Erica Downs: I think that one of the big decisions that China is going to have to make is, how dependent do they want to be on Russia for natural gas versus how dependent do they want to be on LNG?
Jason Bordoff: Russia’s energy exports, including its significant natural gas capacity, serve as geopolitical currency for the country. Before Russia’s invasion of Ukraine, Russia was Europe’s single largest supplier of imported natural gas. Since then, the figures dropped significantly, so Russia’s looking outside of Europe to China as not only a new market for the country’s gas, but also a strategic ally.
The proposed Power of Siberia 2 natural gas pipeline that would transport Russian gas to China offers an insight into not only Russia’s energy export strategy, but also the evolving relationship between China, and Russia. What is the strategic importance of the Chinese Russian energy relationship? Was Russia’s loss of the European gas market significant? Has Europe left its energy crisis behind?
This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff.
Today on the show, we have three of our own scholars here from the Center on Global Energy Policy, Akos Losz, Tatiana Mitrova, and Erica Downs. Akos is a former senior research associate at the center where he specialized in natural gas markets, and the role of gas in the energy transition. He just left us, and is about to return to the International Energy Agency as lead natural gas analyst.
Tatiana is a research fellow here at the Center on Global Energy Policy. She has spent her career focusing on Russia, and global energy markets. Tatiana previously served as the executive director of the Energy Center of the Moscow School of Management, and the head of research in the Oil and Gas Department in the Energy Research Institute of the Russian Academy of Sciences. She’s also an independent director of SLB, the large energy services firm.
Erica is a senior research scholar here at the Center on Global Energy Policy focusing on Chinese energy markets, and geopolitics. She previously worked as a senior research scientist in the China Studies Program of the CNA Corporation, a senior analyst at Eurasia Group, and a fellow at the Brookings Institution.
Tatiana, Akos, and Erica joined me to discuss their recent commentary, the Future of the Power of Siberia 2 Pipeline. We talked about the geopolitical significance of the proposed pipeline, and the insights it offers into the evolving Russia-China relationship. We also covered a range of other topics including the outlook for European energy security, and climate goals, China’s energy demand, and the global gas market. I hope you enjoy our conversation.
My wonderful colleagues, Tatiana Mitrova, Erica Downs, Akos Losz, welcome back to Columbia Energy Exchange. Great to have all of you on for this conversation this week.
Akos Losz: Thanks, Jason.
Tatiana Mitrova: Thank you.
Erica Downs: Thank you for having us.
Jason Bordoff: It’s always like I get to talk to a lot of great people on this podcast, but getting the chance to talk to my phenomenal colleagues about what’s happening in the world, and particularly new pieces of research, is always a highlight. Because you guys do such phenomenal work. We want to make sure we’re sharing that with as many people as possible. Hopefully people will have seen some of this already, not just your recent paper for us, but all the great work you’ve been doing. We’ll have a chance to talk about a lot of it, so much to talk about, especially with all three of you. We won’t get to all of it.
But maybe I could start with the most recent paper, the three of you co-authored, and go from there, because it brings up a lot of related issues with European energy security, great power competition, US-China relations. You chose to focus your time on one particular piece of energy infrastructure called the Power of Siberia 2 Pipeline, which perhaps people not paying very close attention to issues of gas transit in Russia or China would even know about.
Erica, let me start with you. What is the power of Siberia 2 Pipeline and why, given all the things you could have chosen to spend your time and energy on, did you work with these great co-authors, and do a whole analysis of it?
Erica Downs: The Power of Siberia 2 Pipeline is a proposed natural gas pipeline that would run from Russia to China via Mongolia. It’s a big pipeline. The design capacity is 50 billion cubic meters or bcm per year. That’s equivalent to about one third of China’s total natural gas imports in 2023.
There are a couple of reasons we decided this pipeline merited its own paper. The first one, and I’m sure Tatiana will touch on this later, is that the pipeline really represents Russia’s best hope of redirecting a large share of the pipeline gas it previously sent to Europe to a new market. A second reason we decided to devote an entire paper to this pipeline is because of what its construction or the absence of its construction tells us about the China-Russia energy relationship, and even the China-Russia bilateral relationship writ large.
A third reason is that if this pipeline is built, and we see Russia sending an additional 50 bcm per year of natural gas to China, that this will have big implications for global gas markets, especially for countries that export LNG, and are looking to sell gas to China.
Jason Bordoff: That’s a really helpful overview, Erica. Thank you. I think Tatiana, Erica teed you up well to talk about why this was important. From the standpoint of Russia, talk about how much does it really matter? How is Russia being impacted by the fact that it is selling initially by its choice to cut European markets off? Europeans are trying more, and more to now import less gas from Russia, but initially it was Russia’s decision. Tell me if I’m wrong, to say, “We’re going to stop selling gas to Europe.” How important is finding new markets to cope with whatever financial impacts arose from that decision, and tell us what those impacts were?
Tatiana Mitrova: Yeah, you are absolutely right. It was Russia’s choice in 2022 to stop supplies to Europe. Actually during 2022 and 2023, Russia has lost 80% of its pipeline gas exports to Europe. That’s a lot. Obviously, the need to replace these volumes is one of the key drivers forcing Russia to push forward this project.
