The Impact of the Crisis in Ukraine on the European Gas Market

Ongoing turmoil in Ukraine has once again sparked debate about European energy dependence on Russia. That debate is not new and has been revitalized repeatedly since the first major supply disruption in 2006, which took place after several decades of fairly stable supplies. This new Brookings report, “Business As Usual: European Gas Market Functioning in Times of Turmoil and Increasing Import Dependence,” assesses whether the often expressed desire to move away from using Russian natural gas will in fact happen. 

Key Conclusions:

  • Absent very drastic policy interventions, not much change should be expected in the European gas supply mix, which will include a significant share of Russian natural gas in all scenarios under study.
  • In the short to medium term, the lack of market development and integration in Central and Eastern Europe continues to be problematic, as demonstrated in our scenario in which Ukraine no longer functions as a transit state for European natural gas. Though this would have no meaningful impacts on seven of the eight European trading hubs under study, in Austrian Baumgarten, this would lead to price spikes in 2015. This once again reminds us of the fact that European collaboration and continued European integration generates meaningful results. By constructing additional interconnectors, reverse flow options and storage facilities, countries like Poland and the Czech Republic are now better harnessed to market abuse than they were several years ago. Arguably, in parts of Central and Eastern Europe, much work remains to be done, as this paper outlines in reasonable detail.
  • Russian natural gas will be very competitive in Europe, and although Russia is expected to lose some market share after 2030, this is partly offset by an increase in liquefied natural gas (LNG) shipments from Russia.
  • Overall, the utilization rates of LNG regasification capacity increases substantially in the coming years. In due time, LNG from North America is expected to be competitive in parts of Europe, particularly in the U.K., Netherlands and Belgium. However, it is important to emphasize that our analysis suggests that LNG should not be seen as a substitute for Russian natural gas, but rather as a substitute for declining European domestic natural gas production.
  • Finally, the report accounts for the other often debated alternative sources of supply, such as increased imports through the Southern Corridor and increased domestic production of shale gas. While all of these options are important in their own right, there is no evidence that supply alternatives will be transformative in the European gas supply mix in the near future