Dethroning Russia’s gas hegemony

The suspension of Russian gas exports through Ukraine signals a transformation in Europe’s energy landscape and reliance.

A worker walks beneath the pipework in the yard of a comprehensive gas treatment unit at the Gazprom PJSC Chayandinskoye oil, gas and condensate field. This site is a vital resource for the Power of Siberia gas pipeline.
A worker walks beneath the pipework in the yard of a comprehensive gas treatment unit at the Gazprom PJSC Chayandinskoye oil, gas and condensate field. This site is a vital resource for the Power of Siberia gas pipeline. © Getty Images
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In a nutshell

  • Russian gas exports through pipelines via Ukraine have been halted
  • Europe diversifies gas sources, reducing reliance on Russian supplies
  • Prospects for Russian gas in Europe remain bleak amid stiff competition
  • For comprehensive insights, tune into our AI-powered podcast here.

The beginning of 2025 marks a new chapter in the relationship between Russia and Europe. On December 31, 2024, Russian gas exports via Soviet-era pipelines traversing Ukraine were halted. This followed Kyiv’s decision not to renew the transit agreement with Gazprom, the Russian state-owned gas giant, and its own Naftogaz. Ukrainian President Volodymyr Zelenskiy stated that his country would not allow Russia to “earn additional billions on our blood.” This agreement, which was signed on December 31, 2019, allowed Russian gas to transit through Ukrainian territory to reach European customers.

Despite the halt in gas exports, no wave of European panic followed – an unimaginable scenario only a few years ago when any dispute between Russia and Ukraine threatening gas supplies to Europe would have caused a major outcry across the continent, sending gas prices skyrocketing. This time, Europe was better prepared. However, attributing this outcome solely to the ingenuity and efforts of Brussels would be an oversimplification. Various external developments have come together, reinforcing each other and significantly bolstering Europe’s determination to break free from the decades-long Russian grip on its energy market.

Consequently, since the beginning of this century, the European Commission has made the security of gas supply an explicit policy objective. This involves identifying and building new routes that reduce European Union countries’ dependence on a “single supplier” of natural gas and other energy resources.

Russia was the single supplier. Efforts to diversify from this reliance progressed at different paces, but in recent years, they gained momentum with the expansion of the liquefied natural gas (LNG) seaborne trade. This shift coincided with and significantly benefited from the shale oil and gas revolution in the United States, which transformed the U.S. from an EU competitor for global gas supplies to a strategic alternative to Russian supplies.

In just a few years, the U.S. became the world’s largest LNG exporter, capturing market share from traditional suppliers, particularly Russia, in the European market. In response, established and new gas producers have increased their efforts to expand export capacity to protect their market share. This increased competition comes at a time when the energy transition and the rise of green energy threaten the growth potential of gas markets – and may even lead to their decline.

The gas market, which Russia once dominated, has fundamentally changed. Even if a peace deal is reached soon between Russia and Ukraine, it is highly unlikely that Russian gas will reclaim its former hegemony.

Bypassing Ukraine

Russia is the world’s second-largest exporter of natural gas after the U.S. However, Russia had the lead in gas exports through pipelines, boasting an extensive network that largely serves its traditional main market: Europe.

For decades, Russia was Europe’s largest natural gas supplier. In 2000, it accounted for a staggering 85 percent of total gas imports to Europe via pipelines and 74 percent of total imports. This overwhelming dominance went largely unchallenged until recently, although European countries were aware of the risks associated with such heavy reliance on Russian gas and many began taking steps to reduce this dependency, at varying rates.

After Russia’s full-scale invasion of Ukraine in 2022, Europe successfully reduced its reliance on its primary supplier. By 2023, the share of Russian pipeline gas in Europe shrank to 45 percent of total gas pipeline imports into the continent, while its total contribution to European gas imports reached 25 percent (including LNG, where Russia accounted for 7 percent of imports).

