The European Union is expected to import 15.5 billion cubic feet (BCF) per day of natural gas from Russia this year, roughly half of which would normally be transported by pipelines passing through Ukraine. Worries about the security of these supplies in the current crisis are compounded by Europe's increasing reliance on gas imports from all sources.
While EU gas consumption, based on the union's 28 current member countries, has been essentially flat over the last decade, its production has declined by more than a third, as shown in the chart below. As of the end of 2012, EU self-sufficiency in gas stood at just 35%. The widening of the gap between EU gas demand and production bears a close resemblance to the situation in which the US found itself with regard to crude oil prior to the shale revolution, and it is the main source of Europe's vulnerability in natural gas.
The EU has three main options for reducing its dependence on gas imports from Russia. It could shrink gas consumption, which is already happening to a modest degree as pricey gas power generation is being squeezed out between subsidized wind and solar power and cheaper coal power, in a mirror image of US trends of the last several years. This seems inconsistent with the EU's long-term emission goals and the need for gas to back up intermittent renewable electricity generation, so the scope for this option appears limited, at least for the next decade.
EU countries could also attempt to revive domestic gas production. Europe's conventional gas fields may be in decline, other than in non-EU Norway, but its shale gas potential was estimated at 470 trillion cubic feet (TCF) in the US Energy Information Administration's global shale assessment last year. That's about 40% bigger than Europe's reserves and technically recoverable resources of conventional gas. Uncertainties on this estimate are still large, but it's in the same ballpark with the Marcellus shale in the eastern US, which currently produces over 14 BCF/day.
Unfortunately, initial efforts in Poland's shale have been disappointing, while Germany, France, and other countries have imposed moratoria on shale gas development. Unless these policies are reversed in the aftermath of the Ukraine crisis, the EU can't grow its way out of its dependence on Russia.
That leaves import diversification as the likeliest path for weaning Europe off Russian gas. This process is underway, hastened by previous Russian gas brinksmanship. Interest in US gas is understandable on many levels, not least because even after increasing production by around 15 BCF/day since 2006, US shale resources are expected to add another 8 BCF/day by 2025.
Energy experts have been quick to point out that the first US LNG exports won't be available for at least several years, and that companies, rather than governments, are the main parties involved in gas contracts. Customers in Europe will have to compete for US and other LNG supplies with customers elsewhere, especially in Asia, where China's gas demand is growing and Japan's post-Fukushima nuclear shutdowns have dramatically increased LNG imports.
These constraints are real. However, they ignore the ways in which changing the market's expectations about future LNG supplies--and potentially prices--could affect the calculations of Europe's gas buyers today and limit the political leverage that Russia's dominant gas export position conveys. As Amy Myers Jaffe of UC Davis and formerly the Baker Institute tweeted a few days ago, "it isn't about physical LNG cargo to Europe; it is about US exports promoting market liberalization (and) greater liquidity."
A decision by the US government to streamline the permitting and development of LNG facilities cannot enable US exports to displace Russian gas in Europe this year or next, but it would put Russia on notice that in the future it must compete in a market in which gas customers in Europe and elsewhere will have much greater choice. That would certainly complicate President Putin's plans.