No fossil fuel is more important to understanding Russia’s invasion of Ukraine than natural gas. Russia sells gas to Europe via pipelines; Europe relies on it to heat its buildings, power its industry, and generate electricity. This interdependent relationship has gone on for decades, and although it may soon come to a close, it has limited the West from imposing harsher sanctions on Russia than it might have otherwise: The sanctions announced yesterday were “specifically designed to allow energy payments to continue,” President Joe Biden has said.
On Wednesday, I talked with Nikos Tsafos, the James R. Schlesinger Chair in Energy and Geopolitics at the Center for Strategic and International Studies, a think tank in Washington, D.C. He has spent his career studying the role that natural gas plays in global energy security. Our conversation has been edited for length and clarity.
Robinson Meyer: I think a lot of people have heard that natural gas has become a more important fuel over the past decade. Has the role of natural gas changed in Europe?
Nikos Tsafos: First, for Europe, natural gas has been forever interwoven with geopolitics. Western Europe started to import gas from the Soviet Union in the late ’60s. That trade between West Germany and the Soviet Union was a core element of ostpolitik, the German approach toward the Soviet Union—basically like, We fought in World War II, you occupy half of our country, let us try to, like, mend fences and get along. So from the beginning, it has an incredibly clear geopolitical overture. I’m kind of wondering if that is changing. I don’t want to overstate it, but [halting work on Nord Stream 2] is a little bit of a turning point for the Germans.
But now, in the European gas market, two more things have changed over the past 10, 15 years.
One was that Europe was, until recently, a relatively major producer of gas, from the Netherlands, the North Sea, and the U.K. So even though you were importing gas overall, you weren’t incredibly import-dependent. Go back to the early ’90s, and you’re producing like 60, 70 percent of your gas. But over the last 15 years, largely because of geology, that production base gets wiped out. So right now the European Union is, like, 95 percent dependent on imports, if you take out the U.K. So you have this massive shift in dependence: You were a big producer, but everything is now imported.
The second story is that demand has flatlined and declined. Like the peak—well, the peak was 2010, but that was a cold, cold year. The real peak was probably in the early 2000s. So that’s also a different story than the U.S. Here, we talk about coal-to-gas switching, and gas consumption is through the roof. In Europe, if you look overall, the system is using as much gas as it was 15, 20 years ago, depending on how you do the math. So the security perspective is, I’m not consuming more gas, but I’m importing more because my production is declining.
And because of the declining production of Europe, but also because of a number of shocks you had in 2006—when the Russians and the Ukrainians fought for the first time over contract terms—you also have a much greater awareness of security of supply. It becomes part of an overall [strategy]—let’s overhaul the domestic market, give choice to consumers, unbundle the pipelines from the producers, bring competition, build infrastructure, make sure the infrastructure can be used. But that is coming together while Europe is becoming much, much less self-sufficient in natural gas.
Meyer: There have been some apocalyptic scenarios shared around how Russia could respond to sanctions. What worries you and what do you think is likely?
Tsafos: Look, I have sort of crystallized my thinking around two extremes. There is a scenario where shit happens in Ukraine and gas gets disrupted.
Meyer: You mean there’s a pipeline issue, like a mechanical failure, that’s not a response to sanctions.
Tsafos: Exactly. Someone blows it up by accident, or someone blows it up and blames the other side. Who knows? You don’t need too much imagination to assume that if a major conflict happens in and around Ukraine, like, the flow of gas could be interrupted through Ukraine.
But the role of Ukraine is smaller today than it was in the late ’90s. There was a time when 90 percent of the gas that comes from Russia to Europe went through Ukraine. Now it’s less than a quarter. So all the stuff people say, like “Nord Stream 2 is going to kill Ukraine and [gas] transit,” like, yes, Nord Stream 2 is the final nail in the coffin of a Ukrainian transit story that has been in demise for 25 years. So if you talk about that scenario, you ask, “Okay, now who gets gas from Ukraine?” It’s Ukraine, it’s Slovakia. It’s Austria and Italy. You do the math and you realize the Italians, actually, are quite okay because they have a strategic stockpile—they’re the only country in Europe that has a serious strategic gas stock—and the other countries can probably make do.
So that’s one extreme. The other extreme is that we go to zero in the pipelines from Russia.
Meyer: That’s zero in the gas Russia is sending over to Northern and Western Europe?
Tsafos: Yes, zero. So you ask yourself, How do you get to zero? There are maybe three ways of getting there. One is the Europeans do it, one is the Russians do it, and the last is the Russians do it by retaliation. I don’t find any of those to be super compelling.
So if the Europeans do it … it’s like why would you, right? It’s a stupid thing. It hurts you way more than it hurts them, because they don’t make that much money selling gas. They make way more money selling oil. And they have $640 billion in reserves, so they can live without the cash for a few months. That’s why the U.S. has never been able to get the Europeans on board with sanctions that affect existing flows from Russia.
Would the Russians do it preemptively? That also is kind of stupid, right? Because what’s the fastest way to get all of Europe riled up? I like to say, if the Russians have cut off the gas, then we’re probably in some form of World War III, and then that’s the least of your problems. It’s essentially an act of war toward Germany, Italy, Turkey, and, like, everyone in Europe.
