Episode Notes:

Earlier this week, Germany’s vice-chancellor offered a cautiously optimistic assessment of his country’s success in transitioning away from Russian natural gas. The New York Times reported that European natural gas prices have fallen to below their pre-war levels and Sweden announced plans to build new nuclear power plants.

Here to discuss Europe’s ongoing quest for energy security is Dr. Emily Holland, assistant professor in the Russia Maritime Studies Institute at the U.S. Naval War College.

[:48] Overview

[4:03] Impact on industry

[6:20] Nuclear

[9:00] Future risks

[10:44] Nordstream attacks

Episode Transcript: 

Nicholas Danforth: My name is Nicholas Danforth and I'm an editor at War on the Rocks. You are listening to the Warcast. The members only podcast for what you need to know now.

Earlier this week, Germany's Vice Chancellor offered a cautiously optimistic assessment of his country's success in transitioning away from Russian natural gas. The New York Times reported that European natural gas prices have fallen to below their pre-war levels and Sweden announced plans to build new nuclear power plants.

Here to discuss Europe's ongoing quest for energy security is Dr. Emily Holland, assistant professor in the Russia Maritime Studies Institute at the US Naval War College. Welcome back to the Warcast.

Emily Holland: Great to be back.

Nicholas Danforth: So we have a lot of news coming out from the past week. Give us a sense of where Europe stands right now.

Emily Holland: Well, Europe has been very, very lucky. There have been exceptionally and extraordinarily, although perhaps maybe this is just the new norm due to climate change, warm temperatures across the continent, basically all fall and now deep into winter. This is very lucky. And as a result, it's pushed natural gas prices and natural gas futures down to pre-war levels, right?. So it's dropped significantly.

However, I would caution by saying that natural gas actually remains still four times more expensive than it did in 2021, and volatility could resume at any moment with a cold snap like the one the US experienced just before Christmas. So they've been very successful and lucky because of this warm weather, but it doesn't mean everything's fine. What has happened is that that warm weather has allowed all of the policies that Europe has been pursuing over the past few months, such as reaching out to alternative suppliers, really working hard to fill gas storage tanks and reducing consumption. It's allowed all of those things to work and not required Europe to draw down on their storage that they then can't refill.

So Europe's in a pretty good point right now for this winter. Their storage remains high. They're not drawing it down too much, and they've still got ability to replace that because they have not been using so much energy.

Nicholas Danforth: Tell us a little bit more about the measures they've been taking. I know you've outlined some of these when we've talked to you before. Which ones have proved the most successful? And what are the impacts of these policies even when they are working on consumers on industry?

Emily Holland: Sure. So I think the biggest one is that in the wake of Russian invasion of Ukraine, they decided they needed to seek out alternative suppliers. So they started doing things like buying liquified natural gas from a variety of suppliers that are not Russia, although Russia is still sending liquified natural gas to Europe. So from all different suppliers, including the United States, they're buying more natural gas from Norway, they've turned to North Africa.

So they have a whole bunch of different suppliers now bringing liquified natural gas to Europe. In addition, there's been a serious reduction. So consumers are reducing their consumption of gas, they're saving, the reductions, mainly, are coming from industry. And that's a second point that we can talk about in a minute. And then, of course, they are building new infrastructure. So Germany's building new LNG terminals to enable it to buy liquified natural gas as opposed to relying on Russian pipeline gas.

So there's doing things like there's sort of a historic EU agreement to buy gas together. That's always been a problem for the EU. Basically they've had trouble agreeing on common energy policies. But this invasion and this crisis has really spurred a lot of cooperation in the EU. So there's a lot of innovation and a ton of resilience building that Europe is trying to do now in the wake of this crisis. And it's worked in concert with this very warm weather.

Nicholas Danforth: Let's talk about what this has meant for industry, what these cuts have meant for German manufacturing.

Emily Holland: Sure. So basically all over Europe, energy intensive industries, and that's things like steel, chemicals, fertilizer, but even things like glass or tile manufacturers have been really hurt by extremely high energy prices because these firms are reliant on a lot of energy. They need gas furnaces basically burning at all times. So what's had to happen is that they've had to reduce their production across a lot of different industries. So some industries have basically shut production entirely. Fertilizer production is down in Germany significantly. Fertilizer production in Poland is basically offline for the past few months. And then other industries are basically just surviving due to government handouts due to government subsidies. So Europe has handed out over 700 billion euros in industrial subsidies over the past six months. And so they're trying to shield those companies from basically going out of business. Now, this is a real issue because despite the fact that Europe's handling all of these things fine, and there's a nice heat wave which is helping them, it doesn't solve any problems structurally.

So what tends to happen when industry faces high costs is it doesn't come back. So once it leaves, it's hard to come back. So the last time that we had really historically high energy crisis was 2008, and Europe lost about 30% of its energy intensive infrastructure industries, and it left and it didn't come back. So for European industry right now, they have to survive, but really the question is for them is they have to innovate or they will die. They have to find a way to basically keep producing while using less energy. Sometimes that'll be things like maybe they'll stop producing one particular type of thing and they'll focus on another type of thing. Or it might be that they have to shut certain types of production, or maybe they can find a way to transition to green energy technologies and find a way to get government subsidies to do that. But that takes a little while, and the worry is that this de-industrialization will happen in Europe and will shift to other areas of the world that aren't facing these high commodity prices like, say, Asia or the Middle East.

