Cold math. How Europe is bracing itself for a winter without Russian gas and who will replace Gazprom

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The «gas wave» and the bygone era of cheap Russian fuel

Russia is once again using energy carrier exports as a means of pressure: last year, Europe already faced gas blackmail amid certification issues of Nord Stream 2, when Russia created an artificial fuel shortage in the market. The shortage coincided with an increase in demand for energy carriers, as the economies were bouncing back from the pandemic. As a result, gas prices soared to $2,000 per 1,000 cubic meters, which was unprecedented at the time and yet soon became business as usual. At this year’s peak in August, natural gas sold at $3,500.

The rehearsal of today's crisis was lost on European politicians, who made vague plans of a gradual search for alternative suppliers and an urgent transition to renewable energies. Unsurprisingly, Europe failed to adequately prepare for the consequences of abandoning Russian gas, and the situation went downhill in early 2022. The war in Ukraine hiked gas prices to $2,500, with the Russian government making things even more difficult. Vladimir Putin signed a decree to make “unfriendly” nations pay for the gas in rubles, even under euro or dollar contracts. After that, Gazprom, which had long since been posing as a private enterprise, kept driving down gas shipment volumes to European countries that were behind their contract payments in rubles.

In May, as many as two routes stopped operating: the Gas Transmission System Operator of Ukraine halted gas transit via Sokhranivka (with Sudzha still in operation), and the Yamal–Europe gas pipeline was completely suspended due to Russia's sanctions. Russia went on to halt Nord Stream 2, ostensibly to repair one of its turbines, and in September, the key route to Europe ceased the transmission of gas, temporarily at first and then indefinitely. The saga of the multi-billion project reached its end after the explosions that destroyed Nord Stream 1 and one of the strings of Nord Stream 2. Repairs may take from six months to a year and will be highly problematic to carry out amid the sanctions and political confrontation.

The substitution of Russian gas has turned from a long-term objective into a number-one priority as Europe imports 83% of its natural gas. Historically, Russia was the EU’s key supplier, occupying an important position in the global gas market. Thus, in 2021, the country was the leader in gas exports, surpassing the United States (the largest producer), Qatar, Norway, Australia, and Canada. In the same year, Russia supplied 155 billion cubic meters (bcm) of gas to Europe (both through the pipelines and as LNG), which accounted for 45% of Europe’s gas imports.

The EU learns its lesson and diversifies risks

By the estimates of the European Commission, in 2021 Russia accounted for 43.5% of imported gas, Norway for 23.6%, Algeria for 12.6%, and the US for 6.6%. Nigeria supplied another 6%, and Qatar, the remaining 5% or so. Purchasing all of their gas from Russia, such nations as Estonia, Finland, Moldova, and Bulgaria were the most dependent on Russian gas, followed closely by Latvia, Slovakia, Poland, and Austria, which imported over 80% of gas. Among Europe’s major economies, the biggest importers were Germany (53.7%) and Italy (33.4%). To compare, France imported only 7.6% of its gas from Russia, the Netherlands bought 5.2%, and Belgium 3.5%, while Spanish and Irish imports amounted to 0.5% and 0.1%, respectively.

Substituting large volumes is extremely challenging due to the war obstructing logistics and the COVID-19 restrictions still in place. However, Europe is not looking to find a supplier that will fully replace Russia; on the contrary, the region aims to diversify its energy sources to avoid another instance of critical overreliance on a single country.

Europe’s main challenge in its quest for alternative provides is the urgency of the issue because building new pipelines takes time and LNG shipments are limited due to insufficient infrastructure. The situation is exacerbated by the generally low mobility of the LNG market, which Europe counts on: most of the key global LNG producers are already bound by contracts. Rearranging their agreements and existing supply chains is no small feat. Meanwhile, Europe is reluctant to sign long-term contracts, which are customary for LNG, because they endanger the EU’s green transition goals. Meanwhile, LNG exporters are just as unwilling to turn down their existing clients in favor of European ones due to the vague prospects of new partnerships.

And yet, even in such a challenging environment, Europe has found producers that have already increased their shipments for 2022. The EU’s efforts have borne fruit: despite the unprecedented plunge in Russia’s long-distance exports, European gas storage facilities have reached historical maximums (exceeding 90%) ahead of winter, with some of the facilities nearly overflowing. According to the European Commission President Ursula von der Leyen, Europe has successfully replaced two-thirds of its Russian gas imports.