But I would say the most important driver is different. The most important driver is geopolitical. Convincing China to commit to such a large project during the war in Ukraine would be a really geopolitical price for Moscow demonstrating both to the west, and to the global south, that it is able to deepen energy relationship with China despite the war. In terms of compensating for the losses in European market, yes, it is secondary consideration. It’s also important but …
Jason Bordoff: Sorry, just explain for people to put in context. You said 80% of the pipeline gas to Europe is lost. In total then, because maybe it has pipeline exports elsewhere. It has LNG exports. How much has Russian gas exports overall declined because it lost that 80% of pipeline to Europe?
Tatiana Mitrova: It’s nearly 50%. There are seal pipeline gas exports to the so-called near abroad, former Soviet Union countries. There are pipeline gas exports to China which started back in 2019 through Power of Siberia 1, and the raw LNG exports going both to Europe, and to the Pacific region. But European gas market was always the most important, the most luxury, providing the higher prices, and the highest revenues for the Russian budget, and for Gazprom specifically. It’s really critically important. It is lost.
This loss in the eyes of Russian authorities, most likely is irreversible. It’s necessary to find a replacement. Everybody realizes that even if power of Siberia 2 is built, it is not able to compensate completely, neither in terms of volumes because as Erica mentioned, it is just 50 bcm while pipeline gas exports to Europe before the war were 150 bcm, three times higher. Anyway, it’s not sufficient to replace volumes, but more importantly the prices. We will talk more about it.
The export price of Russian gas to China is the lowest among all Chinese gas sources. It is far below the prices at which Russia was selling, and still is selling its gas to Europe. The revenues will be significantly lower. But given this dramatic change in the whole gas landscape after the war, it is necessary for Russia to utilize any opportunity, any chance to find new market for gas. That’s why they are so much focused on this pipeline project. They keep talking, and keep pushing Chinese authorities during each meeting to move forward.
They’ve even made an absolutely unprecedented step for the gas markets. They’ve prepared the feasibility study, all the technical documentation, and they’ve announced last December that they are ready to start construction even without the contract. They didn’t do it yet. But the very announcement was absolutely unique. They’re really desperately waiting for the beginning of this construction.
There is another third consideration, which is also important. Geopolitics, economics, but there is also very critical situation for Gazprom, specifically for the leading Russian gas company. Because for Gazprom, after the loss of pipeline gas exports to Europe, they do not have any other alternative. They do not have any other large infrastructure projects. For them, this project is absolutely essential to reaffirm their position as Russia’s leading gas company. Because they are facing rivalry from the other companies, including Rosneft specifically. They’ve demonstrated enormous losses in 2023 Unprecedented since 1999, they’ve never seen such losses. For these companies specifically, they are also very much focused on the project.
Jason Bordoff: Really helpful overview. It sounds like for Gazprom as a company, this is quite significant economically. But for Russia as a whole, I’ll come to Akos next, but Tatiana, for Russia as a whole, how big a deal is the loss of the European gas market? I think it is the case that most of the energy export revenue came from oil not gas to begin with. Gas was a smaller share. As you said, they’ve lost some of it, not all of it. Is this very consequential for Russia’s budget, and fiscal situation?
Tatiana Mitrova: Not that much, to be frank. You are absolutely right. Gas has never been the key driver of the Russian budget revenues. In the good old days before the war, Russia was receiving like $120 billion from oil and gas, out of which $100 billion dollars were provided by oil, and only 20 billion were coming from gas.
In 2023, budget revenues went down. These gas export duties they provided for just $7 billion, which is not that much, calculations on the potential cashflow, and potential revenues that Power of Siberia 2 could generate. We do not know the prices yet, so these are very preliminary assumptions. But given the whole situation, the project could generate a rent of in a magnitude of 2.5 to $4 billion, which is far less than these 20 billion rent from the European gas market which was lost. But at least something, every little helps.
Jason Bordoff: Akos, can you please build on everything that Erica, and Tatiana have said, and also why you thought this was an important topic to focus on in writing this paper? But both Erica, and Tatiana mentioned the potential impact on the global gas market that this project could have. Maybe you could comment a little bit on that in particular.
Akos Losz: Yes, absolutely. As Erica already mentioned, this is a large project, 50 bcm. Just to put this number into context, 50 bcm is more than the entire gas consumption in the Central and Eastern European region, the region where I come from. 50 bcm is just a bit less than the total LNG exports from the whole continent of Africa. This bigger project is bound to have a global global impact, and an impact on the global gas market in general.
We highlighted three in our paper. The first impact is that it can potentially prolong this oncoming gas market glut. We expect that the global gas market will turn into an oversupply situation in the next one or two years. That can last from a few years to potentially an extended period of time. We have almost 300 bcm of LNG export capacity coming to the market between 2024, and 2030. That will almost inevitably lead to an excess supply of LNG in the market.
Now, if you add on top of that an additional 50 bcm of Russian gas coming to China, then China will need less LNG. China was expected to be the most obvious, and biggest market to absorb this surplus. If you remove that, and add this additional 50 bcm of gas to the market, then that can potentially significantly prolong this oversupply situation.
