War in Ukraine: what are the options for Europe’s energy supply?

Europe is likely to remain reliant on Russian gas in the short term. Over a longer period, there is more scope for reshaping Europe’s energy policy, but this would come at a cost. Fine tuning policy to balance climate objectives against security of energy supply will be difficult.

Through swift action, sanctions and relaxation of immigration rules, European countries have made it clear that they stand with Ukraine in the conflict with Russia. The recent United Nations (UN) General Assembly vote highlighted that this support extends beyond Europe: 141 of the Assembly’s 193 members supported the UN resolution demanding Russia end military operations in Ukraine, with just five countries voting against it.

As economic sanctions take effect, the already struggling Russian economy is reaching new lows. Russia is scrambling to keep the rouble from tumbling even more quickly than it already has by increasing interest rates and by requiring exporters to sell 80% of their foreign currency revenue. But rating agencies have downgraded Russia to ‘junk’, which will make any investor think twice about their Russian assets.

As a result, Russia’s only standing income stream is its fossil fuel exports, especially natural gas exports to Europe. The idea that European countries are effectively financing a war they condemn is anathema to the public and politicians alike. But could Europe realistically meet its energy requirements without Russia? Perhaps in the medium to long term, but it is unlikely in the immediate future.

How important is Russian gas in the European energy system?

Natural gas has been becoming increasingly important in Europe’s energy mix. Ignoring temporary dips, European natural gas demand has been on the rise since at least 1965 (when data were first comprehensively collected). In 2020, it accounted for approximately 25% of European primary energy consumption (Figure 1).

This upward trend is due, at least in part, to Europeans’ desire to substitute away from coal, which releases much more carbon dioxide per unit of energy than natural gas. Europe has managed slowly to reduce coal’s share in its energy mix from around 19% in 2000 to less than 12% in 2020, while also reducing oil’s share from 38% to 34% over the same period. With nuclear and hydropower's contributions remaining relatively constant, natural gas and renewables have gained importance (Figure 1). This has made natural gas a key fuel in meeting Europe’s energy demand.

Figure 1: European energy mix

Source: Authors’ calculations based on BP Statistical Review of World Energy, 2021

This natural gas comes from many countries. Approximately 40% is produced in Europe. The rest is imported from other countries, particularly Russia. In 2000, over 56% of natural gas imported to Europe by pipeline came from Russia. The good news is that the share of Russian gas in European pipeline imports has been declining steadily since then. In 2020, it represented only around 38% of Europe’s pipeline imports (Figure 2).

Figure 2: European natural gas imports by pipeline (in billion cubic metres)

Source: Authors’ calculations based on BP Statistical Review of World Energy, 2021

In this sense, Europe’s dependence on Russian gas has diminished over the last 20 years. But Europe has not been importing less gas from Russia. In fact, the volume of gas imported from Russia via pipelines has been relatively stable since 2000. Russian gas accounts for a smaller proportion of Europe’s total imports because its demand for gas produced elsewhere has been increasing over the years. This reflects declines in European production and increases in demand overall, and has made imports from Russia a smaller share of the larger whole.

The other key supplier of European natural gas is Norway. Norwegian pipeline exports to Europe more than doubled between 2000 and 2020, now accounting for around 24% of total pipeline imports (Figure 2).

Compared with the rest of Europe, the UK is less exposed. In 2020, pipeline imports from Russia accounted for less than 16% of the UK’s total pipeline imports, and most of the UK’s pipeline imports come from Norway.

Overall, there is no denying that pipeline imports from Russia are critical for Europe. Could Europe realistically move away from Russian gas? Could it do so quickly?

Pipeline gas versus liquefied natural gas (LNG)

Pipelines are politically contentious. They often span multiple countries, they are expensive and they take years to construct. Yet once in place, gas can flow freely within certain engineering limits.

The alternative is to transport natural gas in a liquefied form. We have the technology to do this – LNG is often loaded onto specialised vessels that can handle the low temperatures and high pressures involved. Once the vessel arrives at its destination, sophisticated LNG terminals are required for regasification. This infrastructure is also costly, so LNG trade is not a cheap alternative to building pipelines.

European gas supply relies on both technologies. Europe’s main LNG trading partners have changed over the years. Back in 2000, Algeria dominated, with some contribution from Nigeria. But by early 2010, Qatar had become the largest player, supplying just over 50% of Europe’s LNG imports.

Following the rapid growth in US natural gas production in 2018 and 2019, Europe’s LNG imports from the United States expanded very quickly. In 2020, Europe imported over 22% of its LNG from the United States, compared with just 4% in 2017 and 6% in 2018 (Figure 3).

