“Europe is going to have to live according to its means”

Published on: 25 July 2022

On July 11, 2022, Russian state-owned gas company Gazprom shut down the Nord Stream 1 pipeline for its annual ten-day maintenance. At the time, serious consideration was given to the possibility that gas supplies to Europe would not resume after the maintenance period - with all the potential consequences that would entail. What are those potential consequences? How big is the potential economic impact, if Nord Stream 1 were to be completely shut down? Five questions for APG’s Peter Verbaken, Head of Commodities Team, and Gillis Björk Danielsen, Senior Portfolio Manager Commodities. “The impact on the European economy will be the least if Europe responds in a coordinated manner.”


When Gazprom announced to its European customers in mid-July that it could no longer guarantee the supply of natural gas, serious consideration was given to the possibility that Nord Stream 1 would not be restarted. Those fears turned out to be unjustified, to the extent that natural gas began flowing through the pipeline again on July 21. But the supply was still at the same low level as before the maintenance: 30 to 40 percent of the natural gas quantity that Gazprom supplied to Europe through Nord Stream 1 until early June (a few days later, Gazprom announced that it would cut flows through Nord Stream 1 on July 27th, to 20 percent of its capacity). Before that date, the full capacity of Nord Stream 1 was used. Then the gas flow began to decline, and hovered around 40 percent of full capacity around June 17. And with that, it remains a means of pressure with which Russia’s president, Vladimir Putin, is trying to get Europe to stop supplying weapons to Ukraine and/or to reduce the economic sanctions imposed on Russia after the invasion of Ukraine. After all, Europe depends on Nord Stream 1 for a third of its natural gas consumption, and to get through the winter, it needs to replenish its gas supplies in the summer.


What could be the reason that Nord Stream 1 has been restarted after this maintenance period after all?

Björk Danielsen: “If Gazprom completely stops the supply of gas to Europe, it would mean a significant loss of revenue for the Russian state, because it cannot sell that kind of quantity elsewhere. Revenues they need to finance the war against Ukraine. You could speculate that restarting Nord Stream 1 may be a way for Putin to test Europe's resolve and internal solidarity. By maximizing the unpredictability of Russian natural gas supplies to Europe, Russia makes it difficult for Europe to remain united and plan ahead to meet its energy needs. The fact that Russia has resumed gas supply may be a way to dissuade Europe from taking emergency measures now to function without Russian gas in the winter. This is most likely to create divisions within Europe in due course. And that is in Putin’s interest.”


What would a divided Europe look like, if the natural gas supply from Russia were to stop completely?

“Some countries may make separate agreements to keep receiving gas from Russia. In other cases, it can be competition over who gets access to the limited non-Russian gas. Theoretically, a number of countries, including the Netherlands, can secure the necessary natural gas for themselves by stopping supplies to other countries. For example, some of the natural gas pumped into Groningen is currently supplied to Germany. But the chances that those countries will actually cut off supplies to neighboring countries are slim. Politically, it’s a pretty impossible scenario. When the possibility of a Russian supply freeze became more and more real, European member states made agreements to share their gas supplies and help countries disproportionately affected when necessary.”


What would be the economic impact on Europe, if Nord Stream 1 were to be shut down completely?

Verbaken: “The impact on the European economy will be the least if Europe reacts in a coordinated manner. Such a response is indeed expected. But it is far from certain, given the unequal interests of Germany in particular on one side and countries like Hungary, Spain, and Italy on the other. The IMF recently calculated that Europe can significantly limit the economic impact of a full Russian supply freeze with a coordinated approach. Should Europe still respond in a ‘fragmented’ manner, the extent of the economic damage will vary from country to country. For the Netherlands individually, it makes relatively little difference whether Europe responds in a coordinated or fragmented manner. If you look at the IMF figures, the percentages that the Netherlands gives up on gross national product are relatively close - around two percent at most in both cases. But countries that are much more dependent on Russian gas, such as Hungary, will be hit hard in a scenario in which Europe does not respond as one. The GNP of the Hungarians would take a hit of 2.5 to 6.5 percent in that case, compared to 1 to 3.4 percent in a coordinated European response.” 


For how long would the Netherlands be able to get by on its current gas reserves, if it no longer gets gas from Russia and no measures are taken?

Verbaken: “That is an irrelevant question, really, because you cannot consider the Netherlands an isolated country in that respect. Given that the European member states have agreed to share the natural gas reserves, it is better to ask: how long can Europe endure without Russian gas? And that is a very difficult question to answer because it depends on so many different factors. For example, how much the industrial demand for gas will decrease as a result of higher gas prices, and of course how cold - and how long - the winter will be in Europe. It also depends on how much LNG - natural gas that has been liquefied and can thus be shipped around the world - Europe can buy on the world market to make up for a shortage of natural gas.”


So, we just have to wait and see when central heating systems and gas stoves stop working?

Björk Danielsen: “Modeling does produce estimates of the time it will take for European gas supplies to be depleted if Russia stops supplying gas completely. But the bottom line is that Europe will have to live according to its means if the gas supply from Russia is cut off completely. Demand will simply have to be lower to get through the winter. That’s why the European Commission has also asked all member states to reduce their natural gas consumption by 15 percent between August 1, 2022 and March 31, 2023. How they do this is up to all member states. Part of the reduction will have to be achieved by governments and companies, but households may also be asked to make adjustments. The European Commission's proposal in its current form is unlikely to be passed – or even get to a vote – so most likely it will be amended. But we probably won’t be sitting at home with frostbite during the winter. Europe will not let it get that far.”