The second impact is concerning Russia’s own LNG ambitions. Russia wants to triple its LNG exports by 2030. China is, again, the most obvious market for any additional LNG exports including from Russia. If China cuts its LNG imports to make room for more gas via pipeline from Russia, then it leaves basically less room for Russian LNG to go to China, and to go to the global market in general.
Finally, I think the pipeline can also reinforce this role that China has already started to play in the global LNG market. Basically, China became the balancer of the global gas market because it has a large contracted LNG portfolio, and in general has more LNG on contract than it needed in the last couple of years. If it needs even less because of this 50 bcm of additional pipeline gas coming into China, then it’ll be forced to play an even more important, and even more significant balancing role to use its portfolio, and resell its LNG to other importing countries, and be an even more pronounced balancer of the global gas market.
Jason Bordoff: I just want to make sure I understood what you just said, because there was a lot there. But the last point you made is that if a pipeline of this magnitude gets built, and China can reliably depend on that volume of gas coming from Russia, it already has long-term contract side assigned with an enormous amount of global LNG supply, countries that need LNG like Europe in the winter or other parts of the world, if there’s a drought, and hydropower goes down in Latin America, they’ll turn to the global market and say, “Where can we get those supplies we need?” China, you’re saying, is more, and more could play the role of being the country people have to turn to find the supplies they need.
Akos Losz: That’s exactly right. China will be increasingly the arbiter of where those LNG volumes that it has over contracted will be resold. It’ll play an even more important role as a reseller of LNG, and also as a balancing market for the global gas market.
Jason Bordoff: You made one comment I just want to double check on, because there’s a permitting pause in the United States as you surely know. As that question comes to a decision, should the administration in the US continue to permit new LNG projects? There’ll be a big debate about whether the world needs more LNG at all. Did I hear you say the answer to that is probably not because there’s excess capacity as you described it?
Akos Losz: Not until the late 2020, and early 2030s, but beyond 2030, especially around the 2035, and 2040 timeframe, definitely there is further need for additional LNG supply. Even if Power of Siberia 2 comes online, there is going to be potentially a need for additional LNG supply. But of course, Power of Siberia 2 is strengthening the case that maybe bringing in new projects in addition to those that are already under construction is not so urgent, if the pipeline is built, and there will be less immediate need for those additional pre-affied projects, and capacity.
Jason Bordoff: When you say there’s going to be a need for more supply, 2035, 2040, that’s based on where the world is headed today, not what it would look like if we met our climate goals.
Akos Losz: Yes, those are based on business as usual projections, not so much on net zero type trajectories.
Jason Bordoff: Erica, let come back to you. Because a lot of what we just heard from Tatiana and Akos really raises some interesting questions about the role these projects play in geopolitics. The role that as Tatiana said, it’s perhaps most consequential not for extra revenue for Russia, but what it says geopolitically that China is going to position itself in partnership with Russia, particularly at this moment in time.
You heard Akos talk about how that could give China geopolitical influence in another way, and that it has a lot of excess LNG supplies that it can direct to different countries maybe based on economics and price, but maybe based on other factors about partners it wants to work with, and countries that it wants to support. How do you see the geopolitics of this project?
Erica Downs: When it comes to Power of Siberia 2, China, and geopolitics, I think that one of the big decisions that China is going to have to make is, how dependent do they want to be on Russia for natural gas versus how dependent do they want to be on LNG?
A lot of this goes back to China’s thinking about energy supply security. As you know, there are large pipelines delivering oil and natural gas from Central Asia, Russia, and Myanmar to China. One of the motivations for those projects was energy security, because China views oil and LNG that flow through the sea lines of communication to China as being vulnerable to disruption by various modern navies. Overland pipelines have been viewed as more secure.
However, if Beijing were to give a green light to Power of Siberia 2, that would effectively double Russia’s capacity to deliver pipeline gas to China from about 48 bcm. That’s the design capacities of Power of Siberia 1, and this far eastern route pipeline that was agreed upon on the eve of the war. Then of course, there is Russian LNG going to China on top of that, and becoming more dependent on Russia does run counter to China’s longstanding approach to energy supply security, which is to avoid becoming dependent on any single one supplier.
However, if Power of Siberia 2 does not go through, and if projections of China’s natural gas demand in 2040 that we discussed in the paper, a number of the projections that we looked at, saw gas demand at around 600 bcm, which would put imports at around 300 bcm, and I think only 150 bcm of that is already contracted. If we don’t have Power of Siberia 2, and those projections bear out, then China’s going to need a lot of LNG, which raises the question of, how comfortable are they being dependent on increasing volumes of LNG traveling long distances through the ceilings of communication to China?
Jason Bordoff: Coming from the US, Australia, Qatar …
Erica Downs: Exactly. One of the things that we uncovered while doing the research for this paper were some analysis from Chinese sources basically saying that, “Look, imports of LNG from the United States, from Australia, these are a vulnerability.” One way to mitigate this vulnerability is to buy more gas from Russia. I don’t know that a decision about this has been made on China, but when thinking about this project in terms of the geopolitics, this is really one of the big issues that China has to wrestle with.
