Natural gas is the lifeblood of Europe's economy. It is a clean energy source that can heat houses, power factories, and hopefully achieve an energy transition. But the EU has almost no natural gas of its own. Instead, it relies on a small group of suppliers, with Russia accounting for the largest share. Now, the conflict in Ukraine has heightened fears that Russia could cut off Supplies to Europe. Russia supplies more than a third of Europe's gas, and almost the entire continent depends on Russian gas supplies. So far, European sanctions against Russia have ruled out energy resources, so how did Europe become so dependent on a country?
To understand this dependency, we have to go back to the 1950s. At that time, most of the coal burned was readily available. But it has one major drawback. It is more polluted. Natural gas became cheaper, cleaner and easier to transport, and soon became key to Western Europe's postwar economic recovery. You need to remember that natural gas is the most comfortable, reliable, and sensible source of heating, and the Continent itself doesn't have a lot of gas, so it has to look outward. If we look at a map of the main pipelines, we can see that Europe gets natural gas from two main regions.
We saw pipelines from Siberia, through which the cash-strapped Soviet Union supplied more and more natural gas to European countries. Further west is the gas field of the North Sea, which was discovered in the 1970s and led to a sharp increase in supply and demand. Its use has surged since the 1990s and now accounts for a quarter of all the energy consumed by the EU. But while most of the gas came from the UK, the Netherlands and Norway at the time, the decline in reserves meant that Europe was increasingly dependent on imports, especially from Russia. Europe is now heavily dependent on imports for energy, with 90% of the EU's natural gas imported.
Russia captures revenues from most of its countries through the sale of fossil fuels, which in 2021 will account for 36 percent of the government budget. But Europe has also begun to rely on cheap natural gas, and that dependence is even greater in the eastern part of the continent. Some countries get almost 100% of their gas from Russia. Rosneft is either state-owned or owned by oligarchs with close ties to the Russian government. This energy partnership has had a significant impact in Europe. Russia's friendly politicians have secured senior positions in oil and gas companies, such as former French Prime Minister François Fillon and former Prime Minister Gerhard Schroeder, who approved The Russian pipeline and are now ready to work for Gazprom. But that's not the only way Russian gas is used to exert pressure, which also poses a problem. But before we look at it, let's talk about the two things that govern this relationship.
The first is transit fees, which gas companies have to pay when they span different countries. The second is a long-term contract that regulates the amount of gas that Russian companies need to deliver. These are usually done by short-term contracts that help adjust for demand growth, especially during the winter months. The problem is that Russia can use natural gas to put pressure on its neighbors. While Russia has not breached any contracts, price disputes and deteriorating relations with former Soviet republics have seen Russia cut off gas supplies to Ukraine, Georgia and Latvia in the winter. This was initially limited, and these are, after all, transit countries for natural gas. But the construction of additional pipelines like Nord Stream 1 and the now-cancelled expansion project Nord Stream 2 has bypassed Central and Eastern Europe, allowing Russia to avoid transit fees, which amounts to billions of dollars in revenue reductions for Ukraine and Poland. In this way, it is easier for Ukraine to be isolated and cut off its gas supply.
Russia has also restricted spot sales to Europe, sticking to its annual contracts and causing prices to soar. This has led to a drop in Europe's natural gas reserves to almost an all-time low. Although Russian politicians have threatened to cut off the blockade altogether. Europe's dependence has limited its ability to respond to the conflict in Ukraine.
For much of the past decade, the EU has been talking about diversity. Since 2010, the EU has been trying to improve the resilience of its gas supply. This has been building additional storage capacity and LNG terminals to allow imports from around the world, particularly from the United States, which is forcing its allies to buy its own gas for security reasons and economic self-interest. Since the introduction of fracking in the 2000s, the United States has once again become a major producer of natural gas and oil and wants to expand its market. Former U.S. President Donald Trump has been pushing other countries to buy U.S. natural gas, and sanctions have reduced Nord Stream's price advantage over Natural Gas. President Trump told European leaders that the United States is poised to become an alternative source of energy for the continent. Europe is also building a new pipeline through Turkey, which will allow Europe to buy gas from Azerbaijan without having to transit through Russia. But efforts to find new suppliers in Europe and even renew contracts with existing ones face challenges. Despite a lot of effort, as a result, Russia's gas market share in Europe increased from 30 percent in 2010 to more than 40 percent in 2020. The problem seems to be that there are no alternative producers who can supply these quantities. Europe needs energy sources as cheap as Russian gas.
While the EU's gas demand is expected to decline, its domestic production will also decline, meaning imports will have to increase to meet the supply gap. While Europe has tried to diversify its suppliers, Russia has also been seeking to diversify its consumers, especially since it got into a dispute with the West over Ukraine in 2014. It is building infrastructure and the Far East to sell more natural gas to Asia, especially to the mainland. The EU's empty-handed, combined with investment in fossil fuels, has been unable to meet demand over the past decade and for the foreseeable future. There is less and less natural gas in the global market. Finally, as part of the energy transition, several European countries are choosing to bet heavily on natural gas to replace coal-fired power plants and complement renewable energy sources such as wind and solar. The result will only be a dependence on imports, especially the problem of imports from Russia and the growing dependence.
Since the outbreak of the Russian-Ukrainian conflict again, various sanctions and other disturbances in the West have been carried out. Gas prices are also at record highs and gas is in danger of being shut down at any time, with implications for European consumers, industry and safety. Europe's energy dependence is costly, and other countries will continue to benefit from it.