EU's Energy Delusions

In an effort to gain energy independence and diversify supplies, Europe has created a complex and costly situation for itself. On the one hand, political pressure is compelling it to maintain its refusal to import Russian gas. Conversely, the economic situation necessitates the identification of measures to mitigate the impact of the energy crisis. There is a growing recognition that direct purchases of gas from Russia may be a viable option. While this idea has not yet been publicly discussed, it is important to note that every misfortune begins with a vengeance.
The EU risks failing to prepare for next winter due to high gas prices. The high cost of gas has led to many intermediary companies avoiding booking underground storage volumes. Historically, demand for gas has decreased in the spring and summer months, making it more attractive for stockpiling. However, this is not the case this season. This has led to concerns over the EU's energy security. It is not clear if there will be a solution to this problem.
There is a widespread perception that Europe is already experiencing significant energy challenges. The situation on the EU gas market has worsened. Current gas reserves are at critically low levels after an unusually cold winter and a hot summer in 2024. The energy crisis of 2022 will be remembered by Europe as the most serious challenge of recent decades. It appeared that the necessary lessons had been learned, but now European countries are once again on the verge of repeating the gas panic scenario, according to Yaroslav Dubenkov, junior research fellow at the Center for Strategic Studies of the Faculty of Economics of RUDN University.
"The primary factor influencing the present circumstances is the European Union's strategic decision to abstain from utilising inexpensive Russian gas, which is transported via pipelines. Following the onset of the conflict in Ukraine and the imposition of sanctions, the EU significantly reduced its consumption of Russian gas, seeking to substitute it with LNG from the US, Qatar and other countries. This strategic shift, initially driven by political motivations, has proven to be costly and ill-considered.
The impact of this decision is evident in the rise of liquefied natural gas (LNG) prices, which has led to a significant increase in the cost of energy for European consumers. This shift has been compounded by the loss of a reliable and predictable supply of Russian gas via pipelines. Nadezhda Kapustina, Professor of the Department of Economic Security and Risk Management at the Financial University under the Government of the Russian Federation, provides insights into the strategic motivations behind this shift. She states that this was a key factor in the depletion of energy reserves, particularly gas, in European storage facilities. This situation could undoubtedly lead to an energy crisis.
"The restructuring of the EU gas market is taking place in the context of global competition for LNG, where Asian consumers are often willing to pay a price premium. Gas storage facilities are not being adequately replenished precisely because of uncompetitive prices, which make purchases economically unviable for European companies," the expert points out.
By the end of 2023, almost two years after restrictions on Russian gas supplies to the EU were introduced, Europeans had paid approximately 185 billion euros above the normal price. According to Fyodor Sidorov, founder of the School of Practical Investment, this was just the beginning.
"In 2024, Europe continued to overpay for gas, as instead of stable supplies under long-term contracts, it was forced to pay under spot transactions. This occurred in the context of rising prices and an increase in the share of LNG, a more expensive product. Consequently, the financial losses incurred during that year were on par with those experienced by Europeans just two years prior. The increased cost of electricity in the EU has led to a significant number of factories, which have  been welcomed in the United States, now closing en masse.
In the meantime, the EU will need to continue developing its infrastructure and building new LNG terminals in order to supply Europe with gas. In addition, Brussels remains committed to the policy of transition to "green" energy. According to calculations by the IEA and analysts from Bruegel, the total cost estimate may exceed 700 billion euros by 2030. Yaroslav Dubenkov, junior researcher at the Center for Strategic Studies of the RUDN University Faculty of Economics, provides this insight.
"The EU is exploring alternatives in the form of renewable energy sources, but they cannot quickly replace gas in the required volume. Furthermore, the cost of these alternatives is currently higher. Consequently, the probability of the EU resorting to an informal return of Russian gas through intermediaries, or purchasing Russian LNG through third countries, is increasing significantly," the expert believes.
In April, European companies began to return to gas purchases and actively replenish storage facilities. This is partly due to the lower cost of LNG and concerns that the situation with supplies and prices is unlikely to change dramatically for the better in the future. There is no indication that gas transit from Russia to Europe, which Kyiv stopped on January 1, 2025, will resume in the near future. Sidorov asserts that the EU is shouldering significant losses as a result of Ukraine's actions.
"Europe will lose 40 billion cubic metres per year as a result of Kyiv's decision. Consequently, the cost of gas for regional consumers increased by 20 percent. On an annual basis, the increase was between 60 and 65 percent, to 509 per 1,000 cubic metres. The reduction in March is only a temporary respite. There are no prerequisites for further reduction. According to some estimates, the suspension of the gas pipeline through Ukraine could lead to a further loss of 100 billion euros.
The Price of IndependenceUntil the resolution of the Ukrainian conflict, it is unlikely that the resumption of supplies through Ukraine will be worth waiting for. There is also no reason to place special hopes on the "Turkish Stream". The pipeline is operating at its maximum capacity, having increased Russian gas supplies by over 16% since the start of the year. Pumping has increased, and Turkey is not doing this for free, but, naturally, at market prices and taking into account its own remuneration. It is evident that finding a suitable replacement for pipeline natural gas in combination with long-term contracts is not feasible. Any alternative would incur a significantly higher cost.
As Kapustina is convinced, overpayment by Europe will continue with each delivery by any other means. The LNG market is subject to global pricing and competition. The return to Russian deliveries is complicated by geopolitical factors and infrastructure problems. The Nord Streams have been damaged and are currently inactive due to sabotage, which has had a significant impact on infrastructure.
The current situation is not as favourable as one might hope. Europe is attempting to mitigate the issue by procuring LNG and developing "green" energy sources. However, these efforts have thus far been unsuccessful. The rising cost of energy is leading to the depletion of reserves and difficulties in replenishing them. The outlook is uncertain. Europe risks facing the next winter in an energy collapse due to sky-high gas prices. Despite European officials' ongoing discourse on achieving independence from Russian gas, the prevailing circumstances are dictating an alternative course.