Jason Bordoff: Yeah, I could see the concern with being dependent on Russia, but certainly given the situation between the US, and China now concern there as well. I don’t know. Maybe this takes you in the direction of Winston Churchill’s famous dictum, “Security and oil lies in variety, and variety alone.” Maybe that’s true for gas as well in China’s view of the world. Tatiana, quick reaction to that.
Tatiana Mitrova: Yeah, quick reaction. Actually for China, it is also the question of further geopolitical developments. This project is specifically important. That’s the key reason why we wrote about it, because it’s an indicator. What is happening with Chinese geopolitical agenda?
First of all, not project per se. Yes, it is important. It is important for the global gas markets. It’s specifically important for Russia, but even more importantly, it’s an indicator of the global geopolitical shift. If we see this project happening, it means that China has chosen closer cooperation with Russia because it has security concerns regarding the US, to put it very short.
Jason Bordoff: I want to move to some other topics that are all related to this, but not the specific pipeline project alone. But just remind people, maybe Tatiana, on where the pipeline project stands today. There were some recent articles about negotiations between Russia, and China. Russia seemed to really want to get this done. China was happy to be in a bargaining position, which said, “We’re happy to pay a very low price, but otherwise we’re not ready yet.” Take a pretty tough stance in negotiation as I was perceiving it. Where does it stand today?
Tatiana Mitrova: Yeah. There was a meeting between Putin, and Xi Jinping in May. There were expectations that probably some additional information about the project will be revealed. But Miller, head of Gazprom, even didn’t accompany Putin during this visit. It became clear that no contract will be signed.
There were leakages, and some information published by Financial Times that according to their sources, Chinese side has requested the price of gas, which is close to the Russian domestic gas price, which is very low. It is low subsidized price. It means that at the moment China takes very cautious approach. It is not ready to engage with Russia. It is postponing. But it’s not refusing from this project, which is also important. That’s why I’m saying it’s really critical to follow the developments on this side.
Jason Bordoff: Erica, your take on where this pipeline project stands, and then I want to talk a little bit about what the other global impacts of this are, particularly in the European market. Go ahead.
Erica Downs: While Russia would like to hurry up, and have this pipeline built as quickly as possible, as Tatiana has indicated, China is in no hurry to get this pipeline project done.
One reason is that they don’t need the gas right away. Another reason is that they can use this pipeline or the prospect of this pipeline in negotiations with other suppliers, be it Central Asia, and pipeline gas or LNG suppliers. They’re also obviously pushing for a very good price from the Russians. As Tatiana mentioned earlier, China got a very good deal on Power of Siberia 1 gas, and I suspect that Beijing assesses that it is in an even stronger negotiating position today than it was back in May 2014, when the PS-1 supply agreement was inked.
The other thing I want to say on the China-Russia relationship is that while Chinese companies have been happy to snap up discounted cargoes of Russian fossil fuels on the global market, the Chinese companies have been very cautious, as Tatiana mentioned, about entering into any major new energy projects with Russia. They were trying to keep ongoing projects moving forward such as this new far Eastern pipeline. They were continuing to supply modules to Arctic LNG 2 until the US sanctioned a Chinese company involved in that project. Now, we’re seeing another major player in that space pull out. But basically, they’re being very, very cautious.
Jason Bordoff: Just a quick follow up on that, then I’ll come to maybe talk a little bit about what’s happening in Europe. China’s happy to take a tough bargaining position. They don’t need the gas anytime soon. Just talk about that more what their actual need for gas is. They’re growing renewables at a tremendous rate. They’re still building coal plants. Talk about how gas fits into the Chinese energy mix. Also, what that means for their potential goals when it comes to decarbonization that they’ve put out into the world.
Erica Downs: Sure. I’m going to start by talking a little bit about some of the projections in the paper, and then I have some other thoughts to share on this topic as well. When we were looking at projections during the course of research for this paper, we were looking at recent natural gas projections, so made after Russia’s invasion of Ukraine. We looked at projections put out by China’s big three national oil companies. I think we looked at the International Energy Agency, US Energy Information Administration, Shell’s latest LNG outlook.
Based on those numbers, it looks like China is pretty well supplied with existing contracts through 2030. But if we do see some of the higher end projections for 2040 bearing out, if we are seeing Chinese gas demand of 600 bcm or above, then that’s going to imply imports of around 300 bcm, and only half of that’s covered by existing contracts.
That being said, I do think there is a lot of uncertainty about how big a role natural gas is going to play in China’s energy mix for the reasons that you suggested. Now, the official target, still on the books in China, is that they want natural gas to comprise 15% of China’s energy consumption mix by 2030. However, over the past few years, I have seen projections from different sources in China that indicate that gas may not get to that 15%. It may be closer to 12 or 13%. I guess while I still see natural gas having a role to play as a bridge fuel in China, it might be a shorter narrower, I’m not sure what the right word is, bridge than people thought a number of years ago.
Jason Bordoff: Akos, I want to come to you because we’ve been talking a lot about what the Russia-China energy relationship might mean given that Russia has lost a big part of the European market. Tatiana made the claim that Russia does not expect to get it back. We can come back to that point. Europe is now trying to even reduce that number even further if it can, and import less gas from Russia.
