How Putin held Europe hostage over energy | FT Energy Source
Russia's invasion of Ukraine has prompted the biggest shake-up of European energy markets this century. This film explains how Europe became so dependent on cheap Russian gas, and explores the hard choices facing the EU as it tries to balance energy security and climate ambitions.
Produced, filmed and edited by James Sandy; Maps by Russell Birkett, Chris Campbell and Sam Joiner; Graphics by Steve Bernard
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This is a story about a continent that grew addicted to Russian oil and gas.
It became so dependent on one supplier.
A power that then became hostile.
I think it's a story of Europe being blinkered, of seeing what it wanted to see to keep getting cheap gas at all cost.
It's a story, too, of just how weak you can be when you don't control your own energy supplies.
What happens when you open up the job of securing national energy to competition.
Governments and companies have realised that they really are at the mercy of the Kremlin.
We are in a gas crisis right now. And it's about to get worse.
Europe was asleep at the wheel for a war it never thought would come and now faces one of its worst energy crises in decades.
This isn't just a question of Russia saying, hey, we've got lots of cheap oil and gas. We're going to dominate your market for you. This has been almost a willful move by the European Union over the previous decades.
It basically has its roots in a fundamental decision that gas was going to be the bridge technology for Europe.
It wanted to move away from the dirtier, polluting fossil fuels, such as coal and oil. And gas is seen as that kind of transition fuel, whereby you can burn it, and it burns with less emissions.
Gas produces about half as much CO2 when burned as coal does.
And, therefore, you got this greater reliance and this greater shift towards gas, as countries move away from nuclear, in some cases, and certainly, move away from coal.
And the problem was, it presupposed a very high dependence on Russia because Russia was the main supplier of gas to Europe and the EU.
Russia's next door. It produces lots of oil and gas. And it was highly convenient to rely on that, build more pipelines, and become ever more dependent on those fossil fuel supplies.
There's pipelines that go through Belarus into Poland and then Germany. That's called the Yamal pipeline. Then, there's 40bn cubic metres of gas that flow through Ukraine through several different pipelines, also the Turkstream pipeline, which goes underneath the Black Sea through to Turkey. And then from there, gas can be distributed to south eastern Europe, so countries like Greece, North Macedonia, Bulgaria.
But the core pipeline is Nord Stream, Nord Stream 1 in this instance, the largest pipeline running from Russia to Europe in normal times.
The EU imports 156bn cubic metres of Russian gas a year, or did before the war. 55 BCM of that - so around about a third of that - comes through this absolutely critical pipeline that runs under the Baltic Sea, directly between Russia and Germany.
There was cheap gas piped from Russia that was providing a solution to a lot of countries' difficulties when it came to energy policy.
And what's happened over decades is that Russia has been able to build infrastructure that's taken this gas into Europe. Europe has built an industry, industries that have come to depend on that cheap supply of Russian oil and gas.
In the 1990s and before then, most energy, and gas, electricity all came from state monopolies. So the state owned, and managed, and maintained these giant infrastructure networks.
So you had these state-owned entities which were driving the market. And governments would be giving them all the signals about what to do.
But as we've seen liberalisation and privatisation take hold in more countries in Europe, we've seen a move away to private companies deciding the best way to secure gas supplies for the country as a whole but with one eye on profit.
And what the market might think is a rational decision in terms of what's cheapest for the consumer isn't necessarily what's in the best interests of diversifying supply and ensuring energy security.
One of the problems for Europe has been what it's done with its storage, especially the UK. The UK shut down its main natural gas storage facility, something that would be coming into great use right now.
It was decades old. It was in desperate need of refurbishment and reinvestment to keep it going.
The company, Centrica, the owner of British gas, wanted government support to run it but couldn't get it. So they decided instead that they would shut it down.
The UK thought that we would be fine because we have plentiful sources of possible gas supplies.
If you've got big pipelines coming in that are supplying ready flows, then why do you need to make your industries invest in big storage tanks? There didn't seem a need and no one really had the foresight to think that Putin would weaponise energy to the extent that he has.
