Energy Crisis: Europe's Dependence on Russia's Fossil Fuels​

By BK​

What do you need to know this week?

As the rift between Russia and the West widens over the Ukrainian crisis, Europe and Russia’s long interdependence on one another for energy has become a key “bargaining piece” for both sides.

Russia is Europe’s largest fossil fuel provider. The European Commission estimates that Russia provided around 45% of the EU’s total imported fossil fuel in 2021. Russia is linked to European energy markets through a series of critical pipelines, the largest flowing through Ukraine, which has become a ‘chokepoint’ for both sides in the negotiations running up to the crisis.

This winter, energy prices in Europe have already sky-rocketed due to a series of cumulative factors: low gas storage gas levels, high EU carbon prices, a shortage of natural gas tanker deliveries, infrastructure outages and decreased Russian gas supplies. Therefore, any disruptions to any of the four existing main routes - Nord Stream 1, Yamal, Ukraine Transit and Turkstream - as well as any delays to the regulatory approval of Nord Stream 2, will send Europe into an acute energy crisis.

Why is this important for your interviews?

The interdependence between Europe and Russia is likely to deepen if the new Nord Stream 2 pipeline is approved. This pipeline is intended to double the direct supply of natural gas from Russia to Germany via the Baltic Sea. Nevertheless, the crisis in Ukraine is threatening the Nord Stream 2’s regulatory approval process as the US and EU often use the threat of non-approval as a negotiation tactic.

European efforts to wean themselves off Russian fossil fuels will be hard felt. Short-term opinions are relatively limited. For example, according to its prime minister, Norway, Europe's second largest supplier, is delivering natural gas at maximum capacity and cannot replace any missing supplies from Russia. In addition, the European Central Bank has warned that the suspension of Russian energy imports may slash 1.4 percentage points off this year’s eurozone growth.

How is this topic relevant to law firms?

There may be a stream of bilateral breach of contract claims from EU states reliant on Russian natural gas imports. Data from think tank Brugel suggests that the Yamal and Ukraine Transit pipelines have dropped below their five-year average, however, despite this, Russia denies that it is disrupting gas flows to Europe and claims that it is meeting all its contractual obligations on gas exports.

These disputes are usually resolved by international arbitration, either by institutional arbitration via established arbitral institutions with particular sets of rules, e.g. the London Court of International Arbitration (LCIA), or via ‘ad hoc’ arbitration which are tailored to the parties’ contract. As London is a popular commercial hub, many City firms have strong international arbitration practices and may be called to assist in inter-state arbitration proceedings.

Law firms have also been called to represent countries before the international courts. Once again, due to London’s commercial significance, the cross-border work often directly involves the firm’s London office. For example, US law firm Quinn Emanuel Urquhart & Sullivan has chosen to represent Ukraine in a case against Russia at the European Court of Human Rights. Both of the firm’s partners who are leading the case are based in London. US law firm Covington & Burling is also representing Ukraine, however regarding a separate matter in the International Court of Justice.

Finally, with mounting pressure for Europe to block Russian energy imports by 75% in a year, EU governments are scrambling for alternatives to secure Europe’s energy security. For example, both Germany and Italy, which are heavily reliant on Russian energy imports, are increasing investment in renewable sources. Law firms may be called to assist in the setting up and running of future European energy projects by giving advice on project finance and appropriate corporate structure, negotiating supply and insurance agreements and so on.