What is the current gas situation in Europe? Right after Russia cut off supply, after invading Ukraine, we had an energy crisis in Europe, staggering prices 10, 20 fold higher than normally pre-crisis. Tell us what the state of the European energy market is now, and how dependent Europe remains on Russian energy supplies.
Akos Losz: Before the crisis in 2021, Europe imported roughly 140 to 145 bcm of pipeline gas from Russia, depending on whose numbers you’re looking at. That number in two years’ time dropped to about 25 bcms. We lost about 120 bcm of pipeline gas supply in a relatively short period of time, which is a huge shock.
Jason Bordoff: Down from 140, 150 down to 25 or so. A huge decrease.
Akos Losz: Yes, exactly. That’s the pipeline gas part. LNG still keep flowing from Russia. In fact, it’s actually grown a little bit in the first six months of the year. But pipeline gas surplus is the big, big, big part that was lost in this crisis.
Jason Bordoff: The LNG number is smaller. It’s like around 25.
Akos Losz: About 20 bcm of LNG came to the EU last year. The flows increased about 12% in the first six months of the year. It’s actually still a growing part of the EU supply, next to natural energy. But the real big part of the supply came in the form of pipeline gas, and that decreased by about 120 bcm in two years’ time. That’s a huge shock for the European market. That’s what initially drove prices to record high levels.
Since 2023, we can say that the situation normalized. I think it’s a little bit too early to say that we are out of the crisis yet. I think we will potentially never get to that point where we can say that, “We are now safe.” I think what’s safe to say is that we have learned to live with this new reality that Russian pipeline gas is only a small fraction of the European import mix, that’s on the way of getting to even less degree in one or two years’ time.
At the same time, I think Europe is in a situation where it now pretty much filled up the storage capacity by the heating season. But in addition to storage, it needs incremental LNG imports every winter to balance the market. To the extent those LNG supplies are available, and not needed in Asia, Europe is fine. But immediately if there is a coal spill in Europe, additional demand in Asia, or there is a supply disruption anywhere in the global gas market, then prices can suddenly become very volatile. If there is a major disruption somewhere, something unexpected, then we can immediately get back to crisis mode.
I should also say that we are in a more volatile, more dangerous geopolitical environment. I think we have to take that into consideration as well. Because pre-war, we were considering first case scenarios, so this umbrella group for European gas TSOs, they conduct regular simulations for gas supply emergencies. Their worst case in 2021 was to lose either the Yamal pipeline for two weeks or one leg of the Nord Stream pipeline for two weeks. What we have seen in study happening in 2022 is that we basically completely stopped supplies on the Yamal pipeline, and they never come back. They completely lost supply from the Nord Stream lines. Three of the four lines were blown up in a sabotage attack.
In addition, we lost half of the entry capacity through the Ukrainian pipeline system, plus unilaterally suspended supplies to several countries, including Bulgaria, which used to receive gas through the Turk Stream pipeline. We have seen sanctions imposed on Russia’s LNG projects. One of them, the Arctic LNG 2 project’s completely blocked by sanctions. It’s a much more volatile, much more dangerous geopolitical situation.
I think the range of supply security risk is much wider than we previously assumed. I think in that context, we may never be able to say that we leave the crisis behind. It’s always going to be volatile, and a potentially risky environment for natural gas supplies.
Jason Bordoff: Just to remind our listeners where European energy prices, gas prices, electricity prices are today relative to pre-invasion.
Akos Losz: Our current TTF price, which is the benchmark European gas price is around 30, 31 euros per megawatt-hour, which is roughly $10 per MMBtu. That’s already at the level where it was in 2021. We are back to immediately pre-invasion levels, but still higher than the five years average prior to the invasion. It’s still historically a little bit higher than we are used to, but way down compared to where it was in 2022, which was around a $100 per MMBtu.
Jason Bordoff: Pretty close to pre-crisis, but your point, if I heard it correctly, it’s too soon to say this crisis is over. What I heard you saying is it’ll never be over in the sense that if Europe’s new normal is you fill up inventories as much as you can before the winter heating season, when you need to draw them down, Europe is going to do that. But then you’re in the middle, you have a multi-month seasonal period in which there’s no margin for error.
If something goes wrong, there’s a geopolitical incident, there’s a sabotage incident, a pipeline goes down, there’s some shock to the global LNG market, Europe is not relying anymore on pipeline gas from Russia. It’s relying on a global market for gas. The gas could go anywhere. Something happens in China, Qatar, and the US, whatever happens in various straits around the world that tankers go through or drought in the Panama Canal that makes it hard for ships to go through, Europe is now exposed to a much greater number of risks that would cause price spikes, and volatility including on the demand side, like a very cold winter. That’s just the annual new risk and volatility that the European market faces. Is that what I heard you to say?
Akos Losz: Yes, that’s exactly right.
Jason Bordoff: Yeah. Okay. Akos, let me stay with you for one minute, and then come back to Tatiana, and Erica. But in terms of how Europe has gotten to this place, and as you said, as much risk as it faces, I think it’s relative to what some people feared when it lost 120 bcm. As you said, a huge number, this is better than some of the worst case scenarios. Just talk a little bit about how Europe coped with that, how much it reduced demand, what allowed that to happen, how much it ramped up renewables. You, and another scholar here, Anne-Sophie Corbeau recently wrote a paper about the destruction of industrial gas demand. The idea that very high prices destroyed industrial economic activity, and that could be really painful economically for Europe in the longterm. How big a role did that play? If prices are back to where they were before, can that heavy industry come back?
