It is not the heat of summer that is sweating European leaders and businessmen. Russia’s manipulation of natural gas supplies is expected to lead to an economic and political crisis next winter. Or, in the worst case, even soon if Russia suddenly shuts off gas.
Here are the key points to learn about the pressure game in the Ukraine war:
European Commission President Ursula von der Leyen warned on Wednesday that the country and industry must be prepared if Russia cut off its already limited natural gas supply. There are growing fears that the Nord Stream 1 pipeline from Russia to Germany under the Baltic Sea will not be reopened after a scheduled maintenance shutdown later this month.
Russia has already cut off gas supplies to a dozen EU countries, including Germany, the largest economy in the 27-nation bloc, which relies heavily on Russian energy to generate electricity and power their industries. The cutbacks have led business and political leaders to accuse Russia of punishing Europe for supporting Ukraine, which Russia attacked four months ago.
Russia’s state-owned energy giant Gazprom has cut supplies from Russia to Germany via the Nord Stream 1 pipeline running under the Baltic Sea – Europe’s main natural gas pipeline – by 60%. Supplies in Italy have been cut in half. Germany depends on Russia for 35% of its gas imports; Italy for 40%.
Why is reduction a concern?
Europe is shaking up to fill its underground gas reserves before winter. When gas utilities fill reserves in the summer, hopefully, they can buy gas at lower prices and then draw from those stocks in the winter as demand for heating increases. Current reductions will make refilling storage more difficult and expensive.
Reducing power supplies has brought the ghost of a complete Russian gas shutdown closer, making it impossible for Europe to get all the fuel it needs for the next winter. Natural gas is used by many energy-intensive industries that are already facing high costs and reduced costs, which has contributed to the slowdown in the European economy.
At the moment, Europe’s underground storage caves are 60% full. The latest proposal from the European Commission for each country to reach 80% by 1 November.
Berenberg Bank economists Holger Schmidt and Salomon Fiedler say that if the Russians do not resume delivery via Nord Stream 1 after July 24, the European Union will “probably run empty by the end of winter. To stay safe, some rationing gas will probably be set earlier.”
The EU, which received about 40% of its gas from Russia before the war, outlined plans to reduce imports by two-thirds by the end of the year and to completely shut down Russian gas by 2027. The bloc has already said it will block Russian coal. Most Russian oil in August and six months. Before the war, Russia aimed to cut তেল 850 million a day from selling oil and gas to Europe.
To compensate for the reduction in Russian supplies, European governments and utilities have purchased expensive liquefied natural gas or LNG from the United States, which is supplied by ship, as opposed to gas coming from Russia via pipelines and is generally cheaper. But the war has pushed up energy prices, pushed up record inflation in Europe and helped maintain a stable revenue stream for Russia.
There are efforts to get more pipeline gas from Norway and Azerbaijan, while the accelerated rollout of renewable energy and conservation is expected to play a small role. Germany, which has no LNG import terminals, is bringing in four floating terminals, two of which should be launched this year.
Despite its focus on renewable energy, the crisis is pushing countries toward fossil fuels. Despite plans to abandon coal completely by 2030, Germany is rushing through legislation to reopen coal-fired power plants as a temporary measure. Officials also called on the Germans to save energy
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.
Gas security in Europe is fragile despite all these measures. Liquefied natural gas export terminals in energy-producing countries such as the United States and Qatar are running at full speed, meaning Europe is bidding against Asia for limited supplies.
An explosion and fire at an export terminal in Freeport, Texas, took off one-fifth of U.S. export capacity for months, sending another shiver through the gas market. Most of the terminal’s exports were going to Europe, Restad Energy said.
Gazprom said it had to cut off flow to Europe via Nord Stream 1 because Western sanctions blocked a key equipment in Canada, where it was taken for maintenance. European governments are not buying it and call the reduction political.
Gazprom’s measures have risen sharply since the fall in natural gas prices in the wake of the winter heating season. It raises revenue for Russia at a time when it is under pressure from Western economic sanctions, and increases pressure on Europe to provide political and military support to Ukraine.
Gazprom’s tactics can also be seen as a pushback against Western sanctions and the imposition of further fines. And large gas users have been given notice that, like the smaller ones, they will not be spared the potential cutoff.
Germany and Italy saw their supplies cut when their leaders met with French President Emmanuel Macron in Kiev to meet President Vladimir Zelensky and restore the status of EU candidate for Ukraine.
“Cutting the Nord Stream 1 flow to Europe clearly looks like an attempt by Putin to suspend Europe’s gas reserves in the summer, perhaps preparing for another installment in the European power war this winter,” said Tim Ash, a senior emerging market sovereign strategist. Bluebee Asset Management.
Will the Europeans turn off the light or turn to ice this winter?
This is unlikely because EU law mandates that the government provide ration gas to the industry to protect homes, schools and hospitals. Countries that lack gas may also seek help from others that may be in better shape, although this depends on adequate pipeline connections.
The downside of rationing would be industrial cutbacks and shutdowns that could cost jobs and growth in an economy already weighed down by high inflation and lead to a recession.
Meanwhile, a full cutoff could send higher gas prices already at 206 euros ($ 217) per megawatt hour from March 7, towards their record, which fuels further inflation. At the beginning of 2021, before Russia mobilized troops on the border with Ukraine, the price of spot gas was about 19 euros per megawatt hour.
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