The gas interdependence between the EU and Russia was a double-edged sword. While Russia was Europe’s largest gas supplier, the continent was also Moscow’s largest market, with Germany alone accounting for more than half of the Russian pipeline gas exports. This dependence was not solely the result of geographical proximity. The natural peculiarity of pipeline transport limited the options for diversification for producers and consumers. Typically, they would enter a long-term contract with rather rigid terms of trade that remained unchanged throughout the duration of the agreement.

To strengthen its presence in its main market while reducing its exposure to one main transit route – namely Ukraine and primarily via the Soviet-era Urengoy-Pomary-Uzhgorod pipeline, also known as the Brotherhood pipeline, which became operational in 1983 – Russia has invested in a web of pipelines over the past two decades. This included the Blue Stream pipeline beneath the Black Sea to Turkey, which started in 2003; the Yamal-Europe pipeline traversing Poland and Germany via Belarus that became operational in 2006; the Minsk-Kaliningrad pipeline through Belarus and Lithuania, operational since 2011; Nord Stream 1 under the Baltic Sea to Germany, commissioned in 2011 and the TurkStream pipeline extending to southern Europe, which commenced in 2020. Additionally, the Nord Stream 2 pipeline under the Baltic Sea to Germany, which was completed in September 2021, was built but never commissioned due to the Russia-Ukraine conflict.

With new pipelines, Ukraine’s share of Russian gas exports to Europe would have dropped to 13 percent, down from over 90 percent in the early 1990s. If the planned pipelines – TurkStream 3 and 4 – were also built, supplying gas to Southern Europe via Turkey, Ukraine’s transit business would have disappeared entirely. This scenario made strong commercial sense for Russia and had favorable political implications.

However, the sabotage of Nord Stream 1 and 2, which had the highest capacity for exporting pipeline gas from Russia to Europe, and Poland’s suspension of flows through the Yamal pipeline in 2022, derailed Russia’s ambitions.

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Facts & figures

Russia’s natural gas exports

The gas market has undergone significant changes, making it improbable for Russian gas to reclaim its previous level of dominance.
The gas market has undergone significant changes, making it improbable for Russian gas to reclaim its previous level of dominance. © GIS

LNG to the rescue

Fortunately for Europe, the disruptions to the pipeline trade with Russia happened during an era of fundamental change in the global gas trade. Norway has certainly captured some of Russia’s lost market share in the European gas pipeline sector.

Nevertheless, seaborne LNG has made the biggest difference. Globally, between 2011 and 2021, interregional LNG trade grew more than four times faster than pipeline trade. In 2020, the volume of gas traded as LNG surpassed that of pipeline deliveries for the first time.

LNG exporting and importing terminals have rapidly expanded worldwide, including in Europe. Germany, for instance, which relied solely on pipeline gas imports until 2022, swiftly constructed LNG importing facilities and secured long-term deals with major exporters like Qatar. Neighboring Poland opened its first LNG terminal in 2016 and has just completed an expansion of the facility, significantly bolstering the country’s throughput.

The shale revolution has significantly transformed the U.S. energy landscape by unlocking vast resources of natural gas. As a result, the U.S. has quickly ramped up its production and emerged as the leading LNG exporter globally. In 2023, it also became the largest supplier of LNG to Europe, accounting for 45 percent of the continent’s total LNG imports. A key feature of U.S. LNG is that it is typically sold at spot market prices and is not tied to long-term contracts, as is the case with other major gas exporters, like Qatar. This flexibility allows U.S. suppliers to rapidly adapt to changes in market conditions, such as a rise in demand.

This increase in U.S. LNG imports allows Europe to diversify its energy sources significantly. In response, the EU has set an ambitious goal to completely phase out Russian gas imports by 2027. Although this goal is not legally binding, such a scenario could not have been envisaged just a few years ago. 

