Will Europe return to Putin’s gas?

The first proper winter in three years had already reignited energy debates. With temperatures frigid and Asian competition for supplies fierce, the spot price at the Dutch Transfer Title Facility (TTF), Europe’s gas-trading hub, hit €58 ($61) per megawatt hour (MWh) on February 10th, its highest in two years (see chart). Then, on February 12th, came Donald Trump’s announcement that negotiations over an end to Russia’s war in Ukraine would start “immediately”—a statement that financial markets appear to be taking seriously.

Little surprise, therefore, that some European officials are greedily eyeing Russian gas. Lower energy bills might revive moribund European industry and placate households. Jari Stehn of Goldman Sachs, a bank, has forecast that an end to the war could produce a 0.5% rise in European GDP, with most of that coming from cheaper natural gas. Renewed flows could also encourage Vladimir Putin to negotiate a peace deal and then stick to it, proponents suggest. Hungary and Slovakia are making the case. In a recent interview with The Economist, Friedrich Merz, who is likely soon to be chancellor of Germany, said that there would be no return to Russian gas “for the time being”, but conspicuously failed to rule out the possibility.

Any such deal would represent an astonishing turnaround. The European Commission’s position is that it is “not making any links” between the restart of Russian flows and any Ukrainian peace talks. Indeed, its stated ambition is to import no Russian gas or oil at all by 2027, so as to reduce dependence on its hostile neighbour. Most gas deliveries ceased in 2022, when Russia closed down Nord Stream 1, its main pipeline to Europe; another conduit, running through Ukraine, ceased to flow on January 1st this year. The EU now receives just 10% of its gas from Russia, down from 45% in 2021. Russia, meanwhile, cannot redirect most of its supplies, which leads to a heavy financial toll. In 2022 sales of the fuel accounted for 13% of its federal budget. Now they account for just 8%. In 2023 Gazprom, the country’s state-owned gas giant, posted its first loss since 1999.

Ultimately, the decision about whether to turn on the taps will be made by countries at both ends of the pipelines and those the conduits traverse: Russia, Germany and Ukraine, as well as a few other eastern European states. Their leaders will come under severe pressure from other countries, too. Who is likely to prevail?

Step on it

At cruise speed the European Union consumes about 320bn cubic metres (bcm) of gas a year. The bloc’s storage capacity, at around 115 bcm, is equivalent to a third of that. These reserves were nearly full when winter started. Since then, cold weather and supply snags have forced the EU to burn more gas than expected. Its storage is now only 48% full, compared with 66% at the same time last year. High prices are pushing heavy users, such as chemical makers and smelters, to scale back. Industrial output across the bloc, already weak, is contracting further.

A bigger problem will arrive this summer. EU rules require storage to be 90% full by November 1st. It is typically replenished between April and October. This year Europe will have to buy more than usual—just when Asian importers are also rushing to restock. Little extra supply exists: a wave of liquefied natural gas (LNG) from America and Qatar is expected, but most will arrive next year. As a result, the price of gas to be delivered this summer is above that for next winter, an anomaly that makes it unprofitable to store the fuel. Germany’s gas regulator is mulling subsidies to encourage storage. Some countries want to relax the EU‘s storage target.

Hungary and Slovakia still receive piped Russian flows from Turkey; they and a few others, including Austria, probably also get regasified Russian LNG that flows through northern Europe. But they pay more for their fuel, supply of which is less certain than before. Resuming flows via Ukraine, which were paused at the start of the year, would help them. It would also push down prices across Europe by reducing competition for supplies. Since Mr Trump’s remarks about a negotiated peace, prices on the TTF have fallen by 9%. Just reinstating the 15bcm the Ukrainian conduit carried in 2023—well below its maximum—could bring TTF prices down by a third from their recent peak, says Anne-Sophie Corbeau of Columbia University. MUFG, a bank, suggests prices could halve again by 2026 were flows through Ukraine to rise from their low level in 2023.

Ukraine is adamant it will not renew its deal with Russia, but workarounds are being studied. Slovakia’s national gas firm is establishing a subsidiary in Ukraine and applying for a transport licence, which would enable shipments from Russia. There is a more extreme option, too: resuming sales via the Nord Stream 1 pipeline, which once transported 55 bcm a year to Europe, and perhaps even Nord Stream 2, a conduit of the same capacity that has never entered operation. The obstacles are formidable. Germany, which has been badly burned by its previous openness to Russian energy, would have to give its go-ahead. After sabotage, attributed to Ukrainian divers, three of Nord Stream’s four pipes require repair. This would cost hundreds of millions of dollars, says Mike Fulwood of the Oxford Institute for Energy Studies. The EU’s most Russia-wary members would lobby hard against greater dependence on the country’s energy.

Then there is the Trump factor. On the one hand, America’s president wants Europe to purchase more LNG from his country, as would happen in the absence of a Russian restart. The full return of Russian supplies might crush prices around the world, meaning that many American drillers would become unprofitable and billions of dollars of investment in LNG projects would suddenly be worthless. On the other hand, Donald Trump would like a Nobel peace prize, and the return of some Russian gas as part of a peace deal might seem a price worth paying. ■