Russia, the world’s second-largest natural gas producer, has significantly decreased the amount of gas supplied to Europe and threatened to cut supplies completely. Should this happen, Italy and Germany risk losing 4% and 3% of their GDP, respectively.
Ten countries produce around 73% of the world’s natural gas and Russia, after the United States, is the second-largest producer with a 17.4% market share and 37 trillion cubic meters of natural gas reserves. Russia’s war against Ukraine has placed those countries that import natural gas from Russia at serious risk. Following the sanctions introduced by Western states, Russia shut down the Yamal pipeline that delivered gas to the EU through Belarus and Poland, and by mid-June had also decreased the level of gas supplied through Nord Stream 1. In July, Russia completely shut down gas supplies for 10 days, citing maintenance work as the reason for this. The EU believes the disruptions to supplies are “politically motivated.” After resuming supply, Russia halved the levels available with the risk of another total shutdown remaining high.
Fig.1. Top 10 natural gas producers
Source: Visual Capitalist
Overall, natural gas accounts for around 25% of European primary energy consumption and while overall the EU remains dependent on Russia’s natural gas, some European countries face higher risks than others. However, the gas supply market in the European Union had been tight even before war broke out in Ukraine in February 2022, and prices had already begun to soar at the beginning of the year.
Before the war in Ukraine, Europe imported 40% of its natural gas from Russia. Dependence on Russia’s gas varies tremendously across European countries. For instance, while the UK imported only 4% of its natural gas requirements from Russia, Germany and Italy relied heavily on Russia’s natural gas in 2020. Other countries such as Belarus, Turkey, and the Netherlands also had significant energy dependency. According to IMF, in view of the ongoing energy crisis, these countries risk facing a shortage of gas at around the 40% level and a GDP contraction of about 6%.
Fig.2. Countries by million of cubic metres imported from Russia
Source: BBC
An eventual complete shutdown of natural gas supplies from Russia is likely to trigger significant energy cost escalation in European countries. According to research by Goldman Sachs, such a situation may increase European household energy costs by around 65%. Some industries in Italy and Germany, such as those involved in chemicals and cement production, may be forced to reduce their gas usage by approximately 80%. Should there be a total shutdown, the euro-area economy may contract by 2% by March 2023.
Goldman Sachs research team expert, Alberto Gandolfi, talking about the current energy crisis, suggests two possibilities:
“If the worst-case scenario does happen, and Russian gas falls to zero, there are two big implications. The first one is a spike in procurement costs which would essentially mean a 65% increase in power and gas bills from the high levels of today. It’s a significant increase for families. The second implication is really about volume. There is not going to be enough gas around for industries, so gas-intensive companies working across chemicals, glass, paper, steel, cement, etc., will be impacted and will need to reduce production there, which could trigger things like furloughs.”
Foreseeing these risks, the European Commission is calling on member countries to fill their gas storage to 80% capacity by November 1, 2022. However, even so, countries such as Germany will struggle to meet demand over the winter. According to the President of the Federal Network Agency, Klaus Mueller, even if gas storage reaches 95% by November 2022, this stock will only cover around two to two and a half months of heating, industrial and power demand should Russia impose a total shutdown of gas supply.