Akos Losz: Yeah. The way Europe balanced this immediate and sudden loss of roughly 120 bcm of Russian gas was partly by importing more LNG. In the two years between 2021 and 2023, European LNG imports increase by roughly 55, 56 bcm. Then the other part was, of course, reduction of demand. Demand dropped by about 20% or 80 bcm in this timeframe. The rest of the balance was partly coming from increased supplies from Norway and Azerbaijan, but then decreased domestic production more or less offset that particularly due to the shutdown of [inaudible 00:39:55] Then we had some changes in the storage balance. In 2020, when we started at a very low storage balance, and we had a much larger overall storage level in 2023. These additional items account for the rest of the change in the balance, but largely the shortfall was met by reduced demand, and increased energy supply.
Coming back to your question about the reduced demand part, a part of that came from two consecutive very mild winter that we had, which is partly a lucky coincidence. But Europe in general is warming. Actually, Eurostat has an interesting chart which shows that heating demand, which is expressed in heating degree days decreased by about 19% since the late ’70’s. In a sense, warmer winters are to be expected, but these last two winters were exceptionally warm even considering this warming trend. That reduced the heating demand in the residential or commercial sectors, and additional savings and behavioral changes, keeping the thermostat lower, those types of things also contributed to this. Then power demand was also relatively weak in 2023 as the nuclear capacities in France, and hydro generation levels gradually came back. Renewable additions continued relatively strongly, so far demand also weakened compared to 2021.
Then one of the biggest parts of the puzzle was the industrial demand destruction. We analyzed this in some level of detail. As you mentioned, there are really a handful of sectors in the European industry, which were especially by high prices, and this loss of demand. These are concentrated in chemicals, and petrochemicals, refining, steel making, cement, glass-making, aluminum, and all of these other natural gas and all electricity intensive sectors, the heaviest hit during the crisis. As we saw, activity has shown some tentative signs of recovery, especially in the second half of last year, and at the very beginning of this year. But then that recovery pretty much fizzled out, and slowed down to nearly zero in the rest of this year so far. That shows that this loss of industrial activity is partly structural, and part of the destruction is permanent. Some of the demand may never come back, or at least it may take longer than what the expectations, just based on the current price levels would suggest.
Jason Bordoff: If I remember the takeaways from the paper you wrote with Anne- Sophie, it was not a happy picture if you were hoping for an industrial demand recovery in Europe. That was my takeaway from reading it.
Akos Losz: Yeah, that’s right. I think at best, we can hope for a partial recovery, and the prolonged recovery of industrial demand in Europe. It’s really not a realistic prospect to expect that industrial demand will ever go back to the 2021 levels. That’s a broad conclusion that even if prices drop significantly as the gas market goes into a more comfortable balance, I don’t think that will lead to a very robust rebound in European industrial gas demand.
Jason Bordoff: Tatiana, I’m curious if you see the situation in Europe the same way Akos does. Also, what you see as the outlook for Russian gas supplies into Europe moving forward. European leaders have talked a lot about now taking the initiative themselves to completely get off Russian gas, ban Russian LNG into the European market.
The European Commission just announced sanctions, but just on the re-export of Russian LNG. It was like, “We still need the LNG, but you can’t send it here to send it to other people.” Your thoughts about it.
Tatiana Mitrova: Yeah. First of all, I would echo everything that Akos was saying about European gas demand, and the fact that the crisis is not over, it is just prolonged crisis. It’ll be very difficult to get out of it. Because in addition to all the gas market things, there is also broader geopolitical context. Russia is at war. It is at war with the collective west as it says. Nothing can be ruled out completely. It is very difficult for European authorities to start to take it into account. But Nord Stream sabotage is not the only thing that can happen with the European gas infrastructure unfortunately. There are many, many evidences of other attempts to affect it.
But in addition to that, if we are talking about Russian gas flowing to Europe specifically in the end of this year, the transit contract with Ukraine expires. After all these massive daily bombings of Ukrainian cities, and Ukrainian gas infrastructure, it’s very difficult to imagine that Gazprom and Naftogaz could sign a new contract, could even start to negotiate this new contract. Ukrainian authorities were very clear on that.
Nevertheless, there are several countries in Europe which are very much interested in keeping flows of Russian gas, Hungary specifically. Orban just recently made visits both to Ukraine, and to Russia to discuss ceasefire agreement, but also to talk about gas supplies. The raw companies, the raw governments which are interested in preventing these flows, I have no answer whether it will be possible to fix them somehow. Maybe there will be some short temporary arrangements like months ahead of short-term contracts or other agreements. But anyway, the flows through Ukraine are supposed to decline. Basically, Russian gas will keep flowing to Europe only through Turkey, which is not a big volume.
Russian LNG, as you’ve mentioned, ban on transshipment, which is a bit of hypocrisy to be frank. Because Europe keeps importing this LNG, but it doesn’t allow it to go to India, Pakistan, and other countries of global south which are in bad need of this LNG. But okay. Anyway, all these decisions, they are temporary, and the European Commission makes it very clear that they are waiting for the bigger wave of LNG glut, and then they can get rid of Russian LNG without any pain.
