Energy Central-News Article

Despite European efforts to disengage from Russia's energy tap in the wake of the war in Ukraine, Moscow's coffers continue to benefit from hydrocarbon purchases by EU countries. And in this, Spain is being an undisputed leader, at least as far as Russian liquefied natural gas (LNG) is concerned.

According to LNG tanker tracking data compiled by Bloomberg, Spain is the EU member state that has imported the most LNG from Russia so far in 2023. The country has shot up 84% its purchases of this fuel since the start of the full-scale invasion of Ukraine ordered by President Vladimir Putin. In the first two months of this year, Enagas' monthly statistical bulletins reveal an increase of 172% over the same period last year. An uncomfortable reality that has unleashed reactions both in Madrid and in Brussels.

The Ministry of Ecological Transition and the Demographic Challenge, led by Teresa Ribera, sent a letter on March 14 to companies importing liquefied natural gas in Spain requesting their collaboration in limiting purchases that benefit Moscow. The letter, originally revealed by Bloomberg, was received by Naturgy, Repsol, TotalEnergies, Axpo, Pavilion, Enagás, Met Energy, Enet Energy, EdP, CEPSA and BP. In it, they were asked to "intensify the diversification of the supply of liquefied natural gas and dispense with that of Russia".

Ribera's letter responded to the request made earlier this month by EU Energy Commissioner Kadri Simson that European companies should not sign or renew long-term contracts for the purchase of Russian gas. But the reality is that, both in Spain and in the rest of the EU, there is no mechanism beyond words to put a stopper on the flow of hydrocarbons to the continent. The importers are private companies and the transactions are totally legal, given that, unlike crude oil and its derivative products, there are no vetoes or sanctions against LNG from Russia.

In search of a tool

Although Spain is the country where the increase has been most exaggerated, the growing attractiveness of Russian LNG has been reflected throughout the European Union. Imports of the fuel soared to 19.25 billion cubic meters (19.25 bcm) in 2022, up from 14 bcm purchased in 2021, an increase of 35%, according to a tally by think tank Bruegel.

Prior to Russia's full-scale invasion of Ukraine, Moscow supplied about 40% of all gas consumed in the European Union through the extensive pipeline network connecting the Eurasian giant to the rest of the continent. Since February 24, the flow of this hydrocarbon has been progressively decreasing until it now represents 10% of European gas imports. The increased purchases of Russian LNG are largely due to efforts to fill the gap created by this drastic reduction.

It is precisely the legacy of this European dependence that has prevented the introduction of sanctions against LNG from Moscow. Last year, with gas prices skyrocketing to 300 euros per megawatt hour (MWh), the EU-27 moved earth and air to fill their fuel tanks for the winter. In this context, imposing any kind of limit on supply that could push prices even higher was non-negotiable in Brussels. "From the beginning of the invasion of Ukraine, it was clear that it would be extremely difficult to reach a consensus on an embargo on any gas supply," explains Szymon Karda?, a researcher with the European energy program of the European Council on Foreign Relations (ECFR), in an interview with El Confidencial.

This year, the situation is much more placid, with stable prices of around 40 euros per MWh and reservoirs that are still 60% full after the end of the winter season, which is an all-time high and 38 points more than at the same date in 2022. However, several of the member states - with Viktor Orbán's Hungary at the forefront - remain opposed to any embargo on Russian gas, despite the push by some Baltic countries to achieve it.

Unable to reach the unanimous consensus needed to impose sanctions, European institutions are trying to find alternative ways to curb the arrival of Russian LNG. EU-27 energy ministers agreed Tuesday at the Council of the European Union to seek options to give member states legal tools to temporarily veto the ability of Russian and Belarusian exporters to reserve the necessary infrastructure to deliver liquefied gas. This, as long as it does not affect security of supply.

But it is a long way from words to deeds. The proposal is part of the Council's negotiating position on new European rules for the gas market. This measure, among many others that make up the plan, must be negotiated with the European Parliament in a long process that could take months. Sources in the Spanish gas sector tell El Confidencial that the language used in the initiative amounts to little more than a recommendation, similar to that already made by Ribera and Simson. "Honestly, it doesn't change much," says one of the representatives consulted.

The problem goes beyond convincing European energy companies. No Spanish company, for example, has signed a medium- or long-term contract for the supply of Russian gas since the beginning of the war. In fact, the only agreement of this type in force in the country is the one reached in 2013 and until 2042 by Naturgy with the Yamal LNG consortium, whose majority shareholder is the Russian company Novatek. However, what does exist is a multitude of trading companies , many of them based in Spain, which have triggered their acquisitions in the spot market to benefit from the current attractive prices, storing the gas and hoping to resell it in the future.

The problem has no solution in sight and, in fact, risks expanding over the course of this decade, as the number of LNG regasification and storage plants in Europe is set to grow considerably. The stated aim of these facilities is to get rid of dependence on Russian hydrocarbons,but they could end up full of this product. "You build all this infrastructure to get rid of the supplier that manipulated your (gas) markets and caused you great difficulties... To then take on the same supplier through LNG?" said Lithuanian Deputy Energy Minister Albinas Zananavicius, speaking to Reuters. "There is something wrong with that logic," he said.

Bread for today, cramming for tomorrow

Financing Russian coffers is not the only problem facing European countries in the wake of this gas infrastructure push. The Institute for Energy Economics and Financial Analysis (IEEFA), a U.S.-based think tank, revealed in recent research that continental appetite for new LNG import projects is on track to generate regasification capacity that will vastly exceed demand in the coming years.

The report warns that, given the battery of regasification plants being built in European countries, Europe's LNG import capacity is set to exceed 400 bcm in 2030, an increase of 130 bcm, about 33%, compared to 2022. However, the demand estimated for that year by the S&P Global Commodity Insights forecast is just 190 bcm. IEEFA's own estimate is even lower, at just 150 bcm.

This excess capacity - described by the author of the analysis, Ana Maria Jaller Makarewicz, as "the world's most expensive and unnecessary insurance policy" -could end up being a drag on the continent's economy. "There is a real risk that we have invested too much without properly analyzing the situation we could face. We may find ourselves with a stranded asset challenge in a long-term perspective," Karda? points out to this newspaper.

According to the IEEFA study, Spain, the country with the largest regasification capacity in the EU, is also the country with the highest stranded asset risk, with an excess capacity of 50 bcm. It is followed by Turkey (44 bcm) and the UK (40 bcm). By the end of the decade, the analysis forecasts utilization of only 36% of Europe's LNG terminals.