The conflict in the Middle East may accelerate Europe's gas separation from Russia, says Vladimirov

The Iran war's natural gas price shock could accelerate Europe's decoupling with Russian energy while pushing the continent further into U.S. arms. Last week, an Iranian attack forced QatarEnergy to stop production, forcing the second largest liquefied gas exporter in the world. European benchmark gas prices soared by almost 50%. The European benchmark gas prices soared by nearly 50% as a result of the Iranian attack that forced?QatarEnergy, the world's second-largest liquefied natural gas exporter, to halt production last week. Qatar will only supply 4% of the gas imported by the European Union in 2025 according to the European Council. However, with this volume no longer available, the U.S. is now the largest gas exporter and producer. The U.S. could then use this leverage to force Europe to decouple from Russian gas. Since the Russian invasion of Ukraine, Western leaders have been trying to achieve this through sanctions.

This trajectory should not be altered by any temporary relaxation of U.S. oil sanctions during the war. The threat by Russian President Vladimir Putin to stop Russia's gas exports to Europe last week will also provide additional impetus to reduce this dependence. Russian gas accounts for about 10% of EU imports. The EU mandates that all Russian imports end by September 2027. However, legal ambiguities or loopholes may prolong the dependence on Russian Gas beyond 2028.

RUSSIA'S LONG-LASTING GRIP IN EASTERN EUROPE

Gazprom, a state-controlled Russian company, is the largest supplier of super-chilled fuels in Central and Eastern Europe and Southeastern Europe. The TurkStream pipeline system, which connects Russia and Turkey, is the main route for the Russian gas that flows into Europe. Central and Southern Europe remain structurally vulnerable, unlike Northern Europe which has rapidly diversified its energy operations through new LNG terminals. Russian pipeline gas is more commercially attractive due to limited storage, fragmented tariffs for transmission and poorly integrated markets.

The Americans had a very clear message at the Transatlantic Gas Security Summit in Washington, held just a few days before the start of the conflict, which was to accelerate the flow U.S. LNG in Europe's most vulnerable market.

NEW ENERGY FRAMEWORK To accomplish this, senior U.S. and European officials are focused on the new flagship project, the Vertical Gas Corridor, which links Greek LNG terminals to Bulgaria, Romania Moldova and Ukraine.

The Vertical Gas Corridor would fundamentally reorient Central European and Southern European trade flows towards Atlantic supply chains. This would lock in long-term LNG supplies and make the Balkans a frontier market for exporters. In order to support this initiative, U.S. gas exporters such as Cheniere and Venture Global agreed to supply 8 billion cubic meters (bcms) of gas per year through 20-year contracts signed with traders and governments from Central and Eastern Europe. This is roughly equal to 10% of U.S. exports of LNG to the EU by 2025.

These buyers, in turn, have signed non-binding deals with European intermediaries for the purpose of supporting the flow LNG through these areas. The willingness of European leaders to sign long-term contracts for gas after over a decade of talking about the need to cut fossil fuel consumption highlights Europe’s new reality. Energy security concerns are more important than decarbonisation.

The success of a Vertical Gas Corridor in the United States is not guaranteed. Tariffs across the border between Central and Southern European nations remain prohibitively expensive. Regional operators propose a new, "super-bundled", agreement which would allow suppliers the opportunity to reserve an entire corridor under a single contract.

There are also infrastructure bottlenecks. In order to accommodate large flows, underground storage facilities in Bulgaria and Ukraine will need to be upgraded. In addition, without EU financial support to cover the additional costs required for transmission system operators upgrade the grid, Russian Gas delivered via existing pipelines would remain cheaper and undermine diversification efforts. For the Vertical Gas Corridor?to function at scale, LNG from Turkey must flow north. According to my calculations based on data from Argus and Argus, the country has a large amount of underutilised regasification capability, which totals 58 bcm per year. This is enough to increase U.S. LNG supplies to Europe by approximately 70%. Around half of this capacity could be used to ship volumes through the Corridor towards Ukraine and Central Europe. However, in 'practice, Russian gas continues to occupy a large share of Turkish transit capacities through TurkStream. In a geopolitical environment that is becoming increasingly fractured, Turkey might not want to align itself with the interests?Europe or the U.S.

The U.S. has stated that its LNG exports are essential to Europe's industrial growth, economic security and its emerging infrastructure needs. And the conflict in Iran shows that this is likely correct.

Some might question whether it is wise to deepen this dependence, given the fact that the US has decided to continue the war in Iran even though they knew the possible disruptions to the global energy systems.

Europe has few options. It may be worth it to reduce Moscow's influence on the EU economies that are most vulnerable to economic and political pressure.

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(source: Reuters)