Nicholas Danforth: Now, what about the nuclear side of this?

Emily Holland: Well, nuclear has experienced a pretty big renaissance over the last few months. Now that's not without growing pains, of course. Europe's poster boy for nuclear, France, has had huge problems in terms of maintaining their nuclear energy infrastructure. EDF, France's State Company, has been working very hard to bring that offline after a lot of it had to go offline this summer due to maintenance and other sort of safety issues. But now European countries are really thinking and seeing, okay, we need to manage this energy transition. And only one way to do that without prohibitive costs and to manage the bridge between the zero carbon green energy future and today is to go nuclear. So of course we have a lot of new nuclear plants coming online. We have countries seeking to build new nuclear plants.

Of course, the problem with that is that building nuclear power plants takes a very long time, usually takes about a decade to even negotiate because of safety, because of all sorts of issues. And over the last decade or so, most of the western firms got out of the nuclear civilian power plant business because there was no interest in it. And of course, the one company that did not do that was Rosatom, which is Russia's nuclear power agency. So they quietly took over the market over the past 15 years moving beyond the west. Of course, now Rosatom is not everybody's first choice to build a nuclear power plant. They are building power plants in Turkey, Egypt, India, China, all throughout the global south. But in Europe, that is not going to be the choice of who would build nuclear power plants.

So you're looking at, is it South Korea that might be providing those power plants? Is it France? The UK? Maybe even the US. So there is a little bit of a renaissance. But nuclear is not a quick fix. This is where you're looking at a decade to get the amount that you need online. So it's not a quick fix, which is why Europe is in this difficult problem right now that's been ameliorated by warm weather, but it's not a solution. And I think what's important to remember for Europe, and you're seeing a lot of jubilant articles like, oh, Europe saved the day, it's energy secure. Well, a mild winter is not energy security, nor is it energy policy. So you have to really make sure that you're not being complacent because a cold snap could disrupt all of the work that's gone into increasing Europe's energy resilience.

Nicholas Danforth: And are there other factors besides a cold snap that people should be worried about that could disrupt this?

Emily Holland: Well, of course. I hate to say it, but Europe is still buying Russian gas. Russian gas is still coming into Europe. That could be disrupted. Critical infrastructure is, of course, even more critical than ever because energy markets, and particularly gas markets, are going to remain tight globally for several years. That means that any disruption to the way Europe gets its gas now could be really, really serious. So Europe, and northern European navies in particular, paying a lot of attention to protecting critical infrastructure. Of course there are other global factors which may cause problems for Europe. Now that China has rescinded its zero Covid policy, we anticipate that Chinese demand for commodities will increase over the next year. So what does this do to prices? Does this increase prices again? Now there's going to be more competition for that gas that's splitting around the market.

So if there's competition, can Europe still afford to get it or is it going to be pulled in other directions? So there's all sorts of different things that could happen, and Europe still really needs to be careful to minimize demand and maximize supply alternatives. Of course, there are political things that could happen. Who knows what would happen in the US political system. So it's important to remember that Europe is not out of the woods by any stretch of the imagination. They've been very lucky, but they need to continue a serious amount of innovation and a serious amount of working at energy policy to try to build a future for Europe that is beyond Russian energy.

Nicholas Danforth: One final question, since you mentioned infrastructure security, last time we had you on here, it was in the immediate aftermath of the Nord Stream explosion. What's the latest news on that?

Emily Holland: It's actually interesting. The latest news is basically no news. There was an article that came out recently that showed that there was no evidence that conclusively points to Russia as being responsible for the attacks on Nord Stream Two. But the problem is that it's very, very hard to conclusively attribute acts to any one perpetrator. So even if forensics, and Sweden, Denmark, Germany, and the US have been investigating the explosion using forensics such as tracing the type of explosives, et cetera. So even if forensics were able to determine, say for example, that some elements present in the explosive were manufactured in, I don't know, say the Soviet Union, at some point, there's still no way to directly attribute that to Russia or anyone else. So it's always circumstantial at best.

And I think that's probably the best we're going to get out of this investigation. I really don't think it's going to be possible to conclusively attribute the attacks to everyone, which is probably by design. So the best thing that the West could do in the face of this non-attributional attack, is really just to increase the resilience of remaining infrastructure. And I guess you could say the one silver lining of this attack is that now navies and governments are really paying attention to a whole host of critical infrastructure in regards to energy communication, all sorts of things. So, for example, Norway is investing in surveillance, increasing naval patrols with the UK, France, and Germany to try to find, maybe, other ways to distribute oil and gas in case of the disruption.

So that's good because this was a problem for a long time that wasn't really being paid attention to. So now hopefully they can really pay attention to just how critical this infrastructure is and given, like I said, how tight the market for all these commodities will be over the next few years, these pieces of infrastructure are really important to protect.

Nicholas Danforth: Thank you once again for joining us.