As a result of that, even if you assume really high sanctions—which I don’t think the West is going to do, because the Europeans won’t let the Americans do it—it’s such a massive response that I think it’s insulated. It’s just too big.
Meyer: You’re describing a funny tension here, which is, natural gas is very strategically important but relatively not financially important. Is the oil market any different?
Tsafos: Yeah, the oil market is different because the oil market is global, so you can always reroute things. Gas is also a fuel used much more for space heating, and space heating is a totally different thing than driving a car. If you don’t drive the car, it’s annoying, but you probably do one trip instead of three, you pair your supermarket trip with your work trip, and you can make do. And if you don’t drive your car, no one dies, right? But if you don’t have heat in the middle of the winter, people die.
And gas is different in that it’s not as fungible as oil. You can’t move it around the world as easily, so it’s much harder to plug a hole. All those things make [gas] rather different.
Meyer: What role has climate policy played in Europe’s shifting gas usage?
Tsafos: Not a huge amount. Can I do some math that shows you there was some impact? Sure. But to give you a sense, if Germany had never shut down a nuclear-power plant, for instance, and had used all that nuclear power to eliminate gas from the power sector, the impact would be about 4 percent on European gas demand. You can go into the weeds of individual markets, but overall it hasn’t affected the trajectory of demand.
What it has affected is that Europe, like the U.S., has no medium-term climate strategy. The Europeans have this thing where they tell everyone that by 2050, we don’t want to use gas. Well, what happens until then?
I remember asking European officials this 10 years ago. And they were like, “Oh, we want to diversify our sources of energy and we want to decarbonize.” But hold on a minute. Diversification is accomplished by someone making an investment to bring you gas. Decarbonization is accomplished by you not consuming this gas. Do you not see, like, a tension in those two things? And they’re like, “Yeah, but, like, we want them both.” So something has to break somewhere.
Meyer: Is Europe constrained by these two goals? Is its desire to decarbonize as quickly as possible preventing it from confronting the large role that hydrocarbons from Russia play in its current energy system?
Tsafos: If I’m intellectually honest, I’ll say that Europe has done an incredible job diversifying its system. Their re-gasification capacity to import LNG [liquified natural gas] has tripled. They’ve built a bunch of LNG import terminals. This whole claim that Europe should’ve signed up for U.S. LNG—it’s like, who do you think made U.S. LNG possible? It was Europeans! This idea that Europeans have been sitting and doing nothing is kind of rubbish. I don’t think you can say that the European climate push has come at the expense of the gas market.
What is challenging for them is this time element. A long-term contract for gas has to become a short-term contract at some point for it to work with decarbonization.
Meyer: What is animating the market today? Is it something we haven’t discussed?
Tsafos: It is. If I look at European markets, all the stuff that we’re talking about—Ukraine, climate, all this—it’s coming at the backdrop of insanely high prices.
My sense is the market just broke. The underlying driver of this is insufficient gas storage. Last summer, we didn’t refill storage in Europe very quickly, and people just panicked. They panicked because they thought they were not going to make it through the winter. Now, at no point has there been an actual physical shortage of gas. It’s all been forecasts of a shortage. And at some point the market broke, because once prices got crazy, nobody wanted to buy gas in July to store until December, when gas is at its highest prices ever.
To give you a sense of the math, the record-high price for gas in the Netherlands before last year was 35 euros per megawatt. That was the highest price ever. We have been over 35 euros every single day since July.
Now people are talking about Ukraine and are like, “Oh, gas is at 80 euros per megawatt.” But 80 euros per megawatt is an insane number. It’s the equivalent of about $146 a barrel. When oil went to $146 for one day in 2008, the whole world collapsed, like Oh my God, we’re all going to die. We’re processing this crisis in Ukraine against a backdrop of insanely high prices. Which is why the Europeans are like, Man, the prices are whatever. We’re already experiencing the biggest energy shock ever. We’ve adjusted to this for the past six months.
Meyer: Is there a particular aspect of the Ukraine story for people to watch across the whole energy-security space?
Tsafos: There’s two macro stories that I always go back to. One, I worry that there is a narrative of Look how stupid Europe is; they messed up the transition. Why is this happening to them? We should not make the same mistakes. I don’t think it’s true in any way. I think there’s a danger of interpreting this crisis as an indictment of the energy transition, when it’s in no way an indictment of the energy transition.
The second story is that, you know, energy security is hard. I write a lot about Europe on Twitter, and people are like, “Oh, we don’t have this problem in Texas.” And it’s like … were you not alive last year?
So I would love for some general humility that this is a complicated system. It’s tough. It breaks. We just have to keep at it. And you cannot, at any given time, totally upend everything. I see arguments like, “Oh, once we get out of hydrocarbons, this stuff wouldn’t happen.” But when I write about, like, seasonal balancing—that stuff is not going to go away. People say, “We’ll use heat pumps,” but how are you going to balance seasonally in the electricity system? “We’ll use hydrogen.” Okay, but how are you going to balance the hydrogen system?
I get incredibly annoyed when people say we’re in a disorderly transition, because disorder as compared to what order? Order like … the 1970s? It’s just a messy system. It was messy when it was all hydrocarbon-based and it will be messy when it’s all renewable-based. We’re not going from hell to heaven here. We’re just trying to reduce carbon, and that’s tough enough.