Figure 3: European LNG imports (in billion cubic metres)

Source: Authors’ calculations based on BP Statistical Review of World Energy, 2021

LNG trade is critical in situations where pipelines are not viable. Currently, pipeline trade represents approximately 60% of global trade in natural gas. The situation in Europe is quite different because of the extensive pipeline network that has developed across the continent.

Currently, European pipeline imports significantly exceed LNG imports. To get a sense of the scale, Figure 4 plots shares of imports from Europe's top natural gas trading partners. Pipeline imports (shown in shades of blue/grey) are much larger than LNG imports (shown in shades of pink).

But LNG is growing. In 2016, nearly 90% of European imports were via a pipeline; by 2020, this number had shrunk to 80%. This is encouraging and signals that European countries may be able to expand LNG capabilities in an effort to reduce imports from Russia.

Figure 4: European natural gas imports by type and origin (in billion cubic metres)

Source: Authors’ calculations based on BP Statistical Review of World Energy, 2021

Is Russian natural gas unavoidable for Europe?

There are two main ways in which Europe could move away from Russian gas. The first option is to reduce gas consumption, either by substituting towards a different source of energy or by reducing overall energy consumption. The second is to move away from Russian imports but retain gas in the energy mix at its current level.

We could think of the former as diversification of the energy mix and the latter as diversification of natural gas supply. Because of the region's existing dependence on gas, there are no easy options in the short term. But over the longer term, diversification of supply and the energy mix are possible, and the latter is likely to have the largest effect in shoring up Europe's energy security.

Reducing gas imports from Russia in the short term would be difficult to achieve. In 2020, Europe imported 185 billion cubic metres (Bcm) of gas from Russia. The International Energy Agency (IEA) recently assessed Europe's scope to seek gas from elsewhere. In their view, the continent could realistically import an additional 10 Bcm of natural gas via pipeline from Norway and Azerbaijan, plus 20 Bcm as LNG from other exporters around the world, such as Qatar.

Constraining factors include tight limits on the export capacity of major producers, international competition for the existing supply of the fuel (particularly from Asia) and limits on the continent's regasification capacity (both geographical and technical in nature).

The IEA also recommend a raft of further measures for lowering Russian imports, including mandatory minimum levels of gas in storage across Europe (to smooth peaks in demand, particularly next winter), accelerated development of new renewables capacity and the rapid replacement of domestic gas boilers with heat pumps. They estimate that if all the measures were implemented effectively, with considerable financial and political support from governments and institutions, Europe could reduce its imports from Russia by around 50 Bcm.

But all this would be to cut just over a quarter of yearly imports. At present, Europe only has enough gas in storage to cover two months of demand at average winter levels. Therefore, Europe is likely to remain reliant on Russia, at least in the short term.

What are the options in the longer term?

Over the medium to long term, there is more scope for reshaping Europe's energy policy. Germany, for example, has already announced that it plans to accelerate the construction of its first LNG import terminals. One of these was previously planned as a floating terminal – a design that is typically more cost-effective and takes less time to develop.

Refitting an existing vessel as a floating storage and regasification unit (FSRU) can be achieved within 18 months, while onshore terminals take much longer. FSRUs can also be redeployed in other locations when capacity requirements shift (reducing the likelihood that they become stranded assets). Where feasible, this would be a sensible way of rapidly building more LNG import capacity across the continent, giving the bloc more control over the diversity of its gas supply, and consequently, reducing its dependence on Russia.

In addition to expanding flexible import capacity, Europe also needs new contracts with other LNG exporters. As Figure 4 shows, at present, pipeline imports from Russia dominate LNG imports. These contracted volumes will therefore need to be substantial if they are to make a serious dent in Europe’s gas dependency problem. Consequently, they need to be sought from exporters with the requisite production capacity and industry maturity.

The United States is the world’s largest gas producer and a natural partner to seek out. In 2020, it produced 915 Bcm of natural gas but also consumed 90% of it domestically. By comparison, Russia produced around 640 Bcm, and exported nearly 240 Bcm. As such, the United States cannot currently meet Europe’s demand, but has the capacity to do so in the future.

It has reportedly granted construction and export permits for LNG terminals that would have a combined annual liquefaction capacity of around 220 Bcm. By 2025, half of these could be online and furnishing Europe with significant flows of gas.

