In the early ages of hydrocarbons, when the oil companies discovered gas, they quickly abandoned the wells and moved the drilling rigs to other areas, looking for the most valuable crude oil. In those days, gas was considered as the poor relative of the fossil fuel family.
Over past decades, gas gained a relevant — and sometimes even geopolitical — role in the energy arena and it currently provides a quarter of our energy needs. Four milestones marked the growth of gas: by analysing them we can gain some insights into the possible contribution of this resource for our future energy needs.
The four milestones which marked
the growth of natural gas
The first milestone was triggered by the discovery of the huge Groningen gas fields in the Netherlands in 1959. Then, in the 1960s, exploration wells were drilled to explore a possible offshore extension of the Groningen field, revealing massive oil and gas reserves in the North Sea. Later on, large pipelines started to deliver gas from the former Soviet Union to Europe.
Gas received a further push with the oil shocks of 1973 and 1979, when the price of crude oil increased from 3 to over 40 USD per barrel. Oil became too expensive to be burned to generate electricity and was replaced by gas, coal, and nuclear.
The second milestone was the “dash for gas” in the UK and Germany. In the 1980s most British coal mines were closed and power generation switched from coal to gas. The same switch took place later after the German reunification, when electricity generation from gas replaced old and inefficient coal and lignite power plants.
The third milestone was the “LNG revolution” at the end of the 1990s. At that time, Qatar — the country with the world’s third largest gas reserves — was unable to sell its gas because potential customers were too far away to be reached through pipelines. By constructing huge liquified natural gas (LNG) facilities, Qatar was able to dispatch its gas via LNG tankers. This transformed gas from a regional resource transported through pipelines into a global commodity delivered by LNG tankers.
The fourth milestone was the massive production of shale gas in the USA. Between 2009 and 2014, the country nearly doubled its indigenous gas production, going from being an importer to a major exporter of LNG. In 2020, the USA supplied 19 billion cubic meters (bcm) of LNG gas to the EU, making it the largest supplier of liquified natural gas to Europe.
Is Russia still using natural gas
as a geopolitical resource?
When we consider the geopolitical role of gas, the 2009 spat between Russia and Ukraine — which halted gas supplies from Russia to the EU through Ukraine — automatically comes to mind. At that time, some eastern European countries, for which Russia was the sole supplier, were left with no gas as a harsh winter was approaching.
During the crisis, gas was available in western EU countries as it was supplied by other gas producers, but interconnectors able to bring such gas from west to east Europe depending entirely on Russia were missing. After weeks of negotiations, the gas transit resumed, though the crisis exposed a weakness in the internal dimension of the EU energy market since interconnections ensuring the free circulation of gas within Europe were amiss.
After the crisis, the EU acted swiftly by constructing new interconnectors allowing gas to circulate freely among all member states. To further diversify supply routes, new liquified natural gas terminals were built to source gas from the global market. Today, the EU counts over 30 LNG import terminals, member states are fully interconnected, and Europe is much better equipped to cope with possible supply disruptions than in 2009.
Moreover, in the past years, the paradigm around gas supplies changed as massive quantities of LNG became available on a global scale. The USA turned into a large exporter of liquified natural gas and additional quantities of LNG were added by other countries such as Australia and Mozambique. Meanwhile, Qatar plans to double its LNG production by 2027 on its own. Furthermore, if the gas cooperation between China and Iran materialises, the world will be flooded by Iranian LNG.
As such, the paradigm around gas went from being a commodity facing possible scarcity and potential supply disruption to an abundant resource available at a competitive price.
In this context, Russia’s bargaining power is somewhat reduced: though it remains the EU’s largest gas supplier, the global market is currently sufficiently supplied, and no European country depends uniquely on the Russian Federation for its gas.
Nevertheless, Russia has not given up on gas as a geopolitical tool: the North Stream pipeline connecting Russia to Germany through the Baltic Sea is a case in point. The first branch of the pipeline, with a capacity of 55 bcm per year, is operational while the second phase, the Nord Stream 2, which is close to completion, will double capacity up to 110 bcm. Although Russia labelled the North Stream as a commercial product, its clear goal is to bypass Ukraine avoiding transit issues and fees.
The USA imposed sanctions on the Nord Stream project, causing EU contractors to withdraw and leaving its continuation to Russian companies. The Biden administration recently softened the sanctions, probably considering that their impact would be minimal, as 95% of the pipeline is currently complete.
On the EU front, discussions around the Nord Stream have been a thorny issue. Germany stated the Nord Stream was a commercial pipeline but, by constructing it, the country helped Russia implement a divide-and-rule strategy undermining unity in the EU’s external energy relations.
For their part, Baltic countries fiercely opposed the project as the pipeline bypassed them, with one Polish politician openly comparing the pipeline to the Molotov-Ribbentrop pact. When, at the end of his mandate, Chancellor Gerhard Schröder — who promoted the pipeline — accepted a well-paid job with Gazprom, fuel was added to the fire.
However, setting aside geopolitical considerations, the construction of the Nord Stream 2 was a bad idea for both the supplier (Russia) and the consumer (Germany). After all, the cornerstone of supply security is diversification of supply routes and sources but, by completing the Nord Stream, Russia and Germany will put most of their gas trade into a single infrastructure.
Transit in a pipeline could be hampered by natural disasters or accidents and it is therefore a very risky business to put an entire gas flow in the same pipeline. For instance, a few years ago, a pipeline bringing gas from Northern Europe to Italy was damaged by a landslide in the Alps. Nevertheless, this accident went almost unnoticed since Italy had wisely implemented a diversified gas supply system with pipelines arriving from northern Europe, Russia, Algeria, Libya and, more recently, the Caspian Sea. In the case of similar problems, Germany and Russia would not have the luxury of such diversification of supply routes.
In addition to accidents and natural disasters, pipelines are also exposed to cyberattacks. In May, a cyberattack against the Colonial Pipeline in the USA halted transit for six days. The pipeline transporting oil products from Houston up to New York resumed after a ransom payment, but the interruption left thousands of gasoline stations without petrol.
All in all, neither Germany nor Russia have been wise in constructing an infrastructure that transports the bulk of their gas exchange as it is likely to become the Achilles heel of their gas trade.
Over past decades, gas has come of age and it is now a key element of our energy mix covering a quarter of our needs.
The USA shale gas revolution and the construction of new LNG export facilities all around the world brought a huge quantity of liquified natural gas to the market, making it a global and abundant resource available at a competitive price.
Russia remains the largest supplier of gas to the EU, but a clever European strategy based on diversification of suppliers and supplier routes, construction of new LNG terminals, and improved interconnections among Member States has increased the EU’s resilience to possible supply disruption.
Unfortunately, the Nord Stream project seems to go against the basic principle of supply security, which entails a “diversification of suppliers and supply routes”. As a wise farmer “does not put all his eggs in the same basket”, a wise producer and a wise consumer should not “put all, or most, of their gas trade in the same pipeline”. This rings all the more true considering someone said: “pipelines are like marriages, only more binding”.
Furthermore, Germany has decided to phase out its coal and nuclear supplies, putting it in desperate need of Russian gas. If, for whatever reason, such supply were to be interrupted, Germany would be in deep trouble.