I had planned to write one of those year-end reviews for today on what Europe lost over the past year in its ongoing self-immolation against Russia, but that will have to wait for a later date. That’s because while much of the attention these days is on the upcoming closure of the final gas pipeline running from Russia to Europe through Ukraine, the EU also has the shovels out and is digging itself a hole with another of its big LNG suppliers in Qatar.
The EU Threatens to Cut Itself Off From Another Supplier
The EU is targeting Qatar with its new Corporate Sustainability Due Diligence Directive, which requires larger companies operating in the bloc to check whether their supply chains use forced labour or cause environmental damage. On its face, that sounds great, but it could further limit Europe’s energy options following its decision to restrict supplies from Russia, which has caused widespread economic devastation in the bloc. Failure to take enough action on the EU’s corporate sustainability items in the eyes of Brussels can result in penalties, including fines of up to five percent of global turnover.
Qatar simply says it will end all liquefied natural gas (LNG) sales to the EU rather than pay any penalties.
“If the case is that I lose 5% of my generated revenue by going to Europe, I will not go to Europe. I’m not bluffing,” Energy Minister Saad al-Kaabi told the Financial Times in an interview published on Dec. 22. He added that “five percent of generated revenue of QatarEnergy means five percent of generated revenue of the Qatar state. This is the people’s money, so I cannot lose that kind of money – and nobody would accept losing that kind of money.”
Now it’s entirely possible — if not likely — that the EU backs down on corporate sustainability demands of Qatar. Maybe this is just a threat so that some palms can be greased in Brussels. Then again, who would have believed that the EU would voluntarily cut off Russian pipeline gas and destroy its own industry over the course of the past three years?
The Consequences
Qatar is the world’s third largest exporter of LNG after the US and Australia. And since the EU cut itself off from Russian pipeline gas, Qatar has provided between 12-14 percent of Europe’s LNG needs, which puts it alongside the US and Russia as one of the top LNG suppliers to the bloc.
Any supply constraints from Qatar would be a major blow.
“Qatar is one of the world’s largest LNG exporters. The EU is increasingly reliant on its LNG due to reduced natural gas supplies from Russia. A disruption in Qatari LNG shipments would likely exacerbate supply constraints, especially during winter months when demand peaks,” James Willn, partner at global law company Reed Smith’s energy and natural resources group, told The National.
As we can see from the above chart, it’s especially bad news for Europe’s second largest industrial center in Italy, which gets about 50 percent of its LNG from the US, while around 39 percent was arriving from Qatar. As a result of the Red Sea chaos — driven by the West’s support for genocide in Gaza and Yemen’s efforts to put an end to it — shipments are being cancelled or delayed, but Italian energy company Edison is still in the middle of a 25-year contract with QatarEnergy for about 6.5 billion cubic metres (bcm) per year of LNG, and Italian energy giant Eni signed a 27-year deal in 2023. Those deliveries might not be completely cut off, but Kaabi, Qatar’s energy minister, said Doha will explore legal avenues if it faces penalties and would rule out shipping any new supplies.
The EU is already dealing with demand destruction and could be looking at even more should it begin to face problems with the supply of Qatari LNG.
In 2022, EU gas consumption dropped by 13.5 percent compared to the prior year’s levels, its steepest drop in history. The decline is the equivalent to the amount of gas needed to supply over 40 million homes, but it was factories rather than homes making up the biggest chunk of that drop: the EU’s industrial sector accounted for approximately 45% of the demand decrease.
It’s struggled to recover, and there’s probably not a lot the EU can do at this point to fix the problem as the hardest hit industries have not recovered and many operations have either closed or relocated.
Brussels could, however, make the problem even worse, which issues with Qatari LNG could do.
That’s because one of the biggest components of the bloc’s strategy to deal with the loss of Russian pipeline gas is more reliance on LNG. Twelve new LNG terminals and six expansion projects of existing terminals were commissioned between 2022 and 2024, which are increasing the EU’s LNG import capacity by 70 bcm to 284 bcm.
That strategy has its own problems, namely it is more expensive and less reliable, but it becomes even more unworkable if the EU starts excluding the world’s third largest LNG producer. A brief look at the current situation shows how little room the EU has to mess around.
The industrial gas demand drop in the bloc has not resulted in significant fuel switching, but instead in lower industrial output, largely due to the loss of competitiveness. It’s easy to see why. From the Center on Global Energy Policy at Columbia:
Import substitution in some energy-intensive sectors—and broader macroeconomic headwinds for manufacturing activity—have prolonged the weakness of gas-consuming industries, especially in 2023. These headwinds are unlikely to subside soon. As of March 2024, the forward curve for the TTF benchmark still indicated price levels of around €25–30/MWh through 2028, markedly higher than the historical average of €15–20/MWh observed over 2015–19. Even if European gas prices returned to those historical levels, energy-intensive industries across the EU would still face immense pressures from overseas competitors in North America (where the Henry Hub benchmark was trading at well under the equivalent of €10/MWh in early March 2024) and from other producers benefiting from artificially low regulated gas prices, including those in the Middle East and North Africa.
