Russia’s Energy Supply: Europe in need

This dispute between Russia and the West over energy supply has grown bitter as natural gas prices in Europe have skyrocketed, and the U.K. has experienced fuel shortages. Putin accuses the West of promoting "hysteria and uncertainty" with its energy decarbonization campaign. In contrast, E.U. and U.S. officials accuse Russia of reducing the natural gas supply to Europe for political purposes. Moscow has recently desired to expand European exports, but with conditions.

Traditional suppliers like Russia stand to gain from the global energy shift from fossil fuels to alternative energy and suppliers requested by the U.S. and E.U. To overcome coming energy problems, the West will require inventive and realistic strategies toward Russia.

Moscow uses energy as a strategic tool. Russia spent the last decade utilizing its oil riches to build a wedge between the West and develop a sphere of influence over the former Soviet periphery and beyond. This includes targeted natural gas curtailment and long-term contracts with favorable take-or-pay conditions. Russia has stopped natural gas exports to pro-Western states like Ukraine and given Belarus huge price discounts.

The West eventually responded to these activities. U.S. and E.U. sanctions attacked Russia's energy industry in 2009, and E.U. regulations separated transport and supply management, preventing companies like Gazprom from controlling both natural gas sales and transmission networks.

Poland and Lithuania could minimize their dependency on Russia and negotiate better terms with Moscow owing to tanker-delivered liquefied natural gas. The shale revolution rendered previously inaccessible oil and gas deposits in the U.S. available through hydraulic fracturing and horizontal drilling, making the U.S. a major natural gas exporter and diminishing Moscow's capacity to wield energy as a geopolitical weapon.

Russia's status as an energy exporter was in peril due to the energy revolution and the West's heightened emphasis on climate change and decarbonization programs, most visible in the E.U. as the European Green Deal.

Updates:

Recently, everything changed. Even if renewable energy sources are getting increasing attention, fossil fuels will likely play a key role in the energy mix for the next few decades. Russia's market share will reach a record high of 38% in 2035, according to S&P Global Platts Analytics. Despite geopolitical tensions between Moscow and the West and the E.U.'s focus on decarbonization, Russia is expected to remain Europe's key natural gas supply for the foreseeable future.

Europe Market Competition:

Europe will face increasing market competition. With Moscow and Beijing closer in their great-power conflict with the U.S., Russia may extend the natural gas supply to Europe and China. China and other rising Asian markets may insulate Russia from demand risk in Europe while allowing Moscow to use energy for geopolitical purposes.

Role of China:

Even China isn't a reliable long-term market for Russian energy exports. Beijing decarbonizes and diversifies its energy sources to tackle climate change. New technologies like green hydrogen may provide countries with other energy alternatives than fossil fuels.

Europe and China, two of Russia's biggest customers, may not need as much Russian energy. This might make things worse for Russia in the long run. This will generate geopolitical problems for Russia at home (energy exports account for half of Russia's budget) and abroad (regarding its regional and global power ambitions).

Russia's geopolitically motivated actions, such as selectively giving favorable governments and shutting out unfriendly ones, would undoubtedly increase Europe's energy dependence in short to medium term. Moscow has more transport options to Europe owing to the Nord Stream 2 pipeline to Germany and the TurkStream pipeline to Turkey, as shown by Gazprom's new long-term agreement with Hungary that bypasses Ukraine as a transit state. Ukraine has unsuccessfully asked the E.U. and U.S. to prohibit such initiatives. Kyiv has increased attempts to link to the E.U.'s electricity grid.

Progress toward decarbonization:

Progress toward decarbonization is crucial for the E.U. and U.S., given Russia's use of energy as a geopolitical tool. Still, it's not enough to address the West's medium-term energy concerns. To minimize energy shortages and disruptions, the U.S. and E.U. should be more pragmatic with Russia while investing in new energy technology and diversifying.