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After coal, the EU faces an uphill battle to ban Russian oil and gas

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By Jorge Liboreiro
In 2021, the EU imported over 155 billion cubic metres of Russian gas, most of it travelled through a large network of pipelines.
In 2021, the EU imported over 155 billion cubic metres of Russian gas, most of it travelled through a large network of pipelines.   -   Copyright  Dmitry Lovetsky/Copyright 2019 The Associated Press. All rights reserved.

The European Union has dared to break a taboo that a few months ago would have been unthinkable: banning Russian fossil fuels, the precious supplies on which the bloc so heavily depends.

The radical measure came only after leaders were confronted with brutal images of indiscriminate killings in Bucha, a suburb near Kyiv. The massacre triggered an international outcry and raised the most serious accusations yet of war crimes levelled against Moscow, who vigorously denied any involvement.

Upon seeing the horrors of Bucha, member states decided to self-impose a 120-day deadline to completely phase out imports of Russian coal. The ground-breaking move was meant to complement previous rounds of sanctions and help cripple the Kremlin's war machine: the sale of fossil fuel represents Russia's main source of revenue, contributing to over 40% of the federal budget.

But while the announcement from Brussels received initial praise, it was quickly eclipsed by the inaction taken against Moscow's two most profitable exports: oil and gas.

Last year, EU purchases of Russian coal amounted to €5.16 billion, a figure that pales in comparison to the €71 billion spent on petroleum oils and the €16.3 spent on gas.

The power crunch that besets the continent since late summer has further inflated the hefty energy bill. According to Bruegel, a Brussels-based economics think tank, the EU is currently paying Russia €450 million for its oil and €400 million for its gas – on a daily basis.

Josep Borrell, the EU's foreign policy chief, denounced the staggering expenditure before the European Parliament, telling MEPs the bloc has spent €35 billion on Russian fossil fuels since the Ukraine war began and just €1 billion on foreign aid destined to the Kyiv authorities.

That same week, the parliament passed with overwhelming support a non-binding resolution calling for an "immediate full embargo on Russian imports of oil, coal, nuclear fuel and gas."

The appeal mirrored that of Poland and the Baltics, who have for weeks been leading the public campaign to abruptly slash Russian energy, arguing the stoppage is the only way to inflict real pain on President Vladimir Putin and force him to negotiate a ceasefire.

Although the Eastern camp has gained new followers in recent days, including Finland's Sanna Marin and France's Emmanuel Macron, the heated conversation is far from settled.

"We are supporting and actually financing Russia's war," Marin said last month.

On the other side of the table, Germany and Austria, who are heavily reliant on Russian fuels, have come forward with their concerns regarding a total embargo. German Chancellor Olaf Scholz warned a sudden cut-off would plunge "all of Europe into a recession" and his Austrian counterpart, Karl Nehammer, said sanctions are effective when they "don’t weaken those imposing sanctions against the one who is conducting war."

Hungary's Prime Minister Viktor Orbán upped the ante and vowed to veto any attempt to impose an energy embargo because, in his view, it would "kill" his country. (Hungary did vote in favour of the coal ban.)

But as Moscow shows no signs of giving up the invasion and reports exposing the war's brutality continue to emerge and outrage, the EU realises the pivotal debate can no longer be postponed. The extraordinary political unity achieved among the 27 member states to stand up to Putin's aggression faces now its greatest test.

Oil ban and the market's geopolitics

Russia is the world’s third largest oil producer behind the United States and Saudi Arabia, putting out about 10.1 million barrels per day (bpd) of crude oil.

Europe is by far its main client: the continent buys 2.4 million crude barrels every day, together with 1.4 million bpd in other refined products. Germany and the Netherlands alone consume 1.1 million bpd.

This makes Russia the EU's top oil supplier, making up over 25% of total imports and resulting in more than €70 billion spent in 2021.

The Druzhba pipeline, a massive conduit operated by Russia's state-controlled giant Transneft, brings over a million daily barrels directly to refineries in Poland, Hungary, Slovakia, the Czech Republic, Austria and Germany, which then turn the black gold into diesel, naphtha, gasoline and lubricants.

The pipeline has been in place since the 1960s and has fostered a high degree of interdependency between the two sides, who rely on continued and regular supplies to keep business running.

But Druzhba, which ironically means "friendship," is not the only door the EU has to welcome providers. The bloc receives the majority of oil imports through its ports, such as Rotterdam and La Havre, where tankers unload thousands of crude oil barrels and tonnes of refined products.

Should the EU decide to cut off Russian oil, these ports would be key to bypass the physical pipelines and guarantee supplies keep flowing after the embargo is introduced.

"There are a few refineries sitting on this [Druzhba] pipeline who should be the most exposed to a stopping in Russia flows," Ben McWilliams, a research analyst at Bruegel, told Euronews.

"Whereas some of the other refineries which are on ports will have an easier time replacing Russian oil imports because, rather than a ship carrying crude oil from Russia, you get a ship carrying crude oil from the Middle East. And with some constraints, you're able to replace crude oil in this way."

The bloc would need to leverage its power as a wealthy single market to secure the necessary supplies from other oil-producing nations, including Norway, Algeria, Nigeria, Saudi Arabia and the United Arab Emirates (UAE), to compensate for the huge loss of Russian oil.