The EU likes to tout its growing renewables energy, but that has not made up the difference of gas reduction and is largely unhelpful for energy-intensive industries. We can see the effect on the EU’s two largest industrial centers, Italy and Germany:
Italy’s industrial output has contracted for 18 consecutive months and is already dealing with recent gas supply issues due to the cutoffs of Russian gas that was still flowing via pipeline through Ukraine to Slovakia, Hungary, and Austria. Austrian company Österreichische Mineralölverwaltung or Austrian Mineral Oil Administration was already forced by a European court ruling to stop buying from Russia; now Ukrainian emperor Volodymyr Zelenskyy says the last remaining pipeline transit through Ukraine can only continue on the condition that Moscow does not receive payment until after the war. Despite efforts by Slovak Prime Minister Robert Fico, it appears as though a deal is not in the cards.
This is a blow to Italy as Rome had been buying from Vienna increasing amounts from Vienna due to Red Sea shipment problems and as grand plans to source more gas from North Africa largely fell through.
At first, I could not believe my eyes. But digging, data is revealing an unpleasant truth. Italy still relies on Russian gas more than what could appear.
In March, Italy imports from Austria ballooned year-on-year and month-on-month.— Francesco Sassi (@Frank_Stones) April 23, 2024
Doing no better than Italy is Germany, which is entering global financial crisis or pandemic-level-decline territory:
Berlin is calling for the sustainability directive to be postponed by two years.
Why Is the Fight with Qatar Now?
The stated reason is that’s what the directive on corporate sustainability due diligence passed in July 2024 requires. Here’s the overview from the European Commission:
The core elements of this duty are identifying and addressing potential and actual adverse human rights and environmental impacts in the company’s own operations, their subsidiaries and, where related to their value chain(s), those of their business partners. In addition, the Directive sets out an obligation for large companies to adopt and put into effect, through best efforts, a transition plan for climate change mitigation aligned with the 2050 climate neutrality objective of the Paris Agreement as well as intermediate targets under the European Climate Law.
The directive requires EU countries to impose fines for non-compliance with a maximum limit of not less than five percent of the company’s annual global revenue. Qatar still has time to adhere to the requirements. Countries have to adopt the EU-mandated rules into national law by 2026 and in 2027 the rules will start to apply to companies, but they’re already starting to call into question the long-term viability of Qatar as an LNG supplier to the EU.
We’ll have to wait and see exactly how the rules are applied and if US companies face the same scrutiny. The EU’s track record there isn’t great as its human rights and environmental concerns are often wielded as a geopolitical tool. We don’t have to look far for evidence. While the EU is super worried about Uyghurs in China and the plight of Iranians, it somehow never utters a word about the nearly 700,000 Americans (a number that is likely higher) who are homeless or the US carceral state, which leads the world and coincidentally gives the US a labor advantage at a time when the EU is facing a competitiveness crisis.
Brussels can lecture China and others on climate change action while ignoring the fact that the US LNG it increasingly relies on is worse for the environment than coal. That’s because the production of shale gas, as well as liquefaction to make LNG and transport it by tanker, is energy-intensive.
And it looks set to rely even more on those LNG exports from Washington. Trump plans to remove any barriers to more drilling, and the EU wants to buy all it can in an effort to charm Trump and prevent tariffs on imports to the US from the EU.
European Commission President Ursula von der Leyen, doing her best to prove her worth to the incoming administration, came up with a plan to buy even more gas from the US, which would shoot the EU in both feet. This would increase dependence on the US while simultaneously doing even more to wreck the economies of EU states. Here’s Politico with the details:
Stressing that the EU still buys significant amounts of energy from Russia, von der Leyen asked: “Why not replace it by American LNG, which is cheaper for us and brings down our energy prices? It’s something where we can get into a discussion, also [where] our trade deficit is concerned.”
During the first Trump term, Juncker avoided more tariffs by assuring the U.S. president that Europe would facilitate more imports of liquefied natural gas (and more American soybeans.) In fact, the European Commission has no real power in determining European companies’ purchases of LNG and soybeans, but Trump was happy to accept the political theater of parading data that European purchases were going up.
There is no evidence that American LNG is cheaper, as von der Leyen is quoted as saying. It’s actually a lot more expensive than the pipeline Russian gas Europe used to get. There’s also the fact that the European Commission doesn’t have the power to dictate who member states buy gas from.
It can remove some options via sanctions, however.
It could also utilize its new Corporate Sustainability Due Diligence Directive to make business with certain countries — say Qatar — more unattractive while simultaneously making US exports more appealing. Willn, the partner at global law company Reed Smith’s energy and natural resources group told The National the following:
“Qatar could redirect its LNG exports to other markets, such as China, Japan or South Korea, which are major LNG importers and less likely to impose similar sustainability laws. The EU would need to seek alternative suppliers, such as the US, Australia or African nations, potentially at higher costs.”
The directive was one of many new powers added to Ursula’s toolbox during her first five-year term in response to the crisis brought on by the bloc’s war against Russia. They include the Foreign Subsidies Regulation, International Procurement Instrument, an Anti-Coercion Instrument, and the EU Critical Raw Materials Act.
Most are being put to good use for the benefit of US geopolitical goals and the bottom lines of American companies. The same looks likely with the sustainability directive.