As the European Commission reports, in the first half of 2022, Russia accounted for 31.4% of Europe’s gas imports, but this share plummeted in July and August to 17% or less. Meanwhile, the share of other suppliers soared to 82.3–82.8% in July and August, despite never exceeding 60% since 2019. According to Eurostat, Russia’s share of imports dropped to 22.9% as of the end of Q2 2022. In H1 2022, the US, Qatar, and Nigeria supplied 25.7% of the EU’s imported gas. Another 22.7% came from Norway, 10.7% from Algeria, and 9.5% from elsewhere. Closer to the end of the year, as reported by the European Commission, Norway became the largest supplier, with the US as the runner-up.

Notably, the US accounted for the most additional shipments, with the volume of American imports reaching 17.4% in Q2 2022. Whereas the US supplied Europe with less than 1 bcm of gas a month in early 2021 and 4.2–4.3 bcm in early 2022, after the war broke out, American shipments reached 5.53–5.78 bcm, somewhat decreasing further down the line: in July, the US supplied 4.52 bcm in July and 4.63 bcm in August.

The US, Algeria, and even Australia: who lent a hand to Europe

The US undertook to help out Europe as early as in March, when President Joe Biden committed to compensating Europe’s shortage of gas caused by plummeting Russian shipments. The US intended to provide Europe with an additional 15 bcm of gas in 2022 “with expected increases going forward”. At the time, the situation was less urgent, with Nord Stream 1, Yamal–Europe, and Sokhranivka still in operation. The American president's commitment was perceived with skepticism, for the very reason of long-term contracts that distribute gas in the market for decades to come. However, the US successfully reoriented to the European market, overhauling the entire logistic system.

However, current American shipments may exceed Biden’s commitment threefold, having reached 39 bcm in June, which is 68% of US exports, estimated at 57 bcm, and an astounding 70% of US exports in September. To compare, in 2021 the US exported 34 bcm to Europe, which accounted for a mere 35% of its total shipments. If the US maintains shipment volumes, the EU will have received 45 bcm more from the US at the end of 2022 than in 2021. The growth of Europe's share in the American gas export attests to a much higher flexibility of the LNG market than anticipated.

Without Russia, Norway became Europe’s main gas supplier, but its export capabilities are depleted because the country has considerably upped its shipments since the war began and keeps the volumes at record-breaking levels. Over the first nine months of 2022, it exported 84 bcm (a year-over-year increase of 6 bcm), becoming Europe’s largest gas supplier in absolute values. Norway is particularly important for the EU’s largest economy, Germany, covering 30% of its gas needs. Norway's significance is likely to grow with time, as Norwegian prime minister Jonas Gahr Støre has announced that the country is open to long-term contracts with European consumers.

In October, Norway began exporting gas via Baltic Pipe to Poland. This year, the pipeline will have shipped around 4.5 bcm with a maximum throughput capacity of 10 bcm a year. Norwegian Minister of Petroleum and Energy Terje Aasland lauded the launch of Baltic Pipe as “an important step on the important road to Europe's independence from Russian energy”, whereas the Polish Prime Minister connected the event with “the era of Russia’s domination in the gas area coming to an end”.

Azerbaijan also managed to up its shipments to Europe on short notice, with its total 2022 exports to the EU anticipated to reach 12.2 bcm (which is 4.1 bcm more than in 2021). The largest European consumer of Azerbaijani gas is Italy, which has imported 8.5 bcm in the nine months of 2022 – an amount comparable to the total volume purchased in 2021.

Italy is also the main beneficiary of the increase in Algerian shipments; Algeria ranked second by import volumes after Russia in 2021 and has now been propelled to first place. Algeria plans to export an additional 4 bcm to Italy as early as this year, thus setting the total exports at 25.2 bcm, as compared to 20.9 bcm in 2021.

Europe's other alternative gas supplier is Egypt, which has struck a contract with Italian company Eni to ship an additional 3 bcm of gas in 2022 for further distribution in the European market. The deal between Eni and EGAS of Egypt should boost gas extraction and export from Egypt to Italy and Europe at large. Thanks to the signed agreements, Italy's dependence on Russian gas plunged from 40% to 25% as of June, and further to 10% in September, mostly because of Algerian and Egyptian supplies.