Sealing these deals could prove difficult, as the Organization of the Petroleum Exporting Countries (OPEC), in conjunction with Moscow, has been limiting production since the onset of the COVID-19 pandemic, claiming global demand is still unstable and under pressure from the virus.

"So far, OPEC countries are not increasing supply at a higher rate than they were prior to the war, which is, from an economic perspective, quite strange given the prices are over $100 a barrel," McWilliams said.

"This is likely largely due to other geopolitical reasons and not great relations, particularly with America and the Saudis and the UAE, related to what goes on in the Yemen war, which means they're less likely to help out the US and its allies."

OPEC has already warned an embargo on Russian oil would create a huge market shock comparable to the 1970s energy crisis, which prompted a long, painful period of stagflation in the West.

"We could potentially see the loss of more than seven million barrels per day of Russian oil and other liquids exports," OPEC Secretary General Mohammad Barkindo told EU officials in a recent meeting in Vienna, according to a copy of his speech seen by Reuters.

"Considering the current demand outlook, it would be nearly impossible to replace a loss in volumes of this magnitude."

The challenging circumstances have given rise to intermediary ideas that fall short of a total embargo but that would nevertheless squeeze the Kremlin's war chest.

Among the latest proposals discussed by member states is the possibility of slapping an onerous tariff on Russian oil imports, a burden that would reduce demand across the bloc and force Russian companies to sell barrels at discounted prices. Another idea floated is the establishment of an escrow account into which the bloc would funnel some of its energy payments.

While the political debate remains stuck in an impasse, the private sector is taking matters into its own hands. Some of Europe's leading oil companies, such as Shell, BP, TotalEnergies and Neste, have started the process to wean themselves off Russian oil, fearing reputational damage and tit-for-tat retaliation for Western sanctions.

Gas ban and the limits of diversification

The daunting task of banning Russian oil and all its fearsome consequences are rapidly dwarfed by the greater dilemma of banning Russian gas.

Last year, the EU imported 155 billion cubic metres (bcm) of Russian gas, fulfilling about 40% of the bloc's consumption. Unlike oil, where cargos easily transport supply from port to port, the vast majority of Russian gas travels to the EU through a network of above-ground and underwater pipelines.

Many member states have grown accustomed to this large infrascture. In countries like Germany, Austria, Finland, Hungary and Bulgaria, Russia enjoys a dominant position as the prime or sole gas supplier. Germany has direct access to Nord Stream, a pipeline that brings over 55 bcm a year.

This entrenched dependency has pushed the EU towards a more expensive alternative, liquefied natural gas (LNG), which requires sophisticated terminals that transform the cooled-down liquid back into gas. The US, Qatar, Australia, Nigeria, Algeria, Malaysia, Indonesia and Russia are all major exporters.

As tensions ratcheted up along the Ukraine border in the weeks preceding the invasion, the bloc began to boost its LNG purchases, breaking all-time records in terms of volume. A recent political partnership between the EU and the US will provide the bloc with an extra 15 bcm of America-made LNG. The deal builds upon a separate roadmap unveiled by the European Commission that aims to buy 50 bcm by the end of 2022.

But these ambitious plans are designed to gradually decrease the EU's reliance on Russian gas, not to abolish it overnight. Distributing so much LNG across 27 countries could prove logistically arduous: the bloc's LNG terminals are unevenly distributed, with the majority concentred in coastal nations like Spain and Italy, leaving inland countries in Central and Eastern Europe detached from the system.

"Since the start of the war, the European gas market has been very tight," Zongqiang Luo, an analyst at consultancy Rystad Energy, told Euronews.

"All the regasification terminals in Europe are almost running at the full capacity. Especially for the last months, the rate was to the tune of 100% utilisation or close to 95% for the use of gas terminals."

On top of a limited processing capacity, the EU has to deal with a fierce international demand for LNG. Whereas the bloc's consumption of pipeline gas accounts for over 75% of the global market, the share falls to 16% when it comes to LNG, according to the Commission.

Luo believes the EU could overcome this disadvantage if it offers a "very high premium price" that could convince Asian buyers to resell their supplies to their European competitors. However, the expert notes, it would still be "really hard" for the EU to meets its gas storage needs without any Russian pipeline gas.

"You can see the European Union is looking for other pipeline alternatives, like the African gas from Algeria and also the gas supplies from Azerbaijan and, of course, Norway," Luo said.

Norwegian energy operator Equinor and its partners have committed to bump supplies to EU countries, while Italy and Argelia have struck a deal to bring in an extra 9 bcm between 2023 and 2024.

But the sudden diversification push would be enough to make up for only half of the 155 bcm of gas the bloc gets from Russia, McWilliams warned. Governments would be therefore compelled to "ask households to cooperate" to bring consumer demand significantly down.

"It’s possible to save some gas by turning on the heating slightly and by being sensible with the use of energy. It's also going to involve speaking to industry and some industry will have to close down periods of time to manage this," he said, hinting some countries would have to rethink their nuclear phase-out.

The halt in production, which has already occurred in some sectors due to soaring electricity bills, would precipitate a dramatic economic slowdown and possibly a recession, the EU's third in the last two years.

Goldman Sachs estimates a total embargo on Russian gas could see the Eurozone's GDP plunge by 2.2 percentage points this year, effectively wiping out the entire 2.5% growth of its updated forecast.