We've really seen, with the liberalisation of the gas market, the security of supply element has sort of fallen by the wayside.
And the storage in Baumgarten in Austria, in Rough in the UK, which was shut down... they may have been coming into use right now.
And we have a situation whereby you could start to have problems, not just in terms of higher prices but potentially even shortages.
Gazprom, a large, state-owned Russian energy company also acquired assets. It owns gas storage in Germany. In Britain it's one of the big suppliers of gas to business.
Gazprom, as a result, wields a massive degree of control. But that control ultimately ends up back in the Kremlin.
And so it created this entire environment where, it turns out, a key dominant supplier with malevolent intent could use that dominance to exert huge power over European capitals and the politicians in them.
On a few occasions we saw Russia try and use gas supplies to leverage against Ukraine, against Poland, and other countries, leaving them feeling more vulnerable.
Take the Orange Revolution in Ukraine, for example. At that point Ukraine ousted the pro-Kremlin leader, put in a more pro-western leader. And a year after that Gazprom started demanding much higher prices for its energy. Ukraine refused. And it decided to turn off the taps. So it almost seems like there's this kind of stop cock that Putin likes to move in order to further his geopolitical goals.
In 2014 there was the invasion of Crimea. You would have thought Europe would have done more in the wake of that to diversify their gas supply.
In fact, in the decade to 2020 it increased its gas imports from Russia by about 20 per cent. And by 2020 it accounted for about 38 per cent of all Europe's gas supplies, and in Germany more than half.
With Russian gas flowing and making a core part of their energy supplies it makes it more difficult for countries to push back hard when they see behaviour they might consider to be egregious but perhaps not quite reaching the level of full-blown conflict.
For example, in the sanctions regime, gas has been sort of a sacrosanct element that the politicians aren't willing to touch.
In a way, you could argue that Putin was actually emboldened to continue to pursue his agenda in Ukraine. And if the sanctions had been stronger then, then maybe they would have acted as more of a deterrent.
Politics was suddenly part of how Putin saw the energy relationship with Europe, that he could use energy to exert his power, his geopolitical power, first of all in the near abroad. But now, he's also doing it with Germany.
It started in 2021 around springtime when Russia was fulfilling its contractual obligations to supply gas to Europe. But traders were noticing that it wasn't supplying above and beyond that. And the volumes of gas that it was supplying were well down on pre-pandemic levels.
The storage sites that Gazprom owned in Europe; it became clearer as winter was approaching that Gazprom was not filling them. We saw some of them just sit there, 10 per cent, 15 per cent full. And European politicians were very slow to notice this and very slow to respond.
Russia has been able to supply less during the shoulder season months when there's less European demand and ensure that Europe enters this phase with much lower storage than it has in the past. And that has only served to increase the stranglehold that Putin has, in energy terms, over the European economy right now and European politicians.
The relationship has just radically changed since the war began.
Immediately, Europe started to talk about what they could do to make sure that they were not effectively funding Vladimir Putin's invasion of Ukraine.
Russia did generate a very, very big income from the money that European companies paid for its gas.
Russia's revenues from oil and gas are higher than they've ever been, I think in the first 100 days of the Ukraine war earned something in the region of 100bn euros from oil and gas imports. And that was a record.
There is a fundamental problem that the more you squeeze Russia, the more you push up the price in global energy markets, which means that Russia needs to sell less to make the same amounts of money.
You know, sanctions can only have so much of an effect if you're still funding Putin's war chest with your energy payments.
It is clear we need to put an end to this dependence as soon as possible and a lot faster than we had foreseen before this war.
Europe's vowed to get off Russian gas.
The EU actually wants to cut its use of Russian gas by two thirds by the end of this year and totally by 2027.
Now, with Europe saying we're not going to buy your gas and our relationship, at least with Vladimir Putin, is unlikely to ever be the same again, the calculus for Russia has arguably changed.
The physical supply of Russian gas to Europe is very questionable, possibly cut off, in some places already cut off.