The war in Ukraine has forced Europe to think out of the box in its quest for additional gas volumes – and consider Australia and Oman. Normally, Australia did not export LNG to Europe or the UK because of exorbitant shipment costs and low profit margins, preferring adjacent Asian markets. However, late in August, Kpler registered a shipment of 174,000 cubic meters of LNG from Australia to the UK. According to Kpler, the previous instance of Australia exporting LNG to Great Britain was six years ago.

The same tanker shipped cargo not only from Australia but also from Oman, which had never supplied the UK with gas before. Oman was working on the verge of its exporting capacity even before the Russian invasion of Ukraine, with a long tradition of shipping gas to the Asian market under long-term contracts. Only 16% of Oman’s exported gas sells in the spot market. Nevertheless, shipments from Australia and Oman attest to the LNG market showing much higher flexibility than many analysts anticipated.

Europe also lays its hopes on the United Arab Emirates, which ranks tenth among the world’s largest gas producers. The Abu-Dhabi National Oil Company (ADNOC) signed a deal to supply LNG to RWE of Germany during German Chancellor Olaf Scholz’s visit to the country in September. However, the deal is limited to fairly modest volumes in 2022, with the first LNG shipment of a meager 137,000 cubic meters (82.2 million cubic meters post-regasification) to be delivered to the German sea terminal near the Elbe River estuary in late 2022. The cargo has a symbolic meaning, according to RWE’s press release:

“ADNOC's LNG delivery has a volume of 137,000 cubic meters and will be the first liquid gas to be made available to the German gas market via the import terminal in Brunsbuettel. This is an important milestone in the development of an LNG supply infrastructure in Germany and contributes to a more diversified gas supply.”

Possible gas sources for next winter

In 2022, thanks to additional shipments from the US, Norway, Azerbaijan, Egypt, and Algeria, Europe managed to substitute at least 66.9 out of 155 bcm supplied by Russia in 2021. Kpler assesses Europe’s LNG purchases for the first nine months of 2022 at 105 bcm, with the year's total anticipated to reach 123 bcm, which is 44.9 bcm more than in 2021. However, the winter of 2023–2024 may prove to be even more trying: whereas this year Europe managed to fill its gas storage facilities with Russian gas as well (in the first half of 2022, Russia still accounted for 31.4% of European gas imports), next year's shipments from Russia may well drop to zero.

Almost all of the countries that have upped their exports in 2022, including the US and Azerbaijan, are willing to ship more in the years to come. Whereas in 2022 Germany expects only a modest amount of gas from the UAE, in 2023 ADNOC has reserved several additional LNG shipments for Germany alone. However, the capacity of LNG terminals is another issue, with the German infrastructure ready to receive only 12.5 bcm a year, which is 13% of the nation's gas consumption. Chancellor of Austria Karl Nehammer also announced additional gas shipments from the UAE, saying that the country's dependence on Russia had dropped from 80% to 50% in 2022. Later on, in October, OMV of Austria and ADNOC arranged a shipment of gas for the 2023–2024 heating season, without disclosing the exact volume.

Some of the countries that failed to quickly rearrange their logistics this year are willing to do so later. Thus, Eni of Italy struck a deal with Kongo on increasing its gas production to supply an additional 4.5 bcm to Italy in 2023. Another African country with a large potential and scarce investment is Angola. Its agreement with Eni suggests joint exploration of gas fields and an increase in exports, yielding an additional 4 bcm of gas to Italy annually. Angola’s gas reserves exceed 300 bcm with a yearly extraction volume of only 11.3 bcm.

Italy and Algeria are likely to further their cooperation, considering that the President of Sonatrach, Toufik Hakkar, and the CEO of Eni, Claudio Descalzi, have signed an agreement to increase imports via the TransMed pipeline by 9 bcm a year in 2023–2024. Notably, the pipeline's throughput capacity reaches 32 bcm, whereas Algerian LNG terminals are only working at 50–60% of their capacity, leaving room for further increase of exports.

