Could Conflict Spur an Energy Revolution?

March 25, 2022

Stacked column chart showing natural gas production and trade for the EU. Chart subtitle: The European Union is dependent on natural gas imports, with almost half historically coming from Russia. Chart visual description: Y-axis shows Natural Gas Production and Trade (BCM/Year). X-axis shows years (columns) 2015 - 2020. Categories for each column build upward as follows: EU domestic production in dark blue; Pipeline imports - Russia in dark orange; Pipeline imports - other countries in green; LNG imports - Russia in brown; LNG imports USA in teal; and LNG imports - other countries in dark green. Chart data description: EU domestic production has decreased steadily, with a sharp decrease from 2019 to 2020 from 109.9 BCM/Year to 87.4; imports in general have increased over time. In 2020, Russian pipeline imports reached 155.6; other countries' pipeline imports reached 138.3; Russian LNG imports at 18.4; LNG imports USA at 22.9; LNG imports other countries at 57.6. Chart source: Agency for the Cooperation of Energy Regulators (ACER); calculation based on International Energy Agency and Eurostat.

Now one month into the Ukrainian crisis, investor concerns about the knock-on effects of war, higher energy costs, and generally prolonged, heightened inflation have hit a crescendo. Europe’s natural gas benchmark, the Dutch TTF, has been extremely volatile, at one point spiking to more than ten times last spring’s levels. The European Union relies heavily on Russian natural gas. According to the International Energy Agency, in 2021, the EU imported 155 billion cubic meters of natural gas from Russia, comprising roughly 45% of European Union gas imports and close to 40% of total gas consumption. Russia’s invasion of Ukraine has underscored the risks of Europe’s dependence on Russian gas imports and prompted the European Commission to take action.

Beyond halting approval of Nord Stream 2, a set of offshore natural gas pipelines from Russia to Germany, at the outset of the conflict, the European Commission has now vowed to curtail the EU’s usage of Russian natural gas, with a target of reducing imports by two thirds by the end of the year. To make up the difference, the Commission will increase gas and liquefied natural gas (LNG) imports from other countries and phase in alternative gases like hydrogen and biomethane. The U.S. has answered this call, with the Biden administration authorizing additional exports of LNG from two major facilities on the U.S. Gulf Coast. The Commission is also looking to accelerate the transition to renewable energy. In particular, the EU will accelerate its “Fit for 55” rule, deploying a massive campaign of electrification, expansion of renewables and electricity storage, development of green hydrogen tech, and investment in energy efficiency measures. While these longer-term initiatives will take several years to come to pass, the composition of energy sources, at least in Europe, should have a stronger, greener future as a result.

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