The impact of global conflict on the natural gas market – ANALYSIS

Editor's note: Ivan Us, chief consultant of the Center for Foreign Policy Research of the National Institute for Strategic Studies (Ukraine), Ph.D. in Economics.

Historically, it has been suggested that robust trade ties between nations can reduce the likelihood of military conflicts. This interplay between commerce and conflict has evolved through the ages. Following the Cold War, a consensus emerged in Europe that wars were a vestige of the past. This led to a greater emphasis on expanding trade, including with nations that had been considered adversaries during the Cold War. A significant portion of this trade expansion involved the importation of raw materials, fostering a dependency on these imports.

In particular, the European Union’s dependency on external raw commodities, especially natural gas from the Russian Federation, merits attention. Post-Soviet Russia inherited the USSR's mantle as a major exporter of oil and natural gas, with European countries subsequently increasing their import volumes, notably of natural gas.

In the 1990s, natural gas imports from Russia were predominantly seen as a commercial transaction rather than a political tool by European nations. However, from the 2000s onward, the situation changed markedly. For Russia, natural gas exports became a strategic tool to foster European dependency, while European nations continued to view this trade through an economic prism.

Despite perceptions, Russia has not monopolized Europe’s natural gas market. Its share in the EU’s natural gas imports ranged between 14.3% and 17.4% from 2011 to 2020 (see Figure 1). This share increased to 18.9% in 2021. Yet, the outbreak of full-scale war in Ukraine in 2022 saw a significant drop, with Russia’s share plummeting to a decade low of 14.3% in 2022, and further declining to 8.4% by the end of 2023.

Figure 1 – The Share of the Russian Federation in the Structure of Natural Gas Imports by EU Countries.

It is important to observe that the share dynamics only partially represent the underlying trends in the natural gas market. In absolute figures, the EU's imports of natural gas from the Russian Federation stood at USD 10.9 billion in 2020, increased to USD 31.9 billion in 2021, and peaked at USD 58.5 billion in 2022—a year characterized by a sharp decline in the volume of imports from Russia. By contrast, in 2023, the import value dropped to USD 18.1 billion. It is also significant to mention that natural gas prices in Europe saw a substantial increase in 2022 (refer to Figure 2).

Figure 2: Trends in Natural Gas Prices in Europe, 2020-2024 (Euros/MWh)

However, the complexities of the market extend further, as EU documentation reveals substantial imports of natural gas originating from... countries not specified. The considerable volume coming from these unspecified sources prompts concerns, suggesting the possibility that natural gas from the Russian Federation might be concealed within this category (see Table 1).

Table 1: EU Imports of Natural Gas from the Russian Federation and Unidentified Countries, 2019-2023 (USD Billion)

In addition to the "unspecified countries" classification in EU natural gas import data, there exists a "special category." Imports under this special category accounted for USD 9.8 billion in 2022 and dropped to USD 2.3 billion in 2023.

Nonetheless, the available data on natural gas imports do not provide a complete overview, neither within the EU nor in the Russian Federation itself. According to official records available up until 2021, the export figures of natural gas from the Russian Federation appear less significant when compared to those derived from mirror statistics (refer to Table 2).

Table 2 – Exports of Natural Gas by the Russian Federation, 2018-2023 (USD Billion)

Discrepancies between direct and mirror statistics can partly be attributed to a substantial segment of Russian statistics being classified under "not belonging to other groups." In 2021, exports from this ambiguous category in the Russian Federation amounted to USD 73.3 billion, representing 14.9% of the nation’s total goods exports. It is plausible that natural gas is included within this group.

This statistical ambiguity further complicates the ability to pinpoint the geographical distribution of Russia’s natural gas exports. In 2021, Japan emerged as the primary importer, purchasing USD 1.7 billion or 19.8% of Russia's total natural gas exports, followed by China with USD 1.4 billion (15.8%), and France with USD 0.9 billion (10.2%). In the same year, the EU imported USD 3.6 billion worth of natural gas from Russia, accounting for 41.2% of Russia’s total exports in this sector. Notably, this figure contrasts sharply with the EU-reported USD 31.9 billion of natural gas imports from Russia, revealing a nearly tenfold discrepancy.

Mirror statistics from 2023 indicate China as the leading consumer of Russian natural gas, with purchases amounting to USD 11.7 billion, followed by Japan (USD 4.2 billion) and Hungary (USD 3.7 billion). However, the data for 2023 is incomplete, and further adjustments to this list may occur, though they are expected to be minor.

Year-over-year comparisons highlight a rise in natural gas exports from Russia to China, from USD 10.9 billion in 2022 to USD 11.7 billion in 2023, and to Serbia, from USD 966 million to USD 1.2 billion. Conversely, traditional buyers such as Italy saw a significant reduction, with imports decreasing from USD 13.8 billion to just USD 1.6 billion. Similarly, the Czech Republic’s purchases plummeted from USD 7.8 billion to USD 84 million.

