Canada is missing out on a $1.2 trillion European Union natural gas market

Mark Milke and Lennie Kaplan, Canadian Energy Centre, October 20, 2021

In 2009, the central European country of Ukraine endured a twin lesson in geopolitics and energy security: Russia cut off its natural gas supply in mid-winter.

Russia’s public reason was that it was engaged in a pricing dispute with Ukraine. In reality, it was an attempt by the Kremlin to influence Ukraine’s government and to send a message to its public: you need us to keep your homes warm and businesses, schools and hospitals running. After that, Ukraine made efforts to import natural gas through third-party suppliers rather than directly from Russia.

Fast forward 12 years and Europe is racing to make itself even more dependent on natural gas from Russia, a country which can best be described as an autocracy. Europe is doing so while it continually discourages its own natural gas exploration and extraction.

For example, between 2005 and 2019 (the most recent year for which we have this data), Russia has been one of the largest sources of imported natural gas for the European Union, exporting over €165 billion worth to the EU in that period.

The EU’s dependence on Russia’s natural gas increased when the first of two Nord Stream pipelines, partially owned by Russia’s majority state-owned natural gas company Gazprom, became fully operational in 2012. Nord Stream delivers 55 billion cubic metres (bcm) of gas annually from Russia directly to Germany via a pipeline that runs under the Baltic Sea.

These deliveries are expected to grow further, by up to another 55 bcm annually, when the second pipeline, Nord Stream 2, becomes operational in 2022. Nord Stream 2 will also run under the Baltic Sea. As Gazprom itself notes, Nord Stream 2 is seen as “particularly important now when Europe sees a decline in domestic gas production and an increasing demand for imported gas.”

That increasing dependence is why some German lawmakers, including the head of the parliamentary committee on foreign affairs, opposed Nord Stream 2 and wanted it cancelled. That hasn’t happened, and Europe looks set to become more dependent on Russian natural gas and that from other Not Free countries. (The term “Not Free” is from the Washington DC-based think tank, Freedom House, which has measured and ranked countries and territories by their degree of freedom since 1973. Their broad rankings are: Free, Partly Free, and Not Free.)

Here are the hard numbers: Between 2005 and 2019, the European Union imported over €838 billion in natural gas from foreign sources, an average of nearly €56 billion per year. (In Canadian dollars, that’s about $1.2 trillion and $83 billion, respectively.)

Of that, about €286 billion or 34 percent came from Not Free countries, and €519 billion or 62 percent from Free countries. The remainder came from Partly Free countries and/or was not categorized according to a freedom measurement.

Of the over €286 billion worth of natural gas imported by the EU from Not Free countries between 2005 and 2019, almost 58 percent came from Russia, just over 31 percent came from Algeria with just over six percent from Libya. In other words, about 95 percent of the EU’s natural gas imports came from countries considered to be autocratic or Not Free to use Freedom House’ description.

Now focus on just 2019. That year, the EU imported €40.1 billion in natural gas from outside sources with over 41 percent from Not Free countries, just under 53 percent from Free countries, and the rest from Partly Free countries or not measured.

Thus, that 41 percent from Not Free countries was seven percent higher than the 34 percent average in the preceding 15 years—and before Nord Stream 2 starts exporting even more natural gas from Russia.   

Which European countries are most dependent on imported Not Free natural gas?

Of the over €286 billion worth of natural gas imported by the EU from Not Free countries between 2005 and 2019, just over €237 billion, or nearly 83 percent, was imported by Italy, Spain, Hungary, Slovakia, and the Czech Republic.  These EU natural gas import numbers from Eurostat do not include Germany and France due to confidentiality reasons and thus EU imports from Not Free countries are in fact conservative estimates of such natural gas flows.

Could Canada help lessen some of this dependence? Potentially. According to Natural Resources Canada, at the end of 2018 Canada had 73 trillion cubic feet (tcf) of proven natural gas reserves. To extract that and move it offshore (be it to Europe or to Asia), a more predictable regulatory regime for investors on natural gas infrastructure, including pipelines and liquefied natural gas (LNG) terminals, could help secure new markets for Canada’s natural gas.

Such natural gas, mostly uncompetitive before given the distance between Quebec, the east coast provinces (gas deposits exist in such provinces) and Europe, may be more competitive now given the rise and likely permanent higher prices Europeans look set to endure. A side bonus for Europe would be diversified gas import markets and reduced dependence on Russia.

Mark Milke and Lennie Kaplan are with the Canadian Energy Centre, an Alberta government corporation funded in part by taxes paid by industry on carbon emissions. They are authors of EU Natural Gas Imports: €286 billion Imported from Tyrannies and Autocracies Since 2005. Image credit: Pixabay.