How Russia will maintain its energy stranglehold on Europe — Quartz

On Jan. 13, the US Senate voted against slapping sanctions on Nord Stream 2, a pipeline set to deliver Russian natural gas to Germany. The pipeline, which has been constructed but not yet opened, has figured prominently in this week’s stalled strategic talks between Russia, the US, and NATO. While few nations besides Russia are enthusiastic about the arrival of Nord Stream 2, there’s no clear alternative for supplying the continent with critical crucial gas. This week offered a preview of how Russia will use energy politics to flex its geopolitical muscle even as Europe winds down its reliance on fossil fuels.

For Europe, Nord Stream 2 is a potential solution to surging gas and electricity prices. For Russia, it’s an extremely lucrative cash cow that will tighten the country’s already strong grip on Europe as its chief supplier of gas. But for the US Congress to impose sanctions this week would have likely doomed the NATO talks, widening an untimely rift between German and US officials at the moment Russia appears ready to invade Ukraine.

Europe’s gas crisis has several causes including rising demand in Asia and the recent lackluster performance of renewables. But Russia has strategically escalated the situation by cutting back on gas deliveries throughout 2021, said Kristine Berzina, senior fellow at the US German Marshall Fund. That put president Vladimir Putin in a strong position for the talks, she said.

The situation is only likely to get worse. Gas demand is expected to fall in Europe over the next decade as countries tackle climate change and build out renewable energy, according to the International Energy Agency. But a growing share of that demand will be met by imports, mostly from Russia. Meanwhile, an unlikely replacement for fossil fuels in vehicles and industrial facilities—green hydrogen—looks likely to give Russia even more political leverage over Europe.

Hydrogen will rewrite energy geopolitics

Hydrogen is fast emerging as the fuel of the future. As one of the few liquid fuels packing a low-carbon punch (2.6 times more energy per kilogram than natural gas), corporate and national decarbonization strategies are proposing it as a replacement for fossil fuels for the steel, cement, and heavy transport sectors.

For now, hydrogen produced using renewable energy (so-called green hydrogen), is still more than twice as more expensive as conventional fuels. But as costs fall, it is poised to shake up the balance of energy-related geopolitical power.

“The 2050 energy flow map will look very different than it does today,” said Juergen Peterseim, alternative fuels initiative lead at PricewaterhouseCoopers Germany. “Some of the established [fossil fuel] players have a really good potential to remain energy exporters for green molecules.”

Today, almost all hydrogen is produced from natural gas (blue hydrogen) and is produced close to where it is consumed. Once the price of producing green hydrogen falls considerably—which could take years or decades, depending who you ask—it may displace much of the demand for blue. Until then, as more factories and vehicles adopt hydrogen-compatible technology, both varieties will be in the mix for global trade.

The high cost of transporting hydrogen, via ship or pipeline, and the falling cost of electrolyzer technology to produce it locally will somewhat limit hydrogen’s potential as a globally traded commodity, Peterseim said. Most overseas export facilities currently in the works plan to get around that by converting it to denser ammonia first.

Either way, a strong network for global hydrogen trade will eventually emerge. By 2050, one-third of green hydrogen produced globally could be destined for export, a higher proportion than natural gas today, according to a Jan. 15 report by the International Renewable Energy Agency. Hydrogen could account for about the same share of global energy trade as coal does today, IRENA projects.

Most exports will be destined for Europe and Asia, where there are countries with big climate aspirations, busy industrial sectors, and limited renewable energy resources. Japan is looking to import blue hydrogen from Saudi Arabia and green hydrogen from Australia; a shipbuilding subsidiary of Hyundai Heavy Industries in South Korea said this week it will have massive ships ready to transport hydrogen to that country by 2025.

Energy incumbents are already maneuvering to dominate the future global hydrogen trade, which may follow many of the same routes currently used by liquified natural gas. Saudi Arabia, Australia, the US, and Russia all have established fossil fuel industries, plenty of energy export infrastructure, and robust gas and renewable resources. Coal-dependent nations like China may increase their energy independence by becoming large producers and consumers of domestic hydrogen.

New entrants are eyeing the hydrogen export opportunity, including Egypt, Morocco, Chile, and Namibia. But these are at a disadvantage to more experienced competitors, Peterseim says, because they have to build their export infrastructure from scratch. Geographically-smaller oil and gas exporters without the space to build large renewable farms, like Indonesia and Malaysia, may also ill-equipped for a switch to green hydrogen production and lose geopolitical clout.

Europe will import much of its hydrogen

Europe, which faces high industrial energy demand and space constraints for renewables, is likely to be on the receiving end. Green hydrogen may account for 20–25% (pdf) of total energy demand by 2050, and while investment is growing slowly in domestic production capacity, most European countries are likely to be net importers, according to PwC. That’s good news for Russia, especially because European markets will be cheaper to reach via pipeline than, say, via a tanker from Australia. Russia’s stated objective is to control one-fifth of the global hydrogen market by 2030, according to the IRENA report, which is larger than its current share of the gas market. Some German politicians have already discussed eventually repurposing Nord Stream 2 itself as a hydrogen pipeline.

It’s still unclear if the bet on hydrogen will pay off. Skeptics question the cost and the practicality of carbon capture for blue hydrogen. Chris Jackson, the former chair of the UK Hydrogen and Fuel Cell Association, quit his industry group, calling blue hydrogen an “expensive distraction.” And green hydrogen has a long way to go before it is cost-competitive. Whitney Herndon, who leads US energy research at the Rhodium Group, says green hydrogen will be too expensive to replace fossil fuels unless governments impose net-zero emission mandates, spur demand and create the economies of scale to drive down prices.

It’s time to start building the infrastructure for the hydrogen economy

But the world can’t necessarily wait if it wants to achieve the steep emission cuts called for under the Paris Agreement. The infrastructure to jump-start the new hydrogen economy needs to start coming together now if nations want to reach net-zero emissions by 2050.

“If you want to develop a hydrogen trade, everything needs to be built from scratch,” Peterseim said. And because big infrastructure projects like pipelines and import/export terminals take many years to build, he said, developers will need to start work on them without waiting for hydrogen to become cost-competitive, making for a tricky pitch to financiers.

Still, he said, “this decade is absolutely crucial. If we don’t start with the infrastructure soon we won’t have the volumes of hydrogen we need to decarbonize” in line with the Paris Agreement goals.