Will the EU heed calls to ban Russian gas?

The calls to abandon Russian LNG are increasing in Europe, as it is curently almost exclusively purchased by European consumers. A vote on this issue is scheduled for April. This raises questions about why Russia began selling its LNG to Europe and why Europeans have been buying it. It is unclear who will suffer more if the ban is introduced.
The European Commissioner for Energy, Kadri Simson, is urging EU countries to vote in April to stop purchasing Russian LNG. “In the EU, we are gradually increasing pressure on European players to reduce LNG purchases from Russia. Confidence in supplies from the US is important,” said Simson after a meeting of the US-EU Energy Council in Washington.

In 2023, the EU reduced imports of pipeline gas from Russia by five times. However, it significantly increased purchases of Russian liquefied natural gas, up to 15 million tons, which is 38% higher than the 2021 level.

Why has Russia increased LNG supplies to Europe while pipeline gas, on the other hand, has substantially been reduced in this market? Firstly, there are no sanctions against gas from Russia. Pipeline supplies have decreased due to delivery problems, primarily caused by the Nord Stream explosion and the closing of the Yamal-Europe pipeline. Secondly, Russian LNG is sent to areas where prices are higher.
“Supplying LNG to Europe has been profitable for sellers in recent years because prices there are higher than in Asia. Even if prices in Europe and Asia are the same, it is still more profitable to ship LNG to Europe due to lower transportation costs,” explains Igor Yushkov, an expert at the Russian Financial University and the National Energy Security Fund.

Sergei Kaufman, an analyst at Finam Financial Group, notes that exporting to the EU involves the shortest transportation distance. Therefore, exports to Europe are slightly more profitable than exports to the Asia-Pacific region.
We are mainly discussing the supply of Novatek's Yamal LNG plant to Europe. Initially, Novatek planned to send its LNG to Asian premium markets, where prices were higher at the time. There was no mention of Europe. Allowing Russian LNG to compete with Gazprom's Russian pipeline gas in Europe was a peculiar decision at the time. As the Russian budget gains income from pipeline gas exports, the state does not receive any revenue from LNG exports due to tax breaks granted to LNG projects in Russia for 12 years. Previously, Novatek would not have been permitted to take away Gazprom's share in the European market, even though there were no explicit prohibitions.

However, the situation has changed significantly since 2022. With the decrease in Gazprom's gas flow, Europeans have started to accept any LNG, including Russian. Russian LNG has proven to be in demand. The Yamal LNG plant has a capacity of 17.4 million tons of LNG per year and produces about 20 million tons per year. In addition, Novatek has 15 ice-class gas carriers at its disposal to send LNG to Europe, which is faster and cheaper than sending it to China.

The EU is choosing our LNG because it's a competitive offer. According to Yushkov, the supplier from Yamal LNG can offer a discount due to lower liquefaction and transportation costs.

Russia is the world's fourth-largest LNG producer with two plants, trailing behind the USA, Qatar, and Australia. While Australia concentrates solely on Asian markets such as China, Japan, and South Korea, the USA, Qatar, and Russia are also active in the European market. The source notes that in 2023, American LNG accounted for around 60% of Europe's supply, while Russia and Qatar contributed similar volumes.
European countries are increasingly dependent on American LNG. In Lithuania, American LNG accounts for 40% of the market, and in Finland, its share has reached more than 38%. American LNG accounted for 27% of the market in the Netherlands. Germany currently only imports 5% of its gas. However, with the introduction of our own LNG terminals, the share of American LNG is likely to increase significantly.

Meanwhile, the EU's reliance on Russian gas has decreased from 45% in 2021 to less than 15% in 2023.

However, this shift has resulted in significant economic losses for Europe as they have become increasingly dependent on American gas.

It is important to note that American LNG has not completely replaced the volumes of Russian pipeline gas that have left the European market. This is due to the fact that the EU has been steadily reducing gas consumption for several years. In 2023, gas usage in the EU decreased by an additional 20% to 330 billion cubic meters.
What consequences will Russia and Europe face if the EU unanimously votes for the Russian LNG embargo in April?

The Russian budget will not be affected by this, as export duties are not paid for LNG exports. Therefore, the budget will not lose any income immediately.

The impact of the sanctions will depend on the type of restrictions that will be introduced, as noted by Igor Yushkov. The first option is when the ban applies only to LNG supplies from Russia to the European market. The restructuring of the market will result in increased prices for gas in Europe, whether it is traded on the exchange, transported through pipelines, or in liquefied form.

Yushkov warns that if Europe bans Russian LNG, it will face difficulties as it will have to purchase alternative LNG at a higher cost, leading to another price surge. Therefore, such a ban would not be profitable for Europeans themselves.

Novatek will redirect its LNG supplies from Europe to Asia, similar to Russia's actions in the oil market. Russian LNG will be delivered to China, Turkey, and India.

However, if the European embargo is coupled with stricter American sanctions against Yamal LNG, such as those imposed on Arctic LNG-2, the consequences will be more severe.
A ban will not only be introduced on the supply of Russian LNG to Europe, but it will also be impossible to buy gas from Yamal LNG. This raises the question of whether Novatek can acquire the 14 non-Russian tankers and allocate them between Yamal LNG and Arctic LNG-2 to export raw materials from both projects to Asian markets.

However, Yushkov believes that the chances of sanctions against Russian LNG being adopted in April are small. He thinks that the idea was proposed too hastily, and that it has not been discussed as thoroughly as previous sanctions.

Yushkov also believes that the EU is unlikely to immediately abandon Russian LNG. In 2023, Russia exported about 16 million tons of LNG to Europe, mainly from the Yamal LNG project. This is a significant volume that will be difficult to replace quickly. According to Sergei Kaufman, the EU countries are likely to reject pipeline gas, including the current 15 billion cubic meters per year that transit through Ukraine. Replacing both LNG and the volumes flowing through Ukraine simultaneously will be challenging due to the limited supply on the global gas market.

The expert anticipates that the EU will start to decrease imports of Russian LNG from the second half of 2025 onwards. According to the RePowerEU plan, a complete phase-out of Russian LNG may only happen in 2026-2027. Additionally, the expert acknowledges the possibility of the EU revising its plans if the political situation between the Russian Federation and the EU improves.