The repercussions of the Russian invasion of Ukraine represent the biggest global energy crisis since the 1973 oil embargo. While the current and potential supply implications of the Ukraine situation alone are significant, especially for Europe, other pre-existing market conditions are conspiring to make this a global crisis across multiple fuels and limiting the effectiveness of traditional responses. There has been no disruption of Russian supplies to Europe yet, but there has been a threat from Russia to stop gas flows through the Nord Stream 1 pipeline on March 7, while the United States has banned energy imports from Russia. EU member countries have stopped short of imposing similar bans on energy imports but have agreed on a fourth package of sanctions which includes revoking Russia’s most favoured nation trade status.

In this piece, Anne-Sophie Corbeau, a global research scholar with the Center on Global Energy Policy, puts the current global gas crisis into perspective and answers questions about the current state of gas markets and the implications of a ban of all Russian energy products for gas markets.

How widespread is this natural gas crisis?

While Europe relies on Russia for 34 percent of its natural gas, this is a much larger crisis. The gas market is global, and the impact of what is happening there has and will continue to ripple throughout the regions reliant on gas imports. Europe’s need for more gas will affect other LNG importers in Asia, the Middle East, and Latin America. As LNG prices rise, these countries may look to reduce their gas consumption and switch to other alternative fuels if they can and if alternative fuels are available and are more affordable.

Gas spot prices are not only at record high levels in Europe but also in Asia. As a result, any LNG importer with a contract linked to European or Asian spot prices or that is trying to import spot cargoes through tenders is paying unprecedented prices. These prices may be unaffordable for some developing countries.

How tight were gas markets before the Russian invasion?

Global gas markets progressively tightened over 2021 and reached unprecedented levels of tightness by the end of the year. European gas spot prices spiked to $60/mmBtu in December 2021, due to a combination of six different factors:

• A rapid economic rebound that supported a strong increase in energy demand,
• Lower generation from wind and hydropower plants, calling for more gas-fired generation,
• Longer and colder heating seasons in Asia and Europe and hotter summers, driving heating and power demand to higher levels,
• Record high coal and carbon prices pushing up the gas switching price—the price level at which coal-fired generation becomes more economic than gas to run and can replace it,
• A much lower availability of LNG supplies, and
• Lower gas deliveries from Russia to Europe, due to a combination of a colder winter in 2020/21 in Russia that required higher injections in Russian gas storage, and the absence of spot sales on the Electronic Sales Platform since October 2021.

How do these factors impact the ability of gas importers to react to the Ukraine crisis?

Most energy supply disruption scenarios do not plan for events happening in such extreme conditions. They simulate a supplier or a supply route disruption, sometimes in extreme climate conditions. There was no preparation for a situation in which the European and global energy systems were threatened with a major gas disruption when markets were already exceptionally tight. In this case, fossil fuel prices were already high, and the responses lined up to deal with short-term disruptions had, for the most part, already been deployed.

How does the risk to other Russian energy exports threaten natural gas markets?

While European gas prices are outpacing those of other fuels (Figure 1),  this is a multi-fuel crisis, as Russia is not only the largest natural gas exporter. Russian exports represent 16 percent of global coal trade. It exports 5 million barrels per day of crude (roughly 12 percent of global trade) and 2.85 million barrels per day of oil products (15 percent of refined product trade). These commodity markets are also currently extremely tight, as high prices reflect. Disrupting Russian flows of one commodity will have implications for others.

For example, steps that ban imports of Russian oil and refined products will likely increase the oil price and thus impact the price in oil-linked LNG contracts which accounted for 56 percent of LNG trade as of 2020. Higher oil prices or the unavailability of oil supplies could prevent some LNG importers from switching to oil/oil products in the power and industrial sectors.

In addition, Russia represents 46 percent of EU’s coal imports. Removing Russian coal from the world’s markets would also impact the ability to switch to coal-fired plants in the power sector if gas flows are insufficient.

Finally, depending on how the power market is structured, the increase in fossil fuel prices can also impact power prices. In Europe, gas-fired plants are at the margin and have driven electricity prices to record levels.

Figure 1: Europe’s gas prices are at record high levels