Cheap Russian gas in Europe? No such thing: Bousso

Ron Bousso, Reuters

LONDON
EnergiesNet.com 02 18 2025

 As European officials consider the possibility of restarting Russian gas pipeline imports as part of an eventual peace deal in Ukraine, they should be clear about one thing: Russian gas never was, and likely never will be, cheap.

For decades, European politicians and energy executives have labelled Russian gas as “cheap” relative to alternative sources, such as Norwegian gas or liquefied natural gas imports. But this is misleading.

Europe has been the main market for Russia’s vast gas resources for most of the past six decades. Over this period, Europe steadily increased its dependence on Russian gas, building a complex web of pipelines that cemented political and economic ties between the regions.

Imports of Russian gas via pipes accounted for around a third of European gas demand in 2021, but supplies dropped swiftly following Moscow’s invasion of Ukraine in February 2022.

Imports of Russian gas dropped to 18% of the European Union’s imports in 2024, compared with 42% in 2021, according to research centre Bruegel. That number fell further after gas deliveries through the last main pipeline linking Russia and Europe via Ukraine were halted at the start of the year.

The disruption to supplies led to a sharp spike in benchmark European wholesale energy prices, wreaking havoc on many businesses that struggled to remain competitive. Overall gas consumption fell by 20% in the region between 2021 and 2023, forcing governments to intervene with financial support.

European buyers adapted to the crisis by increasing imports of gas from Norway and LNG from overseas, particularly the fast-growing U.S. gas market. That helped bring prices back down to pre-invasion levels by mid-2023.

These dramatic events made it clear that abundant Russia supplies had been helping to moderate European gas prices.

But that did not mean that Russian gas was inherently cheap.

MYTH MAKING

The myth that Russian gas supplies were ever significantly more affordable than other sources seems to have its roots in the Cold War era.

West Germany signed an agreement with the Soviet Union in 1970 to acquire natural gas in exchange for delivering steel pipes, an arrangement known, rather uncreatively, as “pipes for gas.” It was also called the “the deal of the century,” as it helped lower German energy prices. Italy and France reached similar deals in the 1980s.

But even during the Soviet era, the value of the gas exports into Europe was not based on an artificially low price but was instead linked to Dutch prices, Jonathan Stern wrote in his book The Pricing of International Traded Gas After the Soviet Union’s collapse, Russia’s newly-formed gas giant Gazprom and European buyers shifted to modern supply contracts using standard pricing mechanisms based on European gas prices as well as Brent crude oil prices. In the following decades, Russian gas actually priced above the European spot market at times due to growing overseas competition and the rise of renewable energy.

By 2010, European buyers were re-negotiating terms for their long-term contracts, partly because of these price concerns. The new contracts relied more heavily on benchmark European gas prices such as Dutch TTF. In return, buyers often agreed to a system that required them to pay Gazprom (GAZP.MM) for supplies even if they were not required.

The ample supplies of Russian gas available to Europe meant other sources of gas were less in demand, which helped moderate prices overall. And the large volumes of pipeline gas Gazprom delivered into Europe had the inherent advantage of lower transportation costs compared with other sources of supply, such as LNG.

But ultimately, Russian gas was priced using similar mechanisms as competing sources of supply.

As Mike Fulwood of the Oxford Institute for Energy Studies recently wrote , “While Europe, and Germany especially, may have been hooked on Russian gas, given the volume of imports, it was not cheap.”

NO RETURN

Even though the European Union hasn’t banned Russian pipeline gas purchases, the region is unlikely to resume imports at a scale close to pre-Ukraine invasion levels anytime soon, given strong political opposition from key EU members that are wary of offering Moscow financial support.

But even if Europe decided to revive some imports, potentially as part of a peace deal brokered by U.S. President Donald Trump, this is unlikely to lower the region’s gas prices significantly.

That’s because the global gas market has changed dramatically since 2022.

Pre-invasion, Europe used to be the destination of last resort for most LNG cargoes, which primarily ended up in Asia. Europe is now a major importer of LNG, with the majority coming from the United States.

Perhaps counter-intuitively, Russia is the second-largest supplier of this super-chilled fuel to Europe, delivering 17 million tons, or 19% of total EU imports, according to LSEG. Again, the fuel was priced against regional benchmarks.

Europe today needs to set its wholesale gas price at a level that allows it to compete with other markets for LNG supplies. So, however cheap Russian gas might be to produce, its price for delivery into Europe is unlikely to be lower than LNG imports.

The myth of cheap Russian gas has for decades influenced the political discourse about Europe’s relations with Moscow, arguably not to Europe’s benefit. It’s time it was dispelled.

Reporting by Ron Bousso; Editing by Susan Fenton

reuters.com 02 17 2025