The Worst Time

The European Union's ban on spot-market purchases of Russian liquefied natural gas came into force today. As of this morning, no EU country can buy Russian LNG on short-term contracts. Long-term contracts remain valid until 1 January 2027. The regulation was approved by the European Council on 26 January and entered into force on 2 February, with a twelve-week transition period that expired today.

The timing could not be worse. Europe's benchmark gas price is already up 40% since the start of the Iran war. The Strait of Hormuz, through which 20% of the world's LNG transits, remains closed or severely restricted. And Europe has just cut off a supplier that accounted for 12% of its gas consumption, roughly 30% of which arrived under spot contracts. According to Wood Mackenzie and Energy Aspects, the ban could eliminate between 2.8 and 3.5 million tonnes per year of Russian LNG, about 3% of the bloc's total LNG imports.

The European Commission has an emergency mechanism that allows it to temporarily re-authorise spot purchases if the situation deteriorates. But analysts doubt Brussels will pull that lever any time soon: the optics of buying Russian gas weeks after the ban would be devastating. The real test comes on 1 January 2027, when long-term contracts expire. That is when companies still purchasing Russian LNG under those agreements, including TotalEnergies, Spain's Naturgy and Germany's SEFE, will have to find replacements in a market with no surplus.

Russia will not lose its buyers. Novatek, the main shareholder of the Yamal plant in the Arctic, is already redirecting shipments to Asia. Deputy Prime Minister Alexander Novak said Russian companies will reroute sales to China, India, Thailand and the Philippines without waiting for further EU restrictions. Putin himself hinted that Russia might leave the European market early rather than wait for Brussels to finish closing the door.

Europe has enough gas for now, partly because global demand has fallen voluntarily. Asian consumers cut back in response to the Hormuz blockade. But competition between Europe and Asia for available LNG typically intensifies in the summer, when both hemispheres inject into their reserves. If European storage levels start to lag, Brussels will face the dilemma it does not want to face: buy Russian gas or go cold. Not for the first time.