Slovenian gas trader Geoplin is also negotiating a contract with Sonatrach. The details of the three-year deal are not disclosed, but media reports predict an annual volume of 300 million cubic meters, which is around one-third of gas consumed by the country, which imported 79.5% of its gas from Russia. To satisfy the growing demand from European clients, Sonatrach is upping production, having initiated the joint development of two gas fields with Eni in September. The daily extraction volume is anticipated to fluctuate around 1 million cubic meters, reaching 2 million by the end of 2022.

Australia could also continue selling gas to Europe, but its exporting capabilities are limited, with at least 75% of Australian LNG sold under long-term contracts – mainly to Asian clients. Nevertheless, Uniper of Germany got Australian company Woodside Energy to supply gas starting January 2023. The contract does not expire until 2039, with annual shipments bordering on 1 bcm. Despite the modest volume, the deal demonstrates that even countries that were not among Europe's traditional gas suppliers are willing to reconsider existing routes and add European clients to their portfolios.

Long-term agreements: who will replace Russia

Some of the agreements and commitments suggesting an increase in shipments to Europe in 2022–2024 also imply further export growth. The US plans to expand its cooperation with Europe and substitute around 90% of what Russia used to supply, which is about 139.5 bcm, before 2030. Thus, the American company Venture Global announced in October that it had expanded its contract with EnBW of Germany to 5 bcm annually. The first shipments are scheduled for 2026. Two other German companies, Uniper and RWE, have also signed preliminary agreements on LNG imports from the US.

Under its current agreement with the EU, Azerbaijan will have increased its exports to Europe to 20 bcm in 2027. To ensure such volumes, the parties plan to boost the throughput capacity of the Trans-Anatolian Pipeline from 16 to 32 bcm and the capacity of the Trans-Adriatic Pipeline from 10 to 20 bcm. Both pipelines form part of the Southern Gas Corridor, which Azerbaijan uses to export natural gas to Europe.

Eni of Italy is negotiating with ADNOC to ensure mutually beneficial acceleration of their current projects and increase gas volumes in the global market. However, for the time being, extraction from the fields in question is set to begin only in 2025.

Europe had big hopes for Qatar, but the country is traditionally oriented toward South-East Asia in its gas exports. As the QatarEnergy CEO Saad al-Kaabi explained, the company will not breach its agreements with existing clients by redirecting the LNG intended for shipments to Asia toward Europe. Nevertheless, the country may up its shipments to Europe by accelerating extraction, with an anticipated gas production growth of 43% by 2025, from 77 to 110 million tonnes of LNG.

German energy giants RWE and Uniper are nearing the closure of long-term LNG deals with companies developing Qatar’s North Gas Field. The final signing is impeded by disagreements over the contract term and gas price; no further details are disclosed. Even if the contracts are finalized, Qatari gas will not solve Germany's problems in the short term, as the first shipments will not come in until 2026.

Eni of Italy and Total of France joined the development of this gas field in the summer of 2022, with shares of just over 3% and 6%, respectively. Shell, Exxon, and ConocoPhillips also participate in the project, which is estimated to boost Qatar's gas production by over 60% before 2027.

Oman also intends to review its gas contracts that expire in 2025 and will boost production to meet the demand of European clients. Amid the plunging gas extraction volumes, the government has begun to invest in the development of natural gas fields, expecting to ensure a daily output of 130 million cubic meters before 2025. Western players have also expressed interest in Oman's gas fields, with TotalEnergies of France signing an agreement on gas extraction with Oman’s Ministry of Energy in September.

Known for its natural gas reserves, Canada has also stepped forward to lend a hand to Europe, as the Canadian prime minister, Justin Trudeau, assured he would do all in his power to increase the supply of energy carriers amid the crisis triggered by the war in Ukraine, mentioning, however, that exporting LNG to Europe would require economic justification. The Canadian government has refrained from more specific promises, and the vital agreements are yet to be signed. Still, Canada upping its gas production may ease general tension in the market. While Canada’s daily output was within 453 million cubic meters in 2020, it exceeded this value multiple times in 2021 and rose well above 480 million cubic meters in March, April, and May 2022.