In mid-June, Gazprom drastically reduced the flow of gas through Nord Stream 1 by about 60 per cent.
And then it went under scheduled maintenance, which happens every year. And during that period the pipeline flows dropped to zero. And the market was generally assuming it wouldn't go back to 100 per cent after it came back from maintenance.
The issue was a turbine. They said that there was a turbine missing.
Russia was claiming that a turbine stuck in Canada due to western sanctions wouldn't come back.
But the German government said right from the beginning that that was just a pretext. And that actually the reason for this big cut in supply was purely political.
It did come back. It was reinserted. The pipeline started at lower levels.
It came back for a few days at 40 per cent. But then Putin, when he was in Tehran, threatened that this pipeline would be reduced by half. And he followed through on that threat. So it went down to 20 per cent. But then at the end of August, Russia reduced their supplies to zero.
You do not want to be in an apartment or a home that cannot be heated because of a shortage of gas. And governments are deeply worried about this.
So at first, Russia said that it was a technical fault that was the reason behind stopping the flows. But then since then, it said, unless the west lift sanctions the flows won't resume. The European Commission had estimated that if it was an average winter, there would be a shortfall of 30bn cubic metres of gas.
And so they said if we reduce gas consumption by 15 per cent, which is equivalent to 45bn cubic metres, we'll have more than enough. We can put some in storage.
So with the flows of gas going to zero it's raised the stakes for Europe in this game with Russia. Europe might find itself very short on gas come winter.
It pushed for every country in Europe to cut their gas demand between October and March of next year to try and get through this winter without having severe problems. And they made it very clear that most of the burden will fall on industry.
One country that's already starting to talk about gas rationing is Germany. They've said we are in a gas crisis. They're drawing up plans now to decide how German industry will be prioritised. Who gets the gas when there is a shortage? And who has to shut down?
Any industry that requires electricity is at stake. That's Germany's auto industry. That's its manufacturing industry.
We're talking about a massive manufacturing base. So this will potentially plunge the biggest economy in Europe into crisis.
If there are involuntary curbs to industry, economists are talking about recession. So industry is the more obvious, because it doesn't effect immediately day-to-day lifestyles. It doesn't mean that people will be shivering in their homes. But it's ultimately going to impact all of us.
The other options are to find alternatives for gas, for gas is not critical. In electricity generation, for example, why burn gas just now if you can store it for the winter when you can use it for heating. You'd be better to burn something else to produce the pressure in the steam that powers the turbines that creates electricity.
There are countries in Europe that are looking at nuclear, especially in eastern Europe. The only area where there has been some contention is around retiring old nuclear power plants.
Germany decided to shut down all its nuclear power stations in 2011 after the Fukushima disaster in Japan. And it meant that, basically, by the end of 2022, i.e. in a few months time, all of Germany's nuclear power stations would be shut.
Now, that may still be the case. But the conversation in Germany has certainly started up about, look, is there anything we can do to keep the nuclear plants open? If we see a complete cut-off of Russian gas supplies, we may need every bit of help we can get.
At the same time, one of the challenges for this winter in particular is that a lot of France's nuclear plants are undergoing servicing.
I think about half of their fleet are currently under maintenance.
Most of it is from the 1980s. And now they're getting cracks in their cooling towers. And when you're relying on nuclear for about 70 per cent of your energy that's a big problem.
And so there aren't enough reactors around, just when Europe needs them most.
For the time being, in Germany, they've reversed the closure of a lot of coal plants. That's happened in the UK as well.
Bringing back coal plants as a quick fix. It provides energy at a time when energy prices are soaring. But, of course, it makes the long-term problem of climate change much worse.
It was only at COP26 that we saw European countries and almost all the countries in the world stand up and say, oh, we're going to quit coal. Let's phase down coal. Let's put coal behind us.
We do have language on coal. We have language on phasing down of unabated coal. And I think very many people will welcome the fact that that at least has been achieved.
Six months later, we're seeing Germany, Austria, the Netherlands, even the UK saying, oh, wait. We might need to keep those coal plants burning just a little bit longer.