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Facts & figures

Europe natural gas imports

By 2023, Russian pipeline gas made up 45 percent of Europe’s gas pipeline imports and 25 percent of total gas imports, including 7 percent from LNG.
By 2023, Russian pipeline gas made up 45 percent of Europe’s gas pipeline imports and 25 percent of total gas imports, including 7 percent from LNG. © GIS

The evolving landscape of Europe’s gas supplies has come at a significant cost. Natural gas prices remain higher than the historical averages seen before 2022, but they are now a fraction of the peak prices reached in the summer of 2022 just after Russia’s war in Ukraine started. These elevated prices also attracted LNG, particularly from the U.S., to Europe, leading to a relatively swift resolution to the crisis.

Russia’s challenges in the LNG market

Russia has tried to capitalize on the expansion of LNG as another strategy to bypass Ukraine and safeguard its market position in Europe in light of the growing threat from the U.S. LNG not only offers customers greater flexibility and optionality, producers also benefit. Shifting from pipeline to LNG exports would provide Russia with enhanced flexibility, allowing it to free itself from the inherent limited optionality and transit headaches of pipelines.

To facilitate the expansion of its LNG trade, a law on LNG export liberalization came into force in Russia on December 1, 2013. This law allowed companies other than Gazprom (and its subsidiaries), which maintained a monopoly on pipeline gas exports, to export LNG. Despite the changes, the companies benefitting were predominantly government-backed or controlled entities. More recently, several Russian LNG projects have come onstream. Although the country’s LNG exports are still small compared to its traditional pipeline business, it now accounts for 31 percent of total exports of Russian gas in 2023, up from 20 percent two years earlier.

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Facts & figures

European natural gas price

Natural gas prices are currently above historical averages but significantly lower than the peak prices in the summer of 2022 following the start of Russia’s war in Ukraine.
Natural gas prices are currently above historical averages but significantly lower than the peak prices in the summer of 2022 following the start of Russia’s war in Ukraine. © GIS

While most of Russia’s pipeline gas supply to the EU was disrupted following the Ukraine war, LNG deliveries from Russia to Europe increased. In 2024, nearly 70 percent of Russian LNG reached Europe, accounting for nearly 17 percent of European LNG imports, compared to 12 percent in 2023.

Russia is currently the fourth-largest LNG exporter after the U.S., Qatar and Australia. Due to its relatively low cost, large resource base and geographical positioning, Russian LNG has the potential to be among the most profitable LNG on global markets. Nevertheless, its outlook will be determined by the sanctions regime.

Before the war in Ukraine, Russia was poised to significantly expand its LNG export capacity. However, sanctions imposed by the U.S. and the EU, particularly those targeting LNG, have dampened those prospects. The measures, which were mostly imposed in response to Russia’s invasion of Ukraine, came on top of restrictions put in place after Moscow annexed Crimea in 2014, which had already limited its access to advanced LNG technologies.

While the 2014 sanctions had a limited effect, the Russian government supported the development of domestically produced LNG export technology. This was a key part of its roadmap to localize critical energy equipment necessary for mid- and large-scale LNG projects. Despite that, the recent and more comprehensive sanctions significantly restrict Russia’s long-term LNG ambitions. It is therefore unrealistic to expect the bulk of Russia’s LNG projects – especially the larger ones – to materialize in the near future.

Developing LNG technologies and infrastructure requires substantial investment, which is challenging without access to Western financing and technology. A prime example are the recent delays and setbacks the Arctic LNG 2 project has faced. Led by Russia’s largest independent gas producer, Novatek, the project has an annual design capacity of 19.8 million tons per annum (mtpa). Yet, so far, only one train, able to produce 6.6 mtpa, is operational.

“Our goal is to ensure that Arctic LNG 2 is dead in the water. … We’re very focused on ensuring that Russia is not able to develop new projects in order to redirect the gas that it had previously sent into Europe,” Geoffrey Pyatt, former U.S. Assistant Secretary of State for Energy Resources, said last year. Russia condemns the sanctions, unsurprisingly, and attempts to cast the U.S. as the aggressor.