Most pipeline routes incorporate Turkey, which is one of the few remaining sources of Russian gas for Europe. President Recep Tayyip Erdogan has already made plans of transforming his country into Europe’s largest gas hub, facilitating gas transmission from Russia and Azerbaijan. Taking into account its recently discovered fields, Turkey's own gas reserves amount to 405 bcm, and the government plans to start extracting and consuming it before 2023. The product will be used domestically (Turkey consumes around 50 bcm a year); however, it will enable Turkey to resell what it currently purchases abroad.

Egypt, Israel, and Cyprus: gas from the Eastern Mediterranean

The Eastern Mediterranean – Egypt, Israel, and Cyprus – could grow into a major gas supplier for Europe if it puts in place the necessary infrastructure. The latest discovered fields attest to Israel’s gas reserves running into 400 bcm, which are neither intended for domestic consumption nor contracted for export. Cyprus holds another 400 bcm, fully available for export, and Egypt’s largest gas field, Zohr, is estimated to contain 850 bcm, most of which, however, is intended for domestic needs.

Having committed to up its supply to Italy by an additional 3 bcm, Egypt could further increase this volume, even though specific agreements remain to be signed. According to Egyptian prime minister Mostafa Madbouli, the country intends to use the existing market situation to become a major LNG supplier for Europe. Egypt’s current annual gas extraction amounts to 58.5 bcm, and the country is looking to cut its domestic consumption by 15% (around 8.7 bcm) to drive up European exports and earn much-needed foreign currency.

Israel also planned to start shipping gas to Europe in the fall of 2022, but the exact timeline and volume remain unknown. As Prime Minister Yair Lapid announced in September, the Jewish State could substitute around 10% of the gas Europe purchased from Russia in 2021, which is approximately 15.5 bcm. Europe expects to receive gas from the Karish gas field, which is to yield 10 bcm. Its development started in October, a month behind schedule due to disagreements with Lebanon.

Israel has already upped its gas production by 22% in 2022, to 10.85 bcm a year, and the annual extraction from the Leviathan gas field is expected to rise from 12 to 21 bcm. Nevertheless, the first shipments to Europe are unlikely to make a big difference, and the export timeline remains unclear.

Logistics could also be in the way of Israel increasing its exports because the agreement between Israel, the EU, and Egypt suggests transporting the gas via pipelines to Egypt and only then to Europe. However, Egypt’s LNG-exporting capacity is limited to 17 bcm a year, whereas the throughput of pipelines connecting Israel and Egypt is estimated at 7–10 bcm. Europe could count on an additional 10 bcm of gas from Israel, but a further increase in volumes is impossible without additional investment, in particular, in the construction of new pipelines.

Cyprus also holds a share of Eastern Mediterranean gas reserves but is not expected to enter the global market before 2027. Similarly to Israel, Cyprus plans to export gas to the EU via the pipeline to Egypt but is also considering additional infrastructure projects.

If constructed under the 2020 agreement between Israel, Greece, and Cyprus, the EastMed pipeline could become an alternative gas route for Israel and Cyprus. EastMed was to connect the Eastern Mediterranean and Italy via Cyprus and Greece, allowing for a direct transmission of Israeli, Cypriot, and Egyptian gas to Europe. However, the project was abandoned in early 2022, after being deemed unacceptable for financial and environmental reasons. Turkey also obstructed the construction of the pipeline because EastMed would be crossing a sea area that Turkey and Libya defined in 2019 as their economic zone. Although the EU and the US dismissed the agreement between the two states as a violation of international law, Turkey could still impede pipeline construction.

Nevertheless, the project has a chance to see the light of day because, as Alexandra Sdoukou, the Greek Secretary General for Energy and Natural Resources, reminded in October, Turkey will have to «take note of the new reality”. Against the backdrop of Russia's war with Ukraine, threats to gas projects are inappropriate, and if the pipeline were to be built, it would become the most direct gas-exporting route from the Eastern Mediterranean to Europe. Italy has also backed the project, as its parliament passed a resolution in April about the pipeline construction, despite initial concerns about its compliance with climate change requirements. However, the issue of EastMed's destiny remains open.

Turkey, in turn, looks to build a pipeline that would export gas from the Eastern Mediterranean to Europe via the Turkish territory. Whereas such a project would cement Turkey's position as a key gas supply hub, it comes with political challenges, facing opposition not only from Israel but also from Greece and Cyprus.