Because a diversified supply spreads risk, it may also be prudent to seek additional contracts with suppliers in other countries. Qatar and Australia are among the obvious choices. In 2020, they exported around 106 Bcm of LNG each. In Qatar, work is already underway to increase the country’s production and LNG export capacity within the next five years.

Importing LNG is not the only option. At the end of 2020, the long-awaited Southern Gas Corridor became operational, linking Greece, Bulgaria and Italy with gas production facilities in Azerbaijan via Turkey. The pipeline is now expected to deliver 10 Bcm to the continent each year, helping to diversify supply away from Russia. Crucially, this was designed with expansion in mind: with further investment, it could support a further 10 Bcm of imports per year. An additional proposal to link Eastern Mediterranean producers with Italy and Greece could bring in a further 10 Bcm each year from 2025.

These options come with some strings attached. If Europe were to pursue them, it would need to commit to fixed long-term contracts, which are potentially costly due to the uncertainty surrounding gas demand.

On the one hand, as we make the transition away from coal, gas demand is likely to rise, which is reinforced by the fact that gas is a key complement to renewables, compensating for the intermittency and inflexibility of the latter. On the other hand, gas demand must fall if Europe is to meet its emissions targets.

Should countries develop new infrastructure and negotiate these fixed contracts to ensure that their current needs are met, recognising that they may not need the same gas volumes in the future? Or should they under-commit assuming future targets will be met?

In the longer run, ensuring energy security will require investing heavily in new renewables capacity. This expansion of capacity will need to accelerate rapidly. In the meantime, exploiting existing nuclear and hydroelectricity generation capacity should be a priority.

From a climate perspective, carbon capture, use and storage can help to mitigate some of the effects of any fossil fuels that we rely on during the transition. The transport sector is key, so it is critical for Europe to support the rollout of the infrastructure required for electric vehicles. It is equally important to be uncompromising in the pursuit of energy efficiency improvements to bring overall energy demand down.

What are the options in the short term?

If Europe were forced to adjust quickly, some options are available but they are likely to be very costly. Given recent announcements, the UK and European Union (EU) appear determined to pursue alternatives quickly.

Due to logistical and technical difficulties, we believe it would be challenging to achieve these proposals. For example, the most significant element in the EU Commission’s REPowerEU report hopes to procure 50 Bcm of additional LNG imports next year. This volume is 2.5 times more than the IEA estimated would be available, and the Commission did not specify where such volumes could originate from.

Given the current tightness of the market, this is likely to be optimistic. Further, many of the planned measures have a long time horizon and would not address immediate concerns.

One possibility would be to substitute away from gas towards coal or fuel oil. There are fewer issues with coal supply, and Europe still has a substantial fleet of coal-fired power plants.

The IEA estimates that, if used, this alternative generation capacity could offset the requirement for around 22 Bcm of Russian gas imports. But the environmental impact would be substantial. Given the already enormous projected costs from climate change, as set out by the Intergovernmental Panel on Climate Change, policy-makers may be reticent to pursue this option.

Beyond that, governments could consider demand-oriented policies. These could include campaigns to turn off (or turn down) boilers in the winter and air conditioning units in the summer – perhaps with financial incentives provided for doing so – and usage monitored via smart meters.

Aside from the immediate associated costs, governments will have to consider the wider effects, including the possible negative effect of a policy like this on productivity, which is already low and a cause for concern. Indeed, the same applies to the use of coal as a stopgap, as the negative effects of pollution on productivity are well established.

Distributional considerations are also important. In the UK alone, more than three million households are estimated to be in fuel poverty, and many households are already bracing for a sharp rise in energy bills. Unfortunately, it looks like this is just the beginning.

Oil and gas prices are at historic highs and consumers are already feeling the effects. With further sanctions on the way, shortages in the immediate future and accompanying price rises may be inevitable.

This will be costly for Europe and the rest of the world, but we may need to ask ourselves if we are willing to come together and accept this given the atrocities committed in the conflict.

Where can I find out more?

Historical statistics and analysis available on BP’s Statistical Review of World Energy website.

The International Energy Agency’s ten point plan has a comprehensive discussion of how Europe could reduce its reliance on Russian gas, including some logistical and technical challenges that we are likely to face.

The Oxford Institute for Energy Studies has produced a detailed analysis of the effects of a cessation of gas flows from Russia, focusing particularly on the short run.

The Intergovernmental Panel on Climate Change’s Sixth Assessment Report has in-depth information on the costs of climate change.

European Network of Transmission System Operators for Gas (ENTSOG) have extensive information on Europe’s gas transmission network, including maps and pipeline capacities.