EU Plans to Phase out Russian Gas by 2027

On 6  of May, the European Union announced that all member states must develop plans to end dependence on Russian energy. The European Commission will propose legal measures to phase out all EU gas and liquefied natural gas (LNG) from Russia. Following the news, European natural gas prices have strengthened.

According to Bloomberg, despite concerns about the US-led trade war and its impact on energy demand which has lowered prices, “the global supply balance for the fuel remains fragile and the task to refill storage sites will be challenging.”

EU’s Gradual Shift Away from Russian Gas Imports

Russia was the leading gas exporter prior to its 2022 invasion of Ukraine, with around 45% of the EU’s gas coming from the country. That percentage has already decreased, with the EU and Russia taking a more hostile stance towards each other. However, Russia still provides around 19% of the gas coming into the European Union.

The termination will proceed gradually, with a ban on short-term contracts within the current year. Long-term contracts, accounting for about two-thirds of all gas imports, will be phased out by 2027.

A further crackdown will commence on Russia’s so-called shadow fleet. This includes oil tankers with vague ownership and insurance that the country uses to deliver oil. This fleet is used to circumvent sanctions and continue oil exports in a more obscure manner.

Some countries, like Poland and the Baltic states (although these are not all EU members), have already stopped oil imports altogether. The cumulative impact of the plan may significantly impact the Russian energy sector.

The plan aims to reduce the Russian impact on energy prices within the EU and bring more stability through safer and more foreseeable alternative suppliers. The measure includes further plans to ensure that these alternative supplies are available, to aggregate demand, and thus balance purchases between member states, and to better use existing internal EU energy infrastructure. Additionally, the European Union underlined that this effort pairs with its intention to move towards cleaner energy sources.

Non-gas energy sources

While the new plan is sure to significantly impact gas and LNG imports from Russia, it is far from the first attempt to stagger Russian imports. For oil, the EU has nearly completely cut ties with Russia, barring Slovakia and Hungary, which still maintain political ties with the country. Currently, only 3% of all oil imports in the EU come from Russia, compared to 27% prior to the Ukraine invasion.

For nuclear energy, things are a bit different. There are no current plans to stop or slow imports, although a measure will be proposed in June to target Russian uranium. However, this is unlikely to be a strict ban like with oil and gas, with EU energy commissioner Dan Jorgensen specifying that import taxes are the more likely route.

That doesn’t mean complete or partial complacency. While multiple member countries, namely Bulgaria, the Czech Republic, Hungary, Slovakia, and Finland, have reactors designed by Russia and set to run on its fuel, all except Hungary have signed contracts to seek alternative supplies in 2022. However, wait times are long, often taking multiple years, making them unable to switch immediately.

Some pushback to the plan

While most EU members are on the same page regarding the plan, it is not without resistance.

Slovakia’s prime minister, Robert Fico, said that he respects the attempt to push towards energy independence, but is of the opinion that this plan would harm the European Union’s economy. Potentially, this could cause harm to Europe’s competitiveness in global markets. Slovakia would like to see shifts in the legislative process, according to Fico.

SPP, a Slovak gas importer, shared a similar sentiment. It outlined potential harm to the EU’s business sector. Energy price increases would likely drive up company costs as well.

Hungary has taken a stronger negative stance, deeming the plan unacceptable. It has announced that it will take all steps possible to prevent it, fighting and challenging the decision. However, it’s still unclear what these steps may encompass.

The European Commission’s proposal, due in June, will go through the European Parliament. This means that its status will depend on a qualified majority of states. In other words, one or two countries will not be able to prevent the plan by themselves.

The legalities of it

As traders and investors know, companies are unable to simply exit long-term contracts at will. This means that certain legal processes will need to take place for the plan to go as smoothly as possible.

If the short-term contract segment of the plan is to go live by the end of the year, EU countries and their individual lawmakers will need to act fast. The effectiveness of exiting long-term contracts is highly dependent on the legal measures, which yet remain unspecified.

Dan Jannik Jørgensen, Danish politician and European Commissioner for Energy and Housing, has stated that the EU’s proposal would count as a force majeure. In other words, an unforeseeable event, completely outside the companes’ control, which would prevent them from executing their contracts.

The issue is that force majeure would only work if Russian suppliers were proven to be unable to deliver their goods. But over the three years that the Ukraine invasion has lasted, Russian companies have been able to continue operating well.

Legal experts have warned that this may make it difficult for buyers to terminate these contracts without entering arbitration or suffering financial penalties. The EU’s deliberate action further weakens the force majeure case.

The simplest way to avoid this to the EU to impose sanctions. However, this would require approval from all 27 member countries, with previous attempts already blocked by Hungary.

Market implications of halting Russian energy

The plan to significantly decrease Russian energy imports could have a significant impact on EU markets. As mentioned, business costs may rise as the EU scrambles to find alternative routes. For forex traders 그리고 EU stock traders, this may be a time of increased volatility, and it has the potential to push down prices.

For energy traders, this may be a time of decreased supply and increased demand. This may result in tension pushing prices upwards. Specific companies, like Spain’s Naturgy and France’s TotalEnergies, which have longstanding contracts with Russia, may also suffer, depending on the result of the legal situation. The same goes for other Russia-supplied EU energy companies, even without strict contracts, since it’s likely that supply line disruptions will occur.

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