What exactly are LNG and LPG? See Appendix for detailed information
How do the sanctions on Russian resources and fuels work?
Although the EU imposed harsh sanctions on Russia for its invasion of Ukraine, it did not target Russian natural gas (including LNG) or LPG, focusing instead on oil. The reason for this was the challenge of the rapid diversification of gas supplies in Central and Eastern Europe because of the dependence on pipeline supplies.
In the case of natural gas, Russia had already gradually reduced supplies to European consumers, provoking an energy crisis and trying to force EU countries to make concessions over the attack on Ukraine. However, this strategy failed—the EU survived the most difficult heating season in its history thanks to increased LNG imports and gas reserves, mandated earlier.
Russian LNG and LPG still doing well in the EU
Despite a significant decline in the share of Russian gas on the EU market, the share of LNG has started to grow.
This is changing the geography of energy dependence on Russia since, until the full-scale Russian invasion of Ukraine, Central and Eastern European countries were the most dependent on Russian supplies. They imported gas from Russia through pipelines, often with no alternative to the eastern direction. By 2020, more than half of the gas consumed in many EU countries came from Russia.
Russia’s reduction of natural gas supplies through pipelines has led some EU countries to increase imports of LNG from that country. This change mainly occurred in France, Spain, the Netherlands, and Belgium. For the EU as a whole, LNG imports from Russia increased from 14.2 bcm in 2021 to 19.3 bcm in 2022.
The LNG market, unlike pipeline supplies, is globalised, which allows for the purchase of individual supplies from around the world at market prices. France or Spain are therefore able to eliminate Russian gas relatively easily (depending only on the global LNG supply). However, the absence of sanctions on Russian LNG allows for legal imports of this commodity, which these countries do not want to give up for economic reasons.
The argument in favour of importing LNG from Russia has so far been the risk of a gas shortage threatening Europe in the winter of 2022/23. With the arrival of spring and relatively high gas storage levels, gas prices have fallen to as low as 40 EUR/MWh from around 350 EUR/MWh at the peak of the crisis, reflecting positive market sentiment. It is therefore a good time to take measures to tighten sanctions.
How to eliminate Russian LNG from Europe?
The long-term programme for the development of LNG production in the Russian Federation, adopted in March 2021, envisages at least a threefold increase in Russian LNG production by 2035 and the acquisition of new markets.
The hesitation of Western European countries to block Russian LNG imports may help Russia regain the market share it lost in Europe after the reduction of pipeline supplies. This reduces the effectiveness of policies aimed at reducing the EU’s dependence on Russian resources and on Russia's ability to finance its military.
To prevent this, an embargo on Russian gas imports by sea should be introduced. This would be analogous to the solution introduced for Russian oil. It would make it possible to maintain gas supplies via pipelines through Ukraine to, among others, Hungary, which is still dependent on Russian gas (thus avoiding a Hungarian veto), and at the same time, it would eliminate the possibility of imports to countries with diversification potential, such as France and Spain.
An alternative solution is to introduce price caps on Russian LNG. In that case, it would be possible to import LNG only at a predetermined maximum price. The mechanism could be analogous to the restrictions imposed on the provision of Russian oil transportation services. The maximum price could then be set every two months at a level lower than the average price on the TTF exchange. This solution would reduce Russia’s profits from LNG exports to the EU, while easing concerns about the EU’s gas deficit.
Poland Leads Russian LPG Imports
The European LPG market is much smaller than the LNG market by value. However, sales of this fuel still generate significant revenues for Russian producers. In 2022 alone, they amounted to about 1.1 billion euros.
The vast majority of this sum—about two-thirds—went to Russia from Poland. Since Russia’s invasion of Ukraine in February 2022, about 700 million euros have flowed from Poland to pay for Russian LPG. Purchases of Russian LPG did not decrease after Russia’s invasion; on the contrary, they have increased (as of March 2023). A similar phenomenon can be observed in the Baltic States.
