The military assault Russia launched against Ukraine on February 24, 2022 has been a destabilizing event of historic magnitude, its humanitarian, political and economic impacts reverberating far beyond the borders of Russia and Ukraine.
The invasion has underscored the extent of Europe’s dependency on Russian energy supplies, as well as the commercial and geopolitical risks such dependency entails. One month into the ongoing war, Europe’s energy markets are roiling from price spikes and, while the continent’s energy needs appear to be met at present, supply shortfalls remain a serious (and ever increasing) risk.
While the EU has stopped short of joining the U.S., the U.K. and others in imposing embargoes on Russian energy, it has introduced far-reaching sanctions on Russia, including Russian oil majors Rosneft, Transneft and Gazprom Neft. At the same time, several European energy majors have announced plans to exit investments related to the Russian energy sector. Compounding this highly volatile situation are the retaliatory actions Russia has taken and may yet take in response.
It appears that the war in Ukraine is also having the effect of accelerating European states’ efforts to eliminate their dependency on Russian energy. On March 8, 2022, the European Commission announced ‘REPowerEU’, “a plan to make Europe independent from Russian fossil fuels well before 2030, starting with gas, in light of Russia’s invasion of Ukraine”. This plan envisages a two-pillared strategy of (1) diversifying gas supplies by increasing pipeline and LNG imports from non-Russian suppliers, and (2) accelerating Europe’s move away from fossil fuels.
This note addresses both the short- and longer-term impacts of Russia’s invasion of Ukraine on Europe’s energy markets, as well as some of the potential areas for dispute and steps that industry players can take to protect themselves.
The EU’s Reliance on Russian Energy Imports. In 2019, the EU produced around 39% of its own energy and imported the rest, with the energy consumed in the EU coming from the following main sources: petroleum products, including crude oil (approx. 36%), natural gas (approx. 22%), renewable energy (approx. 15%), nuclear energy (approx. 13%) and solid fossil fuels (approx. 13%). That same year, petroleum products (of which the main component is crude oil) accounted for almost two thirds of energy imports into the EU, followed by gas (approx. 27%) and solid fossil fuels (approx. 6%).
Europe is highly dependent on Russian energy imports. According to the European Commission, Russia provides more than 40%of the EU’s total gas consumption and accounts for 27%of the EU’s oil imports and 46%of its coal imports.
Potential Natural Gas Shortfalls. At the time of writing, Russian gas continues to flow, seemingly in sufficient quantities to meet demand. There remains, however, the prospect of Russia turning off the tap, including in retaliation for EU sanctions. In this connection, Russia recently issued a decree requiring buyers of Russian gas to pay in rubles from ruble-held Russian bank accounts and has threatened to cut off supplies to customers who do not comply.
Shortfalls could also occur due to damage to energy infrastructure running through Ukraine. For example, Ukraine’s Ukrnafta reported damage to its facilities in Okhtyrka as a result of Russian shelling, and suspended operation of two gas processing plants in the Chernihiv and Sumy regions of Ukraine. While these incidents do not appear to have caused any notable supply issues, the fact remains that Ukraine is an important conduit for natural gas from Russia to Western Europe.
Energy Price Spikes. The threat of supply shortfalls has caused prices of oil, gas and coal in Europe to spike. For example, the price of Brent crude oil has hovered at around $120 per barrel throughout the first month of the conflict, a level not seen for more than a decade. Natural gas and coal have also been trading at record high prices on the European spot markets, with the spot price of gas experiencing further upward pressure in light of Russia’s decision to require all payments for gas deliveries to “unfriendly countries” to be made in rubles.
Withdrawal from Russia-Related Projects. In the wake of the Russian invasion, Germany announced that it was halting certification of Nord Stream 2, the pipeline network running through the Baltic Sea, which was intended to double the flow of Russian gas to Germany. A number of European and other energy majors have since announced their retreat from investments in or concerning Russia. For example:
Diversification of Gas Supplies. Since the announcement of REPowerEU, European states have focused more attention on ways to diversify their gas supplies. Poland and Lithuania have agreed to bring forward the opening of the Gas Interconnection Poland-Lithuania (GIPL) pipeline, connecting the two states’ gas transmission networks, while Germany has announced plans to secure gas supply from Qatar. The EU and U.S. have also recently revealed a deal which would see more U.S. LNG delivered to Europe.
In this context, the CEO of Sonatrach has recently stated that the Transmed pipeline running between Algeria and Italy has spare capacity that could be used to increase gas transmission to Europe.
Simultaneously, there is a push by European states to develop more LNG infrastructure so as to curb their dependence on gas supplies from Russia, most of which run through pipelines. Examples include Germany’s plan to build two new LNG terminals, Greece’s plan to construct a new LNG facility near Alexandroupoli, and Estonia’s plan to establish a floating storage and regasification unit.