It's utter hypocrisy. It will really undermine Europe's credibility in any future debates with developing countries like India about their coal use. It's a real problem for the entire global effort to combat global warming.
This provides a great incentive to find cleaner, more renewable, greener sources of energy, potentially, in some cases.
Previously, Europe was targeting 40 per cent renewable energy by 2030. And just recently, the commission proposed that be increased to 45 per cent target.
This is the massive investment in renewables. It's accelerating the deployment of renewables across the European Union.
Medium term, they want to build more solar, more wind generation.
They're going to be all kinds of laws coming through now, putting solar panels on every new building, that kind of thing.
Europe has a pipeline already of projects that are underway, under construction. But your average wind power project from conception to providing power to the grid... that takes about seven years. So it's not going to ride to the rescue any time soon.
Money is not the problem when it comes to renewable schemes. Other things are the problems, like planning processes taking a long time, permitting, and grid infrastructure. You can't connect an offshore wind farm if you haven't got the wires.
And the problem here is that these projects take years to build. But cutting gas supply from Russia may happen overnight, as in fact Putin has just shown by cutting flows through the Nord Stream 1 pipeline to Germany.
In the gas crisis the first thing that governments and companies have looked to do is find alternatives. Ask Norway for more. Ask Algeria.
And Israel, Azerbaijan.
And West Africa.
Australia is another big one.
And especially from the United States.
Any country that connects into Europe with a pipeline or they can bring it in by ship - let's do it.
A lot of the plans involve importing more gas through LNG, liquefied natural gas, which is super-cooled gas that's on a tanker.
And that can go by sea to almost anywhere in the world that has the capacity to turn that liquefied supply back into gas and put it into a pipeline network.
The difficulty is that not many European countries have these regasification facilities whereby you can get your liquefied natural gas in and make it into gas again.
Some countries, particularly Germany, have never moved to build a single LNG terminal until now.
It's building LNG terminals. It's even secured temporary kind of floating LNG terminals - they're called FSIUs - off the coast, which will receive LNG tankers. These are these vessels that can turn LNG into gas supplies that can then be put in the pipeline network and distributed through the country.
Even that's not straightforward. There's no guarantee Germany will have those in place before winter really hits this year.
And the problem with these is you need a whole pipeline of infrastructure ready, there, at the port to then take that gas inland. And if you don't have that there, these projects take a very long time.
I mean, that's really one of the main problems that Europe has is the pinch points that are really all over the continent. For example, in Spain it has several import terminals for LNG, but it can't get that gas then to other parts of Europe because it lacks the pipeline infrastructure. There was a plan to build a pipeline called Midcat that would link Spain to France. But that's been stalled for years.
Both the regulators in Spain and France said, look, this is just too expensive. It's going to put people's bills up. So why should we invest in this just in case something happens? But now, it looks like a no-brainer.
By and large, most governments are trying to pull every lever at their disposal. But there's also big global competition for liquefied natural gas.
It's lots of tankers roaming the world's oceans. And they go where the highest prices are being offered.
Historically, more seaborne gas in the form of LNG would go to countries like Japan, and South Korea, and China. And so whilst Europe is important, the actual drivers of gas demand globally... they're based elsewhere.
China's emerging from lockdown. Energy demand could come absolutely roaring back. And that would be an added pressure on competition for liquefied natural gas just at the time that Europe absolutely doesn't need it.
It could make things very, very tight indeed. We'll almost certainly see prices spike higher again as both sides compete to see who gets the gas.
It's not a done deal. It's certainly not a given that Europe will be able to plug the gap with LNG from other sources.
It looks like ploughing into the coming autumn of 2022, there just isn't going to be enough gas in Europe, full stop.
The problem is if you get a very, very cold winter and Putin decides to completely turn off the tap, then you're going to run right into your storage reserves. And next winter looks incredibly difficult. Because how you then top up those storage reserves is even more of a challenge.
There could, in other words, be a fairly long period - I'm talking years here - where Europe is facing very, very straitened circumstances in its energy sector. The crisis is now.