The Russian invasion of Ukraine has profoundly reshaped Europe's natural gas supply dynamics. The graphic below covers the period from 2020 to Q3 2024, charting 626 million tonnes of gas imported by EU countries.
Following the invasion of Ukraine, Russian gas flows to Europe sharply declined but began recovering in 2023. By the third quarter of this year, Russian pipelines ranked as Europe's third largest source, driven by consistent exports to Hungary and Italy, which together account for 40% of Russian pipelined gas purchases in 2024. When combined with Liquified Natural Gas (LNG) exports, Russia remains Europe's largest overall gas supplier.
The United Kingdom, a country not exactly known for its gas fields, stepped into the breach left by Russian gas, topping the charts Q3 2022. UK LNG imports soared by 74% compared to 2021, with shipments arriving mostly from the US and Qatar. This LNG, once regassified, has flowed back across the Channel—mainly to Belgium.
The idea is that EU-based producers have been at a competitive disadvantage for years because of the EU's sophisticated ETS, which it introduced years before much of the rest of the world. The belief is that this has made it difficult to compete with companies in countries not subject to carbon pricing, stalling economic growth within the bloc and limiting certain EU industries' ability to be part of the energy transition.
Post-invasion, the US and Algeria emerged as Europe's go-to suppliers. But since the second quarter of 2024 the U.S. has declined to fourth place in Europe's supply chain as US exports to Spain, one of their largest customers, dropped by 56% in Q2 and Q3 2024 compared to the previous year. Meanwhile, Norway has taken second place, with Azerbaijan making waves thanks to a deal to double exports by 2027.
Italy, by a considerable margin, stands as the dominant importer during the period analyzed, capturing a hefty 35% of gas exports. This is partially thanks to its pipeline connection with Algeria, but also because Italy relies heavily on gas for electricity generation. While Algeria (35%) and Russia (25%) dominate its supply mix, Italy also taps into reserves from Azerbaijan and Qatar, each accounting for 11% of its imports. Notably, Italy holds the crown as the top customer for these latter exporters - Russia being the exception.
Trailing right behind Italy are Belgium and Spain, each accounting for around 16% of the exports shown. Belgium leans heavily on imports from the UK and Norway. Spain is basing its energy diet on a mix of Algerian and U.S. gas.
But the landscape is poised for another seismic shift. Russia is expected to halt all gas flows through Ukraine by year's end, a move likely to send a ripple through global markets. Flows into Austria, for whom Russia was a key supplier, were ceased in November. LNG prices began to climb in Q3 and currently (early December 2024) hover near their annual peak of €48/MWh— still far below the eye-watering €336/ MWh spike seen in August 2022.
Meanwhile, Europe's gas demand has softened, down 7% in 2023 compared to the previous year. The EU's gas storage facilities are also pretty full, now at 94% capacity. Yet, the winter came on stronger this year than last. Reliance on spot-priced LNG instead of prenegotiated pipeline contracts leaves the continent's industrial economy exposed to volatile price swings. As Europe navigates this precarious energy landscape, the resilience of its supply chain - and its economy - remains a critical issue.