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Facts & figures

Proven gas reserves by country

Russia has the largest proven natural gas reserves in the world. Proven reserves are the amounts of natural gas and natural gas liquids that can be recovered in the future from known gas reservoirs.
Russia has the largest proven natural gas reserves in the world. Proven reserves are the amounts of natural gas and natural gas liquids that can be recovered in the future from known gas reservoirs. © GIS

Pursuing new avenues in Asia

Russia has also pursued opportunities in another key market: Asia, particularly China, where gas demand is growing faster than in Europe. Currently, Asia consumes 32 percent of total Russian gas exports, of which 73 percent goes to China. These shares are expected to increase in the coming years.

The Power of Siberia 1 is currently Russia’s only direct operational pipeline to the Asian market. It was agreed upon in 2014 and began operations in 2019. It connects Russia’s far-east gas fields to China. In this respect, the gas exported through this route does not compete with the gas sent to Europe, which comes from gas fields in West Siberia.

More by Carole Nakhle

In February 2022, Russia announced a more strategic project: the Power of Siberia 2 pipeline. Under a 30-year contract, it is expected to be operational in 2030. However, the agreement has yet to be finalized, and there have been reports of construction delays that may push back its launch date even further.

If completed, the Power of Siberia 2 pipeline would allow Russia to offset its gas exports to Europe. The pipeline would supply gas from the West Siberian gas fields to China via Mongolia. Thus, the pipeline would theoretically give Russia the flexibility to direct gas flow either to the West or the East.

The reality, however, is more complicated. Constructing the Power of Siberia 1 took more than a decade, while the Power of Siberia 2 is expected to take more than twice that time due to its extensive length and diplomatic complications of the pipeline passing through a third country. By the time the project is finished, the gas market landscape will likely look different. Furthermore, China’s position as the sole buyer of Russian pipeline gas to Asia leaves Moscow in a weaker bargaining position.

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Facts & figures

Russia's natural gas landscape

  • Russia sits on the world’s largest proven gas reserves (20%) and is the second-largest producer and consumer after the U.S.
  • The oldest major pipeline from Russia to Europe is the Urengoy-Pomary-Uzhgorod pipeline, also known as the Brotherhood pipeline, via Ukraine. It became operational in 1983.
  • In 2023, China became the biggest buyer of Russian LNG.
  • The U.S. produces over 1.7 times more natural gas than Russia.
  • In 2023, Russia sent 21.3 billion cubic meters (bcm) of gas to China via the Power of Siberia 1 pipeline, but it is expected to ramp up its export to 38 bcm (reaching the pipeline’s annual design capacity) by 2025.

In contrast, China has various supply options, including domestic production and imports from Central Asia, East Asia and LNG sources such as the U.S., Australia and Qatar, which aim to significantly expand their export capacity in the coming years. Moreover, China’s energy security objectives focus on having a diversified import portfolio.

In this respect, Russia’s choice between a troubled Europe and a sole buyer in China is less than ideal. Furthermore, compared to other established exporters in the region, Russia is a relative newcomer entering an already busy market.

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Scenarios

Unlikely: Russia reclaims its dominance in the European gas market

Russia is rich in natural gas resources and is a major global supplier. This holds true even though the country has faced several rounds of sanctions aimed at its energy sector since 2014, which have only become more severe following its war in Ukraine. If these sanctions were to be lifted, Russia could find a way to reclaim its former markets in Europe while continuing its efforts in Asia. Such a scenario, however, is unlikely.

Likely: The decline of Russian gas hegemony in a competitive market

Considering the evolving landscape of regional and global gas trade, it is increasingly clear that Russian gas is unlikely to reclaim its former hegemony. Competition has intensified, not only from established LNG producers but also from emerging alternative energy sources, particularly green energy.

Moreover, while Moscow pivots toward Asia, particularly to China, rising demand in that region is unlikely to significantly improve Russia’s prospects. Any shift in focus to the Asian market hinges heavily on China’s energy security and pricing strategies, and Beijing’s approach to addressing climate change challenges.

Thus, given these factors, the most plausible scenario for the future is the decline of Russian gas hegemony in favor of a more competitive market landscape.

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