Russia realizes, as I’ve mentioned, that most likely it will not be able to restore even partially gas supplies to Europe because, and here I want to make the most important point, from the political point of view, Russia has accepted not only the authorities but the whole population, have accepted this idea that Russia will be in isolation. It will be at war or at least in the frozen conflict with the west. Nobody in the country is expecting some reset or some rearrangement that the sanctions will be lifted in any foreseeable future. The country has prepared to live with this new environment, which means most likely no additional Russian gas on top of what we of these 20, 25 bcm that we see now. More likely, they will further drop down to let’s say 15, 16 bcm through Turk Stream. That’s it.
Jason Bordoff: I want to come to Erica in just a second, but Akos, you wanted to add something. Also, Tatiana made a point that a lot of our listeners may not be aware of, notwithstanding this horrific conflict and invasion how much Russian gas still flows through Ukraine. That agreement is coming up for renewal. The expectation is it wouldn’t be. But on the other hand, there’s several European countries that depend on that gas. How important is that? How much flows through Ukraine? Given that dynamic where there are certain countries that would like to see that continue, what’s likely to happen?
Akos Losz: Yeah. Last year of that 25 bcm of Russian pipeline gas, roughly half came through Ukraine, and half through the Turk Stream system. This year, it’s a little bit higher. On an annualized rate, we have about 15 bcm of pipeline gas flowing through Ukraine at the moment. It’s really three countries that still depend on that transit corridor, Italy, Austria, and Slovakia. Hungary pretty much redirected all of its deliveries through the Turk Stream system.
I agree with Tatiana. I don’t think that Turk Stream flows will be impacted anytime soon. On the other hand, Italy is well on its way to pretty much reduce their Russian pipeline gas to zero from 2025. I think there’s not going to be any additional need for these short term nominations from the Italian side.
I think Austria is still heavily dependent on Russian pipeline gas supplies, but recently started looking at other options. It has plenty of pipeline gas capacity coming from other directions, so it can access LNG. Of course, it’s a bit more expensive, and a bit more complicated to move that LNG all the way to the center of the European continent. But it’s very well possible to supply Austria from other sources. I think the government just started investigating how they could stop using Russian gas completely. Austria may opt for these short-term nominations for a time, but I think there is also a desire to discontinue deliveries through Ukraine.
Slovakia has also taken steps to import LNG including through Poland in recent weeks. I think I shared Tatiana’s assessment that those flows through Ukraine will drop significantly once the contract expires. I think signing a new transit agreement is definitely out of the question. I think it’s going to be short term, much, much more volatile in terms of nominations. I think overall, it’s going to be at a much lower level than this current 15 bcm of annual flows potentially in some months dropping to zero, and in some months reaching maybe half the current level, is my current expectation for the gas flows through Ukraine. Yeah.
Jason Bordoff: Okay. Erica, we’ve been talking so much about the complex geopolitical dynamics here. We’re talking on the day that NATO leaders are gathering in Washington DC, where you live, to focus on two topics in particular. One is how to support Ukraine, and the other is how to build greater partnerships in the Indo-Pacific to counter China’s rise, and influence. Given what we have seen in this new era of great power competition, the recent US EU tariffs that have been imposed on imports from China, the rhetoric we hear from a potential Trump administration about how it would approach engagement with China, how is that affecting the way China thinks about its energy relationships with Russia, and maybe other suppliers as well?
Erica Downs: I have a couple of points that I’d like to make. I think one, and Tatiana had mentioned this earlier, is the fact that tensions between China, and the United States are likely to make China look more favorably upon closer energy relationships with Russia, possibly to include Power of Siberia 2. This goes back to the point I was making earlier in our conversation, that for China, there looks like there’s a choice that they’re going to have to make between greater dependence on Russia versus greater dependence on LNG from US, Australia, Qatar. For China, both of those dependencies come with pros and cons. In my view, I think, if we were to see a prolonged, and sustained further deterioration in the US-China relationship, that might make Russia look like a more attractive energy partner to China. That’s point number one.
Point number two goes to the tariffs that the US, and the EU have put on Chinese EVs. I suspect when you think about how China’s going to respond to that, there are immediate responses, and then there are responses that are going to have to evolve over the longer term. In terms of longer term responses, I think one response on the part of China might be to try to continue to diversify their energy, and other trade partnerships away from the United States so they can’t be hurt by US tariffs.
Because right now, for China, we have Biden imposing tariffs. Obviously, Trump had imposed tariffs during his first administration. If there’s another Trump administration, I think it’s likely we might see more tariffs. I think if you’re sitting in China, regardless of whether it’s Biden or Trump, who’s going to be the next president that, because both of them have implemented these tariffs on Chinese imports, that one lesson is to put China in a position where it can’t be hurt by those tariffs.
Jason Bordoff: I want to close by asking all of you about how we should think about climate change, and the urgency of decarbonizing when we talk about these huge, massive infrastructure projects. Erica, you talked a little bit earlier about how China thinks about its climate goals. I’m not sure Putin is thinking a lot about those. You can tell me if that’s wrong, Tatiana.
