Europe Dependent on Russian Gas, but Market May Help

Europe gets about a third of its natural gas from Russia, much of it through Ukraine.

The rotary handle to a valve stands locked and chained in January 2008 at a natural gas storage facility in Berlin.

The rotary handle to a valve stands locked and chained in January 2008 at a natural gas storage facility in Berlin. Russia's natural gas supply may play a key role in the current crisis involving Ukraine.

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They’re going to need some gas money, but maybe not as much as once thought. 

While Europe remains heavily dependent on Russian natural gas – much of which is piped through Ukraine – experts say that high supplies already in storage plus a mild winter that has kept demand low will help insulate Europe from more serious market turbulence that might stem from Russia and Ukraine’s dispute over Crimea. 

"Low utilisation means Ukraine's gas network is of lesser importance today than in the past," market analysis firm Bernstein Research said in a note to clients, which was subsequently reported by Reuters and the BBC.

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Troops reportedly connected to Russia entered Crimea last week after months of protests in Ukraine devolved into violence. Euromaidan demonstrators calling for closer ties with the European Union clashed with riot police backed by ousted President Viktor Yanukovych, who snubbed an EU trade agreement in favor of a bailout from Russia and President Vladimir Putin. 

The invasion spurred harsh criticism from Europe and the United States. On Thursday, the Obama administration expanded a visa ban instituted earlier in the week, and also signed an executive order paving the way for further sanctions. 

Europe, meanwhile, has said it would implement travel bans, freeze certain Russian assets and cancel a planned EU-Russia summit, although its appetite for stronger sanctions is limited. Russia is Europe’s third-largest trading partner, and the continent gets about 30 percent of its natural gas from Russia.

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“They’re heavily dependent on Russia,” Jason Bordoff, a former White House energy adviser, says of Europe. “Ukraine in particular has almost no other options to bring gas to the market, and we’ve seen Russia use that as a weapon as recently as 2009 when it cut off supplies as a result of a pricing dispute.”

In short: “If someone shuts off the taps to Ukraine, that’s going to be a real challenge to deal with,” he says.

It’s hard to tell, though, how likely a scenario that would be. As much as Europe relies on Russian natural gas, Russia is also “heavily dependent on sales of oil and gas for revenue,” Bordoff says. What’s more, Russia does "want to be seen as a reliable supplier as they sign long-term contracts.” 

Europe’s dependence on Russia also has decreased slightly. While the continent still gets about a third of its natural gas from Russia, it used to rely on far more – about 45 percent came from Russia in 2003.

Industry groups have started calling on President Barack Obama to support greater exports of liquefied natural gas, which they say would help decrease Europe’s reliance on Russia – not to mention increase industry profits at home. 

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Bordoff doesn’t disagree.

“If Russia has less ability to set monopoly prices, it will have fewer chances to use its natural gas as a weapon,” he says. 

In the short term, though, one of the only options may be to break out the checkbook. 

“There are few options to bring alternative supplies to Ukraine if Russia were to physically cut off supplies,” he says. “So it’s critical we offer financial assistance to help Ukraine deal with the higher energy bills they’re going to have to pay.”