It is also necessary to mention Germany, the leading economy of the EU. For many years, the main supplier of natural gas to this country was unknown. Since 2015, the majority of natural gas to Germany has been supplied from an unspecified country (Table 3).

Table 3 – Geographic Structure of Natural Gas Imports by Germany, 2019-2023, %

As of the end of 2023, Russia’s leading gas exporter, Gazprom, sold approximately 69 billion cubic meters of gas, marking its lowest output since 1985. This represents a significant decrease from the 100.9 billion cubic meters in 2022, which itself was the company's poorest performance on record. Compared to pre-war levels in 2021, when exports stood at 185 billion cubic meters, Gazprom's shipments have declined by a factor of three.

Shipments to Europe plummeted to 28 billion cubic meters, a figure reminiscent of the late 1970s. Prior to the invasion of Ukraine, Russia was dispatching about 180 billion cubic meters of gas to the EU.

In essence, the Russian Federation has markedly reduced its market presence in Europe and Japan, forfeiting its primary revenue sources from natural gas sales. Meanwhile, exports to China have increased, where historically, prices have been lower than Russia’s average export rates.

Concerning Ukraine, until 2014, the country was a major consumer of Russian natural gas. In both 2011 and 2012, Ukraine’s natural gas imports from Russia were substantial, totaling about $14.3 billion annually, which represented up to 98.6% of its total gas imports. However, by 2013, total imports dropped to $11.8 billion, with Russia's share decreasing to 91.2%.

The year 2014 saw dramatic changes with Russia's annexation of Crimea and parts of the Donetsk and Luhansk regions, which led to a significant reduction in gas imports to $6 billion in 2014 and $4.7 billion in 2015, followed by a further decrease to $2.5 billion in 2016. By 2017, Russia’s share in Ukraine’s gas imports had fallen to 6%, fluctuating slightly in subsequent years and reducing further after the onset of the full-scale war, ceasing entirely in 2023.

Nevertheless, Ukraine continued to import natural gas from other countries in 2023, with Switzerland becoming the largest supplier, accounting for 23.7% of the total imports. Other significant suppliers included Poland, Germany, and Slovakia.

Gas consumption in Ukraine dropped to approximately 19 billion cubic meters in 2023, while domestic production by Naftogaz increased by 6% to 13.3 billion cubic meters. This reduction in consumption alongside increased production suggests that Ukraine might achieve self-sufficiency in gas by 2024.

Despite the cessation of Russian gas imports, Ukraine’s engagement with Russia in the natural gas sector continues, particularly regarding the transit of Russian gas through Ukrainian territory. The existing five-year transit agreement is set to expire at the end of 2024. During the ongoing conflict, Ukraine's partners have urged the continuation of this transit, which has been a point of contention within Ukraine as the arrangement has financially benefited Russia significantly.

For 2022, Ukraine earned approximately $1.2 billion from transit fees, reducing to $800 million in 2023, of which only about $150-200 million actually benefited Ukraine's budget. Analysts suggest that extending the transit contract could generate a maximum of $450 million under current tariffs, making it unlikely that the contract will be renewed after 2024 as Europe seeks to diversify its energy sources.

The strategic manipulation of natural gas supplies has been a longstanding tool for Russia to exert influence over European countries, a dynamic starkly observed during Russia's 2008 conflict with Georgia and the 2014 annexation of Crimea. The dependency on Russian gas has often tempered European responses to Russian aggressions.

However, recent shifts indicate a growing European resolve to diversify away from Russian gas. The EU, in collaboration with Azerbaijan and other countries, is redefining its energy routes to enhance security and reduce dependence on Russian energy supplies. The EU plans to increase gas imports from Azerbaijan significantly, aiming for 20 billion cubic meters by 2027 while also expanding renewable energy cooperation.

Countries like Algeria and Qatar, as well as the United States, are also playing increasingly prominent roles in supplying natural gas to the EU, reflecting a concerted effort to lessen Europe’s reliance on Russian energy.

Table 4 – Geographic Structure of Italy's Natural Gas Imports, 2019-2023 (%)

Azerbaijan has consolidated its presence in the gas markets of Southern EU countries, becoming the leading external supplier to Bulgaria (refer to Table 5) and the second largest to Greece (refer to Table 6).

Table 5 – Geographic Distribution of Natural Gas Imports in Bulgaria, 2019-2023 (%)

Table 6 – Geographic Structure of Natural Gas Imports by Greece, 2019-2023 (%)

As evidenced by the experiences of Italy, Greece, and Bulgaria, the replacement of Russia is occurring at a slow but steady pace, leading to an evident displacement of Russia in the global natural gas market.


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