Also, Akos, in Europe, you gave an outlook for what gas demand will be, where supply needs to come from. When you think about REPowerEU, and fit for 55, and the ambition that Europe has to get even stricter, and more ambitious about those goals, how does that change the outlook for everything we’ve been talking about massive gas infrastructure projects, the global LNG market?
Erica Downs: I’m happy to start. One, I look at China’s relationship with its major energy partners. One of the things that has struck me is that you don’t see climate change or transitioning to a lower carbon future really featuring in the China-Russia energy relationship.
However, in contrast, this is something that we are seeing in China’s relationship with Saudi Arabia. I mentioned Saudi Arabia because Saudi Arabia, and Russia are China’s two top oil suppliers. In the case of Saudi Arabia, you do have Chinese companies partnering with Saudi companies to develop renewable projects in China, and in third countries. You’ve had Saudi Arabia welcome China to continue to invest in clean energy projects in Saudi Arabia. We just don’t see that at all in China’s relationship with Russia. Then of course, when you turn to the United States, we are seeing concerns about national security, concerns about the next presidential election, really trumping concerns about transitioning to a lower carbon future.
Jason Bordoff: Tatiana.
Tatiana Mitrova: Yeah. Jason, maybe I will sound provocative, but I’m afraid that we’ve entered into the period of time when environmental, and climate considerations are becoming less important for the key global decision makers than security, and geopolitical issues, unfortunately. But the whole mess with the war in Ukraine, it is just a sign of the broader reconfiguration of Eurasian space.
Ironically, China is becoming the main beneficiary, using sometimes climate rhetorics when it comes to Central Asia, not using this climate rhetorics when it comes to Russia. Because for Russia, it’s not relevant, though the goal of net zero by 2060 is officially still there, but nobody cares in Russia about that. But it’s about building broader alliances, increasing power, and security. We do not know how this war will end, and when it will end. It might take many years or there could be a frozen conflict or something like that. But obviously, the world in Eurasia, at least, will not be the same.
The way how so far China is positioning itself regarding Russia, it shows this readiness for very pragmatic cooperation, just taking what is accessible, and not engaging into any dangerous projects or activities. Back to your question, I’m sure that China will use this opportunity when it will not be dangerous from geopolitical standpoint, from the sanction standpoint, it’s always better to have this pipeline, even if it’s not fully utilized, if it is like 10% flows. But just as an option, as an insurance, in case of any unprecedented activity or something unexpected, climate, they will think about climate after they ensure security. That’s my feeling.
Jason Bordoff: Akos, a final thought from you, sitting in Europe, which has, as I said, very ambitious climate goals, but is falling short of them right now.
Akos Losz: Yeah. Europe may be an exception to the trend Tatiana is mentioning, because Europe’s response to the crisis was in part to accelerate the transition with the REPowerEU plan, and the Fit for 55 program would already have reduced European gas demand by about a 100 bcm by 2030. The REPowerEU plan if fully implemented would reduce it by an additional 200 bcm plus. Of course, there are elements of it which are more wishful thinking than realities like the ambitions related to great hydrogen production in particular. There are other parts where the EU is falling short in delivering these three barrier targets. But in general, I think the intention was to front load some of these measures, including on energy efficiency, on doubling down on renewable capacity expansions, and doubling down on heat pump deployment, and those other measures which will inevitably reduce gas demand.
You can debate the exact extent to which this will cut into European demand, but European gas demand actually peaked around the late 2000’s. It’s been on a declining trend ever since. I think these policies will inevitably accelerate that declining trend. Now, we actually produced the REPowerEU tracker. You can see exactly where the EU is meeting its ambitions, and its own track to achieve those targets. It’s doing quite well on energy efficiency. It’s doing quite well on solar deployment. It used to be doing well on heat pumps, although heat pump sales decelerated last year a little bit, because of the uncertainty, and changes in the subsidy regimes in many countries.
But it’s falling short badly, in green hydrogen deployment, and also in biomethane production. You can say that EU climate policies will definitely have a negative effect on gas demand in general, but to what extent low carbon gases can come in, and substitute some of that commercial gas demand is a bigger question mark. So far biomethane, and green hydrogen has not progressed as well as it was hoped.
Jason Bordoff: Thank you. Akos Losz, Erica Downs, Tatiana Mitrova, always such a treat to talk to all of you, read your work, learn from you, and privilege to call you colleagues here or in one case, former colleague. Because we’re sad, but also delighted that Akos will be taking over as the lead gas analyst at the International Energy Agency. Our loss is the gain for the world that’s trying to understand these issues by everyone benefiting from your analysis through the great work the IEA puts out. Congratulations on that.
But thanks to all of you for making time to be with us today, and all the work you do with us every day.
Thank you again to Tatiana, Akos, and Erica. Thank you for listening to this week’s episode of Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University School of International and Public Affairs. The show is hosted by me, Jason Bordoff, and by Bill Loveless.
The show is produced by Erin Hardick, and Tim Peterson from Latitude Studios. Additional support from Martina Chow, Kyu Lee, and Caroline Pitman. Roy Campanella engineered the show.
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