European countries boosted LNG imports by 60% in 2022 to make up for declining pipeline gas shipments from Russia. The key role in LNG supplies to the European continent is played by the US who promised to keep sending large supplies of LNG to EU ports this year as the Continent aims to continue weaning itself off Russian energy supplies. The United States more than doubled its target to ensure delivery of an additional 15 billion cubic metres (bcm) of liquefied natural gas to the EU. Last year, U.S. exports to the EU were 56 bcm, up from 22 bcm in 2021.
At the end of 2022, Russian gas accounted for only 16 percent of the EU’s gas imports, down from 37 percent in March 2022. In the first quarter of 2023, imports of Russian liquefied natural gas to the EU were the highest in the last three years. The largest share of Russian LNG is imported through Spanish ports, while Belgian, Dutch and French ports account for most of the remaining volumes. making up 18 percent of Spanish gas supply, 15 percent of French supply and 10 percent of Belgian supply respectively.
The most significant role is played by Yamal LNG supplies to Iberian peninsula. Yamal LNG's 2022 net profit under Russian Accounting Standards (RAS) was RUB 840.2 billion, compared with RUB 400.3 billion a year earlier. Revenues also almost doubled to RUB 1.1 trillion (up 96%), while the cost of sales decreased by 13% to RUB 113.6 billion.
According to official statements published on 9 March 2023, Russia intends to almost triple its liquefied natural gas export capacity to 100 million tonnes per year by 2030 from the current 35 million tonnes per year. The key among them is Arctic LNG 2. This project aims to transport and sell more Russian gas to international markets and could double the export capacity of Novatek, Russia's largest private gas producer.
As we can see, the absence of the embargo on Russian LNG opens up additional opportunities for Russia to fill the budget, and, accordingly, to continue an active war against Ukraine.
Following the growing threats of increased EU dependence on Russian LNG, Bruegel in its new briefing paper “The EU can manage without Russian liquified natural gas” outlined four different options available to the EU.
In the first, ‘wait-and-see’, the EU would continue to import Russian LNG and would wait to introduce sanctions until the second half of this decade, when LNG markets are less tight. The second approach, ‘soft sanctions’, would entail a partial effort to reduce imports of Russian LNG without dramatically impacting long-term contracts that form the basis of much EU-Russia LNG trade. Under a full ‘EU embargo’ scenario, sanctions on Russian LNG would force companies to declare force majeure on long-term contracts and no Russian LNG would enter the EU.
A fourth approach, ‘EU embargo with EU Energy Platform offer’, would see the bloc tear up the existing trade structure and return to the table as one entity to negotiate. This approach could be complemented by the introduction of a price cap on Russian LNG imports that rely on EU or G7 services, including trans-shipments, vessels and shipping insurance.
Of course, we cannot talk about the possibility of the first scenario, as this will simply lead to Russia being very successful in finding ways to divert LNG cargoes to friendly countries (firstly Asian ones). The experience of the EU’s crude oil embargo shows that Russia was able to find new buyers without difficulty as demand from the EU and G7 was withdrawn. Yes, it has already been estimated that Russian LNG supplies to China rose by more than two thirds in the first quarter of 202. Beijing and Moscow are more likely to cooperate in liquefied natural gas and Central Asian natural gas, not the Power of Siberia-2 pipeline. At the same time, Russia's Yamal LNG plant is set to resume LNG supplies to India's oil and gas company GAIL under a long-term contract. Japan has not withdrawn from Russian gas producer Novatek's Arctic LNG 2 project and plans to increase imports of Russian liquefied natural gas (LNG) by 2 million tons per year by 2026.
Ukraine demands to impose a full embargo on Russian LNG. Some countries like the U.K. and the Baltic states banned Russian gas outright, including LNG, and more governments in the region called on companies to reduce reliance on it. But a total embargo on gas flows from Russia has so far been politically unpalatable in the EU. Still, the speed with which western European markets adapted to the reduction in Russian pipeline gas hit Gazprom particularly hard. Production was cut by 20% in 2022 to 412.6 billion cubic meters, the lowest in at least 15 years. And its net income attributable to shareholders fell more than 41% to 1.23 trillion rubles.
EU and G7 should also consider imposing a price cap on all Russian LNG traded with third countries globally. In similar fashion to the trade in crude oil, EU and G7 members have significant control over the ownership and insurance of the ships used to transport Russian LNG. Between January and May 2023, all ships were insured by, and over 90 percent were owned by, companies resident in the EU or G7.