Poland’s situation is unique in Europe and is mainly due to four factors. First, the Polish LPG market is characterised by the dominant role of autogas. About three-quarters of LPG is used by cars (about 3 million vehicles). At the same time, it should be noted that these vehicles can alternatively use gasoline, which has a positive impact on the resilience of the Polish economy to disruptions in LPG supplies from Russia. Sectors lacking the possibility of substituting LPG with gasoline could be supplied through domestic production and imports from other directions.
Poland is dependent on imports to meet its demand for LPG. Domestic refineries do not have sufficient capacity and there are no prospects for a significant increase in production from deposits. As a result, only 16% of the consumption of this fuel in Poland is covered by domestic production, which is the worst among all liquid fuels (compared to gasoline and diesel).
Another important factor specific to Poland is the existing supply chain. About 55% of the LPG entering Poland from abroad is delivered by rail, less than 29% by sea, and about 16% by road. Historically, Poland has used land-based LPG terminals located in the east of the country and designed to receive fuel from Russia and Belarus. For years, this proved to be the cheapest import route in terms of logistics.
Poland has four LPG marine terminals, but their reloading capacity does not allow them to completely replace supplies from the east. For this reason, although a trend away from Russian LPG has been observed in recent years, it is a very slow process. Without political intervention, Russia’s dominant position in the Polish LPG market will remain unchallenged.
Another peculiarity of the Polish LPG market is the low storage capacity. In total, Polish storage facilities have a capacity of 105,000 tonnes and are mainly located at reloading terminals. Only a third of them are located in marine terminals. This means that the storage capacity corresponds to only 4% of the country’s annual LPG consumption. As a result, the Polish LPG market is dependent on the continuity of supply (mainly from Russia) and is very sensitive to possible fuel shortages.
How to eliminate Russian LPG in Europe
The key to eliminating Russian LPG from Europe is to solve Poland’s problems with the supply and use of this fuel. The introduction of an EU embargo on the supply of this fuel from Russia, given the low stocks and dependence on continuous supplies from the east, would lead to price increases and LPG shortages in Poland. Rationing in the form of, for example, a temporary ban on the sale of autogas would be necessary to protect the most vulnerable households, agriculture, and industry. However, it should be noted that this situation could also be provoked by Russia in order to create a crisis in Poland.
It is therefore in Poland’s interest to counter such a scenario. This can be achieved by increasing investments in storage and reloading capacities at Polish LPG terminals. In addition, increasing imports via Western European terminals (ARA ports) can be a countermeasure. Ultimately, Poland should strive for a situation in which it will be possible to implement an embargo on Russian LPG without rationing this fuel.
Author: Maciej Zaniewicz
Date of publication: 07 April 2023
LNG is liquefied natural gas. Natural gas is mainly methane. LNG is obtained by cooling purified natural gas so that it changes its state of matter to a liquid, reducing its volume by about 600 times.
In this form, the gas is easy to transport. After liquefaction at terminals, LNG is loaded onto ships for transport to customers. In most cases, LNG is sent to regasification terminals (in Poland, there is one in Swinoujscie). There, the LNG is returned to its gaseous form (regasified) so that the raw material can be fed into the gas network.
But there are other ways to use LNG. Once delivered to the terminal, LNG can be reloaded in liquefied form onto tanker trucks that deliver the product to fuelling stations, for example, for buses (in metropolitan areas like Warsaw, buses and other vehicles use LNG), or to local regasification stations. There the raw material can be regasified and delivered directly via the distribution network to the end users. This is known as “island” gasification, which is cost-effective in areas far from the transmission network. LNG also can be transferred between ships for use as fuel. This is known as bunkering.
LPG is Liquefied Petroleum Gas (LPG). It is a mixture of gases, mainly propane and butane, stored in a liquid state under pressure. LPG occurs naturally in oil and natural gas reservoirs from which it is extracted. It is also produced during the refining of crude oil (a petroleum product). LPG is easier to transport and store than LNG. It does not require liquefaction and regasification facilities, and it can be stored at very low temperatures. As a result, LPG is widely used as a motor fuel (about three-quarters of the LPG consumed in Poland is autogas), for heating buildings and powering gas stoves, as well as in agriculture (e.g., for heating greenhouses).