Review of Carbon Phase-Out and Renewable Energy Policies. While the REPowerEU doubles down on the EU’s longer-term commitment to phase out fossil fuels, there are signs that the war in Ukraine is prompting some European states to slow down their carbon phase-out in the more immediate term to stave off the risk of supply shortfalls where cleaner alternatives may not be ready in time.
Germany is a good example of both types of change. It has been reconsidering its decision to shut down its last three nuclear plants, and is reportedly contemplating a slower-than-planned phase-out of coal-powered energy. At the same time, it has recently announced an acceleration of solar energy projects and is considering boosting tenders for wind energy projects.
The developments described above could give rise to several types of disputes:
Shearman & Sterling’s International Arbitration and Project Development and Finance groups have deep experience across the energy sector, including oil and gas matters (upstream and downstream), nuclear power, hydroelectric power, and renewable energy. We act for multinational corporations, financial institutions, Sovereign States and State-owned companies in contract management, disputes and restructurings concerning, among other things, issues of consortium and joint venture relations, contract cancellations and terminations, construction, price review, tax treatment and stabilization and investment.
Our team also has unrivalled Russia disputes experience. It includes investment and public international law specialists who represented the majority shareholders of the former Yukos Oil Company against Russia, resulting in an historic $50 billion arbitration award in our clients’ favor. We also have substantial experience representing Ukraine and Ukrainian State entities against Russian interests.
Our lawyers also include members of Shearman & Sterling’s dedicated global sanctions team, providing advice and support to companies across a range of sectors and industries in navigating the increasingly complicated web of Russia-related international sanctions.
If your business has any exposure to Russia, we would be happy to work with you to navigate this rapidly evolving situation.
 European Commission, “REPowerEU: Joint European action for more affordable, secure and sustainable energy”, March 8, 2022:.
 See European Commission
 See European Commission
 See e.g., REPowerEU, p. 1:
 BBC, “Ukraine war: Russia threatens to stop supplying gas if not paid in roubles,” April 1, 2022.
 Ukrnafta.com, “Operational information on the status of work of PJSC ‘Ukrnafta,’” February 28, 2022.
 The Financial Times, “Renewed concerns about oil outlook push Brent crude above $120,” March 23, 2022.
 See e.g., Wood Mackenzie, “Coal prices spike as Russia-Ukraine crisis escalates,” March 3, 2022, The Financial Times, “EU plans to cut Russian gas imports by two-thirds in a year,” March 8, 2022.
 Reuters, “No change in law needed for rouble gas payments – Russian lawmaker,” March 29, 2022.
 Reuters, “Germany freezes Nord Stream 2 gas project as Ukraine crisis deepens,” February 22, 2022.
 BP.com, “bp to exit Rosneft shareholding,” February 27, 2022.
 Reuters, “Britain's Centrica to exit Russia gas supply agreements,” March 1, 2022.
 Reuters, “Italy's Eni to sell stake in Blue Stream pipeline co-owned with Gazprom,” March 1, 2022.
 Equinor.com, “Equinor to start exiting from Joint Ventures in Russia,” February 28, 2022.
 Shell.com, “Shell intends to exist equity partnerships held with Gazprom entities,” February 28, 2022.
 TotalEnergies.com, “Russia: TotalEnergies Shares Its Principles of Conduct,” March 22, 2022.
 Reuters, “Poland, Lithuania speed up gas link amid Russia supply worries,” February 28, 2022.
 The Guardian, “Germany agrees gas deal with Qatar to help end dependency on Russia,” March 20, 2022.
 Reuters, “U.S., EU strike LNG deal as Europe seeks to cut Russian gas,” March 25, 2022.
 Reuters, “Transmed gas pipeline has spare capacity to increase supply to Europe Sonatrach,” February 27, 2022.
 France 24, “Germany to ‘fast-track’ gas terminals as part of Qatar deal,” March 21, 2022.
 Upstreamonline.com, “New LNG import project flagged for Greece,” March 3, 2022.
 Upstreamonline.com, “Estonia revives LNG import project to reduce reliance on Russian gas flows,” March 18, 2022.
 Vice.com, “Germany Reconsiders Nuclear Energy In Light of Russia’s Invasion of Ukraine,” February 28, 2022.
 Euronews, “What are Europe's energy alternatives now that Russian gas is off the cards?” March 30, 2022.
 Reuters, “How Europe can kick its Russian gas habit,” March 1, 2022.
 The Guardian, “France to build up to 14 new nuclear reactors by 2050, says Macron,” February 10, 2022.
 Reuters, “Russia moves towards nationalising assets of firms that leave – ruling party,” March 9, 2022.