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The Impact of the Russia-Ukraine War on Europe’s Energy Trade Diversification

Updated: Mar 7

The European Union (EU) is a significant contributor to global energy consumption, representing more than 12.5% of the world’s energy use. The primary energy-consuming sectors in the EU are buildings, transport, and the industrial sector, which collectively make up 75% of total final energy consumption.


EU Energy Mix diagram
Source : European Commission - Energy

Europe's energy trade of crude oil and petroleum products account for the largest share in energy consumption in the EU, with a share of 34.5%, followed by electricity (23.2%) and natural gas (21.9%). Renewable energy, including hydropower, solar, wind and biofuels, accounted for 14%, with nuclear making up the remaining 10%.

Over the last several decades, the energy-mix in the EU has experienced changes, with oil products decreasing and natural gas filling in its use place. The EU’s efforts to decarbonize the economy has led to a consistent rise in the use of renewables, whereas coal production is declining.


EU Gas Consumption and Energy Dependency
Source : European Commission - Energy

EU Energy Imports

European energy imports mainly consist of oil, natural gas, and coal, with a smaller share imported for nuclear fuel and renewable energy. With limited and depleting natural energy resources, domestic production in the EU fulfills only 42% of energy needs, and, thus, relies disproportionately on energy imports. Some EU members are more reliant on energy imports than others due to their geographic location, energy mix, and economic development. Among the member countries, the situation varies greatly: As of 2020, Germany had a 63.7% dependency rate on imports, whereas Estonia had a 10.5% dependency rate.


Russia is EU’s largest energy supplier for oil and gas, followed by Norway, Algeria, and Qatar. In 2020, Russia supplied 43% and 29% of all EU gas and oil imports, respectively. Many individual countries some of which are Germany, Finland, Hungary, receive a high proportion of Russian oil and gas supplies, making them highly dependent on Russia’s export policies.


Russia’s invasion of Ukraine in 2022 upset markets and the geopolitical landscape of energy, hiking up oil and natural gas prices to record levels in nearly a decade. The highest price oil went during the RU war was $112/barrel - the last time it was this high was back in 2011.


The economic disruption caused by the war has forced many energy-dependent nations to reconsider their energy suppliers and amplified calls for an accelerated energy transition. In addition to the existing effects of the COVID-19 pandemic, high inflation, supply chain disruption, and rising interest rates, have led to a decline in real income, pushing the world towards a recession. European countries have felt the brunt of this change, due to the overreliance on Russian energy exports.


According to the European Central Bank (ECB), headline inflation, which includes both food and energy prices, in the EU increased from 2.6% in 2021, to 8.4% in 2022. Energy and food inflation accounted for two-thirds of this record-high number. The situation is made worse as Europe is in the midst of an accelerated energy transition, driven by EU’s goals to achieve net-zero by 2050.


Since the start of the war, the EU has imposed a significant number of sanctions on Russia and sought alternative ways to meet its energy needs. According to Eurostat, the EU substantially decreased its natural gas imports from Russia over the last 22 months.


Before the war, in February 2021, Russia accounted for 48% of all EU gas imports. However, by November 2022, this share fell down to just 12.9%. Similarly, Russian crude oil exports to EU accounted for 24.8% in 2021, but this share went down to 9.9% in the fourth quarter of 2022.


The decline in Russian exports were partially due to retaliatory gas export bans placed on the EU by Russia following the EU’s sanction on Russian energy imports. This decline in imports from Russia was compensated by increased imports of liquified natural gas (LNG), mainly from the United States (US). In 2022, the EU imported 54% of its LNG from the US, up from 24% in the year before.[1] This was mainly due to low storage inventories and high natural gas prices in the EU, which incentivized global natural gas suppliers with destination flexibility in their contracts to deliver greater volumes of LNG to Europe.

EU Energy Sanctions and Imports of Natural Gas
Source : European Commission and Eurostat

In response to the market disruption caused by Russia’s invasion of Ukraine, the European Union has introduced an ambitious renewable energy plan known as REPowerEU. The mail goal – to reduce its dependence on Russian fossil fuels.


The plan aims to scale and speed the use of renewable energy in power generation, industry, buildings, and transportation. This feat is made possible through energy savings, diversification of energy supplies, and an accelerated roll-out of renewable energy.


REPowerEU seeks to generate 45% of the EU’s energy from renewable sources by 2030 and replace two-thirds of the energy previously supplied by Russia. The 27-member bloc is also investing in infrastructure for hydrogen and biomethane, both green alternatives for natural gas. This phase-down of fossil fuels and accompanying clean energy transition offers Europe a long-term pathway to greater energy security.


EU-US LNG Trade
Source : ITC Trade Map

The US became the world’s largest exporter of LNG in 2022, surpassing others by sheer volume and providing Europe with a critical energy lifeline. Purchasing LNG abroad has been a key factor in avoiding supply disruptions in the EU, and the US has played a major role in securing and enhancing the Union’s security. This has deepened cross-Atlantic trading ties and elevated the US’s role as an energy superpower and anchored a booming export business for US LNG exporters such as Cheniere and Sempra.

Gas Storage Capacity Data
Source : GIE - Aggregate Gas Storage Inventory https://agsi.gie.eu/

The United States has the world’s highest LNG export capacity, which is expected to increase by more than 40% by 2025 with the opening of new facilities in the states of Louisiana and Texas. The US Energy Information Administration predicts US LNG exports will increase 14% in 2023, compared to 2022, to displace natural gas exports from Russia to Europe. Moreover, warmer weather and high stockpiles may result in reduced LNG prices, which would incentivize price-sensitive countries in Southeast Asia to increase demand.


To be sure, there are some challenges to accessing opportunities in the European market.


Several EU member states have signed contracts with gas producers along the Gulf Coast. The expansion of these LNG projects increases the possibility of international competition and risk of over-investment and over-supply for US LNG suppliers.


Energy-rich countries in Africa and the Middle East are increasing their liquefaction projects and entering the European market, seeking to profit from the current geopolitical and market situation. In addition to higher competition facing US LNG exporters, there is a possibility of decreasing demand from Europe as the latter’s gas storage facilities are reaching full capacity. Storage capacities in five countries (Germany, Italy, France, the Netherlands and Austria) make up two thirds of the EU’s total capacity. In Nov 2022, gas storage capacity in the EU reached 95%.


As Europe works towards achieving its renewable energy and net-zero goals, we can expect fossil fuel consumption, including LNG, to decline. These LNG contracts typically range from 10 to 25 years, resulting in a deep-seated reluctance to sign long-term deals by European businesses due to broader environmental goals. However, LNG is still considered a transitional fuel to help replace more carbon-intensive fuels such as petroleum.


There is considerable potential for increased LNG trade between the US and EU given the latter’s need for achieving energy security and importance LNG will play as a tool to transition to clean energy. However, we can expect increased competition and volatile gas prices to continue in 2023.


As China, the world’s largest LNG importer, lifts its COVID-19 lockdown policies, the pace of economic recovery and industrial activity may increase. This could potentially offer US gas suppliers a market to replace any shortfalls in demand expected from its European counterparts.



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