It’s not a summer heat wave that has European leaders and businesses sweating. There are fears that Russia’s manipulation of natural gas supplies could lead to an economic and political crisis next winter. Or, in the worst case, even earlier.
Here are the key things to know about the energy pressure game during the war in Ukraine:
Russia last week cut gas supplies to five European Union countries, including Germany, the largest economy in the 27-nation bloc that relies heavily on gas from Moscow to generate electricity and of the electrical industry.
Russian energy giant Gazprom has cut supply to the Nord Stream 1 gas pipeline that crosses the Baltic Sea between Russia and Germany by 60% – Europe’s main natural gas pipeline. Italy sees its offer reduced by half. Austria, the Czech Republic and Slovakia also saw reductions.
This is in addition to gas cuts to Poland, Bulgaria, Denmark, Finland, France and the Netherlands in recent weeks. These shutdowns were initially seen as less of a problem because Poland, for example, was already phasing out Russian gas by the end of the year, while others had alternative supplies.
The latest cuts, however, have affected countries that are large economies and use a lot of Russian natural gas. Germany depends on Russia for 35% of its gas imports; Italy for 40%. At present, gas reserves are sufficient for current needs.
WHY ARE THE DISCOUNTS A CONCERN?
Europe is scrambling to fill its underground gas storage before winter. Gas utilities operate at a steady pace, filling up reserves during the summer – when hopefully they can buy cheaper gas – then drawing it down during the winter as heating demand increases. The reductions will make filling storage more expensive and harder to achieve.
The move also brought closer the specter of a complete Russian gas cut that would prevent Europe from getting all the fuel it needs for the winter. Natural gas is used by several energy-intensive industries, such as glassmakers and steel mills, which are already facing higher costs and reduced usage, which is helping to slow down the European economy.
For electricity generation, gas is the “pivotal” energy source that kicks in when renewables like wind and solar generate less power due to unpredictable weather conditions and when electricity consumption increases in cold or warm weather, such as last weekend’s heatwave that caused record breaking Europe.
Currently, Europe’s underground storage caverns are 57% full. The European Commission’s latest proposal is for every country to reach 80% by November 1, while Germany has set targets of 80% by October 1 and 90% by October 1. november.
Analysts at the Bruegel think tank in Brussels warn that “Bulgaria, Hungary and Romania will not reach the EU’s 80% target if they continue at the current speed”, while “Germany, Austria and Slovakia will have great difficulty in filling their storage facilities”. if gas flows from Russia are stopped.
WHAT DO WE DO ?
The EU, which before the war got around 40% of its gas from Russia, has outlined plans to cut imports by two-thirds by the end of the year and phase out Russian gas completely by 2027. The bloc has already said it will block the start of Russian coal. in August and most Russian oil in six months.
The goal is to cut the $850 million a day Russia collects from oil and gas sales to Europe to prevent funding for its war in Ukraine.
European governments and utilities have bought expensive liquefied natural gas, or LNG, from the United States, which is delivered by ship, as opposed to gas that comes from Russia by pipeline and is usually cheaper. But the war has driven up energy prices, fueling record inflation in Europe and helping to keep incomes high for Russia.
Efforts are being made to secure more pipeline from Norway and Azerbaijan, while accelerated deployment of renewables and conservation are expected to play a lesser role. Germany, which does not have LNG import terminals, is installing four floating terminals, two of which should be operational this year.
Despite the emphasis on renewable energies, the crisis is pushing countries to return to fossil fuels. Germany is rushing legislation to restart coal-fired power plants as a temporary fix despite plans to phase out coal completely by 2030.
Vice-Chancellor Robert Habeck said it was “bitter” to turn to coal but “in this situation it is pure necessity”. The government is planning measures to encourage industry and public services to use less natural gas. Habeck also urged the Germans to save energy.
“Gas consumption needs to be further reduced, so that more gas can be stored, otherwise in winter it’s going to be tight,” he said.
The Dutch government has said it will allow coal-fired power plants to operate at full capacity again to conserve natural gas that would otherwise be burned to generate electricity.
Europe’s gas security is fragile despite all these measures. Liquefied gas export terminals in energy-producing countries like the United States and Qatar are operating at full capacity, meaning Europe is bidding against Asia for limited supplies.
Additionally, an explosion and fire at an export terminal in Freeport, Texas, knocked a fifth of the United States’ export capacity offline for months, sending a new chill through the gas market. Most of the terminal’s exports were destined for Europe, Rystad Energy said.
“The situation in the European natural gas market is getting even worse,” said commodities analyst Carsten Fritsch of Commerzbank Research, pointing to the explosion and scheduled shutdown for maintenance of Nord Stream 1 which will mean no gas will only flow through the pipeline from July 11 to 21. “The accumulation of gas stocks urgently needed for the winter months could therefore weaken” and prices will probably go even higher.
WHAT IS RUSSIA’S GAME?
Gazprom says it had to cut flows to Europe via Nord Stream 1 because Western sanctions blocked key equipment in Canada, where it had been taken for maintenance. European governments are not buying it and are calling political gas cuts.
Gazprom’s measures sent natural gas prices skyrocketing after they fell in the wake of the winter heating season. This increases Russia’s revenue at a time when it is under pressure from Western economic sanctions and adds pressure on Europe as it provides political and military support to Ukraine.
Gazprom’s actions can also be seen as a setback against Western sanctions and a deterrent to imposing further sanctions. And large gas consumers have been warned that, like smaller ones, they are not exempt from a possible cut.
Germany and Italy saw their supplies cut around the time their leaders joined French President Emmanuel Macron in Kyiv to meet President Volodymyr Zelenskyy and back EU candidate status for Ukraine.
“Cutting Nord Stream 1 flows to Europe clearly seems like an effort by Putin to block Europe’s efforts to build gas stocks over the summer, presumably ready for another round of Europe’s energy wars this winter” , said Tim Ash, sovereign emerging markets strategist at BlueBay Asset Management.
WILL EUROPEANS SEE THE LIGHTS GO OUT OR FREEZE THIS WINTER?
This is unlikely as European legislation forces governments to ration gas supplies to industry so that homes, schools and hospitals are spared. Countries that lack gas can also seek help from others that may be in better shape, although this depends on adequate gas pipeline connections.
The downside of rationing would be cuts and industrial closures that could cost jobs and growth in an economy already squeezed by high inflation and fears of a global slowdown as central banks raise interest rates.
Meanwhile, a full shutdown could push gas prices up towards their all-time high of 206 euros ($217) per megawatt-hour from March 7, further fueling inflation. In early 2021, before Russia mass troops on the border with Ukraine, spot gas cost around 19 euros per megawatt hour.
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