Commodities, Features, Oil & gas

Could Australia hold the key to Europe’s gas crisis?

Australia gas

As Europe combats severe natural gas shortages and looks to diversify its imports amid the Russia–Ukraine war, could Australia be the reliable, geopolitically-safe supplier it needs?

Words by Alexandra Colalillo.

For decades, energy trade agreements between Russia and Europe have been driven by geopolitics as each side seeks to exploit oil and gas for political influence. 

However, as a major player in the global energy market, Russia has the upper hand in this game and is adopting its position of power for political leverage amid the Ukraine crisis. 

Alexandra Colalillo is an economist and manager at a multinational professional services firm in Western Australia.

Given Russia is home to the world’s largest gas reserves and is the second-largest global producer of natural gas behind the US, it is uniquely placed to control prices and threaten the welfare of the European Union (EU), which is at the mercy of Russian gas supply. 

Russia has a wide-reaching gas export pipeline network with transit routes via Belarus and Ukraine and transit routes directly into Europe. These pipelines include Nord Stream, Blue Stream, and TurkStream. 

In 2021, Russia completed Nord Stream 2, a 1200km pipeline under the Baltic Sea taking gas from the Russian coast near St Petersburg to Lubmin in Germany. However, the German Government made a decision not to approve its certification in the wake of the Russian invasion of Ukraine. 

As European domestic natural gas production has declined over time, its dependence on Russia has increased. In 2021, Russian natural gas accounted for 45 per cent of imports and almost 40 per cent of EU gas demand, equivalent to 155 billion cubic metres.

European fears of a severe winter gas shortage are driven by the risk of a large-scale supply disruption precipitated by Russian gas producers. 

National-security specialists have long recommended that the EU reduce its dependence on Russian imports at any cost; however, the delay in gas diversification now places the EU in a vulnerable position ahead of what could be a turbulent winter. 

Policy-makers in the region are now scrambling to fill underground storage with natural gas supplies to provide households with enough fuel to keep the lights on and homes warm before the cold returns. But the push for the EU to diversify its natural gas dependency presents Australia with profound opportunities to step in at this critical time.

The European Union is at the mercy of Russian gas supply.

Russia’s political influence over Europe

In response to Russia’s invasion of Ukraine and the ‘gas-for-roubles’ payment dispute, the EU joined the US in imposing sweeping financial sanctions on Russia. 

Germany’s regulator also refused to give Nord Stream 2 an operating licence given Russia’s state-backed energy giant, Gazprom, owns a 50 per cent stake in the pipeline and all of the gas that would pass through it. 

The licence refusal stems from concerns from the US, UK, Poland, Ukraine and Germany that the pipeline would give Russia even more of a stranglehold over gas supplies to Europe.

Due to the non-compliance with the new Russian-imposed payment scheme to pay for natural gas in roubles, Moscow has suspended all natural gas deliveries to Poland, Bulgaria, Finland, Denmark and the Netherlands, and has halved natural gas deliveries to Italy and Slovakia. 

Russia also recently cut off natural gas flows from Nord Stream 1 to Europe, after repeatedly cutting off supplies from the pipeline over the past few months. Nord Stream 1 is the world’s longest sub-sea pipeline, transporting 55 billion cubic metres of gas a year. 

This is likely to heighten the existing gas crisis that has prompted emergency measures from governments and painfully high bills for consumers.

Given most German homes rely on Russian gas for heating, supplies being cut could have the potential to tip Germany into a recession, hitting the economy by €193 billion in the second half of this year. 

The end of Russian gas imports could also impact the German labour force by approximately 5.6 million jobs. This would then ultimately require the government and regulator to step in as the distributor of natural gas, and the rest of Europe will be affected given Germany’s geographical location in the middle of the EU. 

However, one has to question whether this decision serves Russia’s best interest given it would negatively impact its export revenues. 

Europe’s response as Russia cuts gas supply

Since Russia’s invasion of Ukraine in February 2022, Germany has reduced its dependence on Russian gas in a gradual effort to stop using Russian gas altogether. 

Instead, Germany is leaning on its other main suppliers of natural gas, Norway and the Netherlands, who provided 31 per cent and 13 per cent, respectively, of Germany’s gas imports in 2021. 

The German Government has also given the go-ahead for the country’s first liquified natural gas (LNG) terminal to be built at Wilhelmshaven.

More broadly, Europe has announced plans to cut 90 per cent of its Russian oil imports and two-thirds of its Russian gas imports by the end of the year. EU governments are also buying gas on the spot market and attempting to secure alternative sources, including importing LNG from the US and elsewhere.

However, Europe has limited infrastructure to receive LNG shipments and a fire at a key US export depot in Freeport, Texas, undercut US gas export capacity and highlighted Europe’s vulnerable position. 

With the Biden administration promising to help Europe secure more natural gas from US exporters, this also presents an opportunity for Australia. 

Woodside’s Scarborough project could support future European gas shortages.

Can Australia step in?

In 2021, Australia exported 80.9 million tonnes of LNG, equivalent to almost three quarters of the volume of gas the EU imported from Russia in that year. 

As Europe seeks to diversify its natural gas imports, Australia has an opportunity to fill the demand gap. This could include bringing on additional LNG trains in Darwin. 

The second train at Woodside’s Pluto and Scarborough fields could add five million tonnes per annum. 

Santos’ Narrabri coal-seam gas project in NSW is an emerging project that could be turned to down the track. The project is said to be able to support up to 50 per cent of NSW’s gas needs once up and running.

However, Narrabri, which was first developed by Eastern Star Gas before Santos bought the project in 2011, must navigate regulatory approvals before it can come onstream.

Federal Resources Minister Madeleine King offered support for Narrabri in June, suggesting it would be an important subsidiary as Australia’s renewable energy transition continues to mature.

While Australia won’t be able to immediately expand its gas production or build a pipeline connected to Europe in the short term, Europe’s energy challenge extends beyond keeping households warm this winter. 

Securing alternative and reliable energy supplies is a long-term game, giving Australia time to advance its economic and security interests.   

However, at least 75 per cent of Australia’s LNG is sold via long-term contracts linked to the oil price and Australia can’t supply more to Europe without breaking these contracts. The government can only intervene in gas exports when the local market doesn’t have enough supply, and that only concerns the east coast since WA, home to two-thirds of exports, has its own unique market. 

On the west coast, what is not exported via contract is kept in the state under its 15 per cent domestic gas reservation policy, mandated for domestic use only.

Furthermore, as approximately a third of LNG developed on the east coast is shipped, any gas we could supply to Europe would impact Australia’s existing struggling system and manufacturers. This may become feasible as renewable energy replaces gas on the electricity grid; however, it is unlikely in the next 10 years.

The Russia–Europe geopolitical divide will fundamentally change future energy markets, and while Australia is positioned to step in over the long-term, it will not single-handedly solve the problem any time soon. 

This feature appeared in the August issue of Australian Resources & Investment.

*This article has been updated to reflect market conditions on September 9.

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