Sunday, 23 June 2024

Can Europe wean itself off Russian oil and gas?

5 min read

By Prachi Jadhav

Russia’s attack on Ukraine has cast a shadow on the climate change agenda. Europe has been shaken by the skyrocketing oil prices and is left scrambling for alternatives.

  • Russia has a powerful position in the energy sector
  • A push back on Europe’s green deal
  • EU leaders are indecisive on imposition of energy sanctions.

Russia’s invasion of Ukraine has created a major humanitarian crisis. At the same time, there are rising fears that efforts to address climate change will now be relegated to an afterthought and placed on the back burner. The Russia-Ukraine war shows the deeper environmental implications that go beyond national boundaries, as it unveiled Russia’s role in the energy sector at the global level. The horrific attack has created problems such as price fluctuations, as a result of the volatility in energy supply.

Kadri Simson, European Commissioner for energy said, “Russia's invasion of Ukraine has aggravated the security of supply situation and driven energy prices to unprecedented levels”. 

Russia has a powerful position in the energy sector

European countries are the largest importers of Russian gas accounting for 70% of its total imports. They also depend on Russia for more than half of its oil needs. According to the US Energy Information Administration, Russia exported 48% of its crude oil to Europe in 2020. Oil and gas prices continue to rise sharply and have broken the 2008 record. 

Gas prices in the UK have touched $2.04 per litre although the UK is relatively less reliant on Russia as compared to the European Union (EU). The UK imports less than 5% of its gas from Russia as shown by the Oxford Institute of Energy studies' analysis. Against this backdrop, there are rising concerns regarding the EU and UK’s energy security which is heavily reliant on Russian fossil fuel exports. Frans Timmermans, executive vice-president for the European Green Deal said,  “Putin's war in Ukraine demonstrates the urgency of accelerating our clean energy transition”. 

Europe is the biggest consumer of Russia’s state-owned gas company Gazprom, which has recorded 83% sales in 2020. Official data shows that Kremlin earns nearly $700 million each day from oil and gas exports to the UK, US and the EU collectively. Therefore, a total cut-off is predicted to be highly unlikely. 

A push back on Europe’s green deal

The crisis has taken place at a time when Europe is gearing up to decarbonise its economy by 2050 and it is attempting to inspire efforts towards a green and sustainable future. Many European countries have shut down their coal plants and they have heavily invested in solar and wind energy. But their dependence on fossil fuel is still high due to the intermittency of renewable energy.

Europe has committed to cutting down its carbon emissions by 50% by 2030. With the EU Green Deal that was signed in December 2019, Europe aims to become the first carbon-neutral continent by 2050. There’s an increasing pressure on EU leaders to accelerate their efforts to decarbonise their economies and reduce their reliance on Russian oil and gas. Shell, the British multinational oil and gas company has committed to abandoning major crude oil projects in Russia, amid unprecedented economic sanctions by the US, UK and EU.

Based on a recent proposal shared by the EU Commission, their strategy is to diversify their gas supplies to reduce dependence on Russia at the same time increasing the percentage of renewable energy sources in the long term.  Ursula von der Leyen, president of EU Commission said, “We must become independent from Russian oil, coal and gas. We simply cannot rely on a supplier who explicitly threatens us. We need to act now to mitigate the impact of rising energy prices, diversify our gas supply for next winter and accelerate the clean energy transition. EU has been reaching out to countries like the United States, Qatar, Azerbaijan, Nigeria, Egypt, Japan and South Korea for the supply of gas”.

EU leaders are indecisive on imposition of energy sanctions

EU is mulling over imposing energy sanctions on Russia given its heavy reliance on Russian gas for its energy needs which could then have an impact on electricity prices. EU, UK, USA and Japan have already begun imposing hefty measures like freezing its central bank assets and closing down the trust funds owned by Russian oligarchs. But imposing energy sanctions on Russia's lucrative energy sector, as effective it sounds, the EU stands divided on this decision. A possible alternative that European nations are discussing as a short-term solution is sourcing liquid natural gas but even that would have to be sourced at a higher price than natural gas from Russia.

Both Russia and China wish to exert influence and use their respective supply chains on how the EU, US and other economies use renewable energy. They are strategising to carve out Russia-China mutual dependency. Energy policies are no longer domestic issues but are intertwined with global issues and therefore call for global efforts to attain a sustainable future and greater energy security.

The war is also a crucial moment for private investors to understand how their wealth is being used. Fund managers are forced to think twice before investing in companies and countries that are serial human rights violators. Asset managers and private companies like BP Plc also hold ESG shares of Russia's state-owned energy company, Gazprom and Rosneft unmoved by the environmental track record of these firms. Morningstar reported that nearly 14% of the sustainable investment funds have exposure to Russia. The British government forced BP to sell their shares given the havoc the Russian invasion has created and social ramifications that ensued. Other major asset management firms like DWS are making commitments to stop investing in Russian securities. While others are still holding onto their investments.

In addition, the Ukrainian crisis has emphasised the fact that policies for climate change adaptation along with democratic resilience strategies are building blocks in the near future. The European Union can use this opportunity to use its geopolitical influence to build co-resilience. 

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