EU Plans to Reduce Reliance on Russian LNG Amid Energy Security Concerns

Key Takeaway

• The EU plans to expedite its clean energy transition and reduce reliance on Russian LNG, with potential temporary bans starting January.
• Discussions are ongoing to maintain gas flows through the Russia-Ukraine pipeline, with alternatives like Azeri gas being considered.
• European gas prices rose 2.2% amid these developments, reflecting market sensitivity to supply changes and concerns over energy security.

EU's Energy Security Push

The European Union's executive branch is set to initiate a comprehensive plan to bolster energy security and expedite the transition away from fossil fuel imports, with a particular focus on reducing reliance on Russian liquefied natural gas (LNG). According to EU diplomats, the European Commission will outline these efforts on Wednesday, marking the beginning of an action plan to be unveiled later. This initiative aims to reconcile the diverse energy strategies of the EU's 27 member states, each with different energy sources and supply contracts.

A significant challenge lies in phasing out Russian supplies, as the EU has increased its imports of Russian LNG in recent years despite deteriorating relations with Moscow. The EU energy ministers have called for a roadmap to phase out Russian fossil fuels, supported by Germany and the Czech Republic, who propose creating a high-level group to steer this effort. One potential measure is a new law effective from January, allowing temporary bans on LNG deliveries from Russia and Belarus to protect essential security interests. Finland has already indicated its intention to use this provision to phase out remaining Russian imports.

Russia currently supplies around 18 billion cubic meters of LNG to European ports, primarily in France, Spain, and Belgium, with about 1 billion cubic meters re-exported. The EU is discussing sanctions on key Russian LNG projects and a ban on using EU ports for re-exports, though there is insufficient support for a complete prohibition on LNG imports. Talks are also ongoing to maintain Russian gas flows to Europe via Ukraine, with the transit agreement set to expire at the end of this year.

Pipeline Negotiations

European officials are engaged in discussions to keep gas flowing through a crucial Russia-Ukraine pipeline, aiming to prevent further disruptions to the continent's energy supplies amid the ongoing war. Despite efforts to reduce dependence on Russian gas, several eastern European states continue to receive it through this pipeline. The current transit agreement expires at the end of 2024, prompting talks on potential solutions.

One option under consideration involves European companies purchasing and injecting gas from Azerbaijan into Russian pipelines heading to Europe. This arrangement would allow Europe to avoid directly buying Russian gas while maintaining supply. Ukraine supports this idea, as transit revenue is vital for its war-ravaged economy. Oleksiy Chernyshov, CEO of Ukraine's state-run Naftogaz, emphasized the importance of utilizing Ukraine's transit and storage infrastructure, ruling out any collaboration with Russia's Gazprom PJSC.

Azeri gas could theoretically benefit Russia if set up as a swap, allowing Moscow to send its gas elsewhere. However, Azerbaijan currently lacks spare gas production and is using its pipeline system to Europe at full capacity. Talks are in the early stages, with decisions expected closer to the year's end, coinciding with the European winter and the transit agreement's expiration.

Market Reactions and Challenges

European gas prices remain sensitive to supply changes, with benchmark futures rising by 2.2% on Tuesday. The energy crisis of 2022, driven by a significant reduction in Russian pipeline gas, nearly pushed Europe into recession. The European Commission believes the bloc can withstand the end of Russian transit via Ukraine without major security risks, relying on alternative suppliers and its ambitious climate strategy, including more renewables and energy savings.

However, some member states are concerned about a potential replay of the energy crisis, aligning their interests with Ukraine. Slovakia and Austria, key beneficiaries of the current transit arrangement, are involved in discussions. Slovakian Prime Minister Robert Fico mentioned the possibility of importing gas from Azerbaijan, with part of it staying in Slovakia and part passing through to other countries. Austria, heavily reliant on Russian gas, has not commented on the matter.

Germany has fast-tracked several LNG terminals to replace Russian shipments, but Gazprom still ships around 15 billion cubic meters of gas to Europe annually via Ukraine. German economy minister Robert Habeck emphasized the importance of finding a solution that doesn't bolster Moscow's revenues while ensuring reliable energy supplies for southeast Europe.