Surprises from Africa

As of today, Nigeria has already become one of Europe's primary gas suppliers, accounting for 14% of its imported LNG. In the future, Nigeria could double its shipments, but not until it addresses its security challenges, including vandalism and theft across its oil and gas infrastructure: due to countless incidents with pipelines and attempts of siphoning-off, the terminal on the Bonny Island is working only at 60% of its capacity. Even if Nigeria maintains the current extraction and exporting volumes, it has the potential to push its European exports above the levels of the recent few years. Whereas in 2021 Nigeria supplied 23 bcm to the EU, its 2018 export volume was way higher and amounted to 36 bcm.

Africa’s second runner-up by gas reserves is Mozambique, ranking just below Nigeria and Algeria. A large gas field in the north of the country is being developed by an international consortium led by Total of France. An LNG terminal is being built nearby for gas exports to Europe and Asia. Europe has proven its interest in Mozambique's energy resources by investing €45 million into its army to help the country keep its illegal armed groups at bay. Having militia fighters take control over the country's northern oil fields, which are developed by Western companies, would put Europe under financial strain.

Despite security threats, Total still intends to start extraction in 2024, while Eni of Italy plans to start shipping this year, using the available Coral Sul floating LNG terminal, with the first cargoes scheduled for November.

Mauritania, which also holds a large gas field with reserves estimated at 425 bcm, has some unrealized gas exporting potential. The country has signed an agreement with British Petroleum (UK) and Kosmos Energy (US) on gas exploration and extraction – a deal that should enable Mauritania to launch LNG production in November or December 2023.

The math is simple: Europe will pull through. What about Gazprom?

Even by the most conservative estimates, Europe has successfully substituted almost two-thirds of Russian gas with supplies from alternative sources. Deals with Egypt, Algeria, Kongo, Angola, and Australia will bring the EU 20.5 bcm. Another 10 bcm will arrive via the new pipeline from Norway, and ten more from Israel, even without additional infrastructure. If Azerbaijan, Norway, and the US maintain their European exports at the 2022 levels, Europe will get an additional 55.1 bcm. In all, the imported volume will amount to 96.6 bcm, which is 62.3% of what Europe purchased from Russia in 2021.

Restoring Norwegian exports to their 2018 levels will yield another 13 bcm. The possible volume of shipments from Qatar, the UAE, and Oman is so far unclear, and several African states, Canada and Cyprus still have unrealized potential for export to Europe. By the estimates of the European Commission, renewable energies can substitute another 23 bcm of Russian gas. Moreover, this assessment leaves out additional gas purchases in the spot market, possible new contracts, new infrastructure projects, and increased shipments associated with extraction growth.

Italy has so far been the most successful among European nations in adjusting to the new reality, especially considering that it ranked high among Europe’s largest economies by dependency on Russian gas, second only to Germany. The country has been blessed with better infrastructure than elsewhere in the region, so it will replace 20.5 bcm out of the 29 bcm supplied by Russia before 2023–2024. In 2022, in addition to agreements with Egypt, Algeria, Kongo, and Angola, Italy has also considerably upped its gas imports from Azerbaijan, Libya, Qatar, the US, Norway, and the Netherlands, so it will be able to substitute 8.5 bcm of Russian gas from these sources in the next two years.

However, Europe is not out of the woods yet. As the International Energy Agency warns, in 2023 the EU could face an unprecedented gas shortage of 30 bcm. The estimate is based on Russian shipments dropping to zero and Chinese demand spiking due to the lifting of COVID-19 restrictions. The gas substitution progress made in 2022 could result in European leaders putting their feet up, so the IEA urges the EU to take timely measures, which include cutting energy consumption. Importantly, Germany, Europe's most developed economy, has ended up critically dependent on gas supplies.

Naturally, the suspension of shipments to Europe will deliver a blow to Gazprom as well. Over the nine months of 2022, the company's long-distance exports have plunged by 40.4% year over year; meanwhile, oil and gas revenue make up over one-half of the nation's income. Dwindling European exports and their possible cessation in 2023 will deliver an even heavier blow on Russia's trade in energy carriers, and finding new customers for 155 bcm is impossible because even China will not be able to receive such volumes due to limited capacity.