term, which Europe will find hard to replace. The EU may thus face escalating supply chain problems and higher energy commodity price inflation.

^[3] In their study (external link) of early March 2022, J.P.Morgan analysts considered three scenarios for gas supplies from Russia to the EU and their impacts on natural gas prices:

• No sanctions are imposed on Russian gas exports. Exports based on long-term contracts continue at almost the 2021 level. The average spot price (TTF) is 81 EUR/MWh in 2022. However, it includes a higher geopolitical risk premium and attracts more imported LNG into Europe.
• Russian gas exports fall by about 30% due to longer-lasting damage to the infrastructure in Ukraine. The average spot price of natural gas immediately rises to 180 EUR/MWh (the level recorded last December). This attracts enough LNG and causes the price to drop. However, the price stays above 110 EUR/MWh. This reduces demand from Asia, where gas is replaced by oil.
• Russian gas exports to Europe halt completely (due to EU sanctions or Russian retaliatory sanctions). The price soars well above 200 EUR/MWh, but the supply of LNG on the global market is unable to make up the shortfall. Europe does not even have enough regasification and redistribution capacity to accept such volumes of LNG. This would mean a sizeable restriction of consumption in industry and later also household consumption, low stocks before the next heating season and many other problems.

^[4] The restriction of supplies became a reality at the end of April. On 27 April, Russia’s Gazprom announced that it was halting supplies of gas to Poland and Bulgaria.

^[5] See also the box What is driving the record-high growth in gas and electricity prices in Europe? in MPR – Winter 2022.

^[6] As estimated by Corbeau (external link) (2022), the share of imports from Russia in total natural gas imports to the EU was 45% in 2021 and Russian gas accounted for around 40% of total consumption. Approximately 91% was pipeline gas and the rest LNG. Supplies to the EU have recently declined in favour of supplies to Turkey.

^[7] The price of electricity from gas power plants strongly affects the price of electricity on energy exchanges, in line with the marginal cost concept. Given the recent growth in the price of gas (coupled with a rise in prices of emission allowances), this has caused electricity prices to rocket.

^[8] Although gas accounted for just 8% of electricity generation in 2019, its share in total EU primary energy consumption was 21%. Oil and oil products had the largest share of primary energy consumption (41%). Electricity from non-fossil sources also accounted for 21%.

^[9] Traders (mostly commercial firms), who traditionally buy gas stocks over the summer (at the usually lower summer prices) to cover higher demand during the winter (especially for heating), are not motivated to fill their storage tanks before the next winter under the current market conditions, as they face a risk of financial losses. This is another challenge for the European administration, which, besides working to make Europe less dependent on Russian gas, is trying to secure the minimum necessary gas stock in Europe.