The current crisis in Ukraine reminds the European energy industry of January 2009, when a dispute between Ukraine and Russia resulted in the blockage of pipelines that carry natural gas across Ukraine to Europe. The blockage led to a two-week crisis that severely affected 18 countries. Across Europe, the spot market price of natural gas increased by 40 percent to €32 per megawatt hour.
Although the larger geopolitical consequences of the current upheaval in Ukraine could be far greater than in 2009, the short-term economic impact on the rest of Europe will likely be more limited. Compared with five years ago, the EU is far less reliant on pipelines passing through Ukraine, has larger natural-gas reserves, and has more options for substituting Russian gas with liquefied natural gas (LNG), which is available on the world market. The fact that the Russia-Ukraine standoff is occurring at the approach of spring, when gas consumption falls off dramatically, also lightens the potential impact.
Should the Ukraine crisis stretch into the summer, the implications for the rest of Europe will be far more severe. Gas pipelines crossing Ukraine remain critical. The biggest of them, the so-called Brotherhood pipeline that branches into Slovakia, Austria, Italy, the Czech Republic, and Germany, transports 15 percent of the natural gas consumed in Europe and accounts for one-third of its gas imports. A cutoff would cause European energy costs to spike, hurting everyone from consumers to industrial users.
We consider the prospects of a long-term stoppage unlikely. And in the event of a prolonged crisis, Europe’s options for coping are better than they were five years ago. A crisis could also prompt the EU to take further measures to ease its dependence on Russian gas, such as making greater use of LNG and perhaps even accelerating plans to develop reserves of shale gas.
Companies operating in Europe must nevertheless take into account both the short- and long-term risks related to the events unfolding in Ukraine. The short-term fallout of a Ukrainian pipeline blockage would be mitigated by the following factors:
These four structural changes, plus a relatively warm winter, mean that in the short term, Europe will likely be comfortably supplied with natural gas even if supplies through Ukraine are completely cut off. If the crisis drags on and escalates, however, the Ukrainian pipelines will be sorely missed later in the year. The first signs of trouble could appear in April and May, when European nations begin to refill their depleted storage capacity of gas so that they will be well supplied in October, when the heat is turned on again. Under this scenario, we see the following mid- and long-term consequences:
Given the highly unpredictable nature of events in Ukraine, companies should prepare for the worst: a long-term blockage of gas supplies from Russia. They should prepare strategies—such as hedging against rising gas prices and lining up alternative sources—for coping with higher energy costs. Fortunately, because the European gas market is today better equipped to deal with such an event than in 2009, it can limit the negative impact. By taking action now to guarantee energy security over the longer term, European governments and the energy industry can greatly reduce the odds that another political crisis involving Russia will again put the region’s economy at risk.