It is not a summer heat wave that makes European leaders and companies sweat. It is the fear that Russia’s manipulation of natural gas supplies will lead to an economic and political crisis next winter. Or, in the worst case, even sooner if Russia suddenly cuts off gas.
Here are key things to know about the energy pressure game on the war in Ukraine:
European Commission President Ursula von der Leyen warned on Wednesday that countries and industry must be prepared in case Russia completely cuts off already limited natural gas supplies. Fears are growing that the Nord Stream 1 pipeline from Russia to Germany under the Baltic Sea will not restart after a scheduled maintenance shutdown later this month.
Russia has already cut gas supplies to a dozen EU countries, including Germany, the 27-nation bloc’s biggest economy, which relies heavily on energy from Russia to generate electricity and power its industries. The cut has prompted accusations from business and political leaders that Russia is punishing Europe for its support of Ukraine, which Russia invaded four months ago.
Russian state energy giant Gazprom has cut supplies through the Nord Stream 1 pipeline that runs under the Baltic Sea from Russia to Germany, Europe’s main natural gas pipeline, by 60%. Supplies to Italy have been halved. Germany depends on Russia for 35% of its gas imports; Italy for 40%.
WHY ARE REDUCTIONS A CONCERN?
Europe is struggling to fill its underground gas storage before winter. Gas utilities top up reserves during the summer when they can hopefully buy less expensive gas and then draw from those reserves during the winter as heating demand increases. Current reductions will make recharging storage more difficult and costly.
Diminishing energy supplies have raised the specter of a total gas cut in Russia that would make it impossible for Europe to get all the fuel it needs for the coming winter. Natural gas is used by several energy-intensive industries that are already facing higher costs and reducing consumption, which has contributed to the slowdown in the European economy.
Right now, Europe’s underground storage caverns are about 60% full. The latest proposal from the European Commission is for each country to reach 80% by November 1.
Economists Holger Schmieding and Salomon Fiedler of the Berenberg bank say that if Russia does not resume deliveries via Nord Stream 1 after July 24, the EU “will probably be left empty at the end of winter”. the gas would probably be set beforehand.”
The EU, which before the war got about 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 entirely by 2027. The bloc has already said it will block Russian coal starting in August and most Russian oil in six months. The goal is to cut the $850 million a day Russia was making from oil and gas sales to Europe before the war began.
To offset reduced Russian supplies, European governments and utilities have bought expensive liquefied natural gas (LNG) from the United States that is delivered by ship, as opposed to gas that comes by pipeline from Russia and is often be cheaper. But the war has pushed up energy prices, fueling record inflation in Europe and helping to maintain a steady stream of income for Russia.
There are efforts to get more gas pipelines from Norway and Azerbaijan, while accelerated deployment of renewables and conservation are expected to play minor roles. Germany, which has no LNG import terminals, is bringing in four floating terminals, two of which should be operating this year.
Despite a focus on renewable energy, the crisis is pushing countries back to fossil fuels. Germany is rushing to pass legislation to restart coal-fired power plants as a temporary measure despite plans to ditch coal entirely by 2030. Officials have also urged Germans to conserve energy.
The Dutch government says it will allow coal-fired power plants to return to full capacity to conserve natural gas that would otherwise be burned to produce electricity.
Gas security in Europe is fragile despite all these measures. LPG export terminals in energy-producing countries like the US and Qatar are running at full throttle, meaning Europe is competing with Asia for limited supplies.
An explosion and fire at an export terminal in Freeport, Texas, took a fifth of US export capacity offline for months, sending another shudder to the gas market. Most of the terminal’s exports went to Europe, Rystad Energy said.
Gazprom says it had to cut flows to Europe via Nord Stream 1 because Western sanctions stranded key equipment in Canada, where it had been taken for maintenance. European governments do not buy it and qualify policy reductions.
Gazprom’s moves have pushed natural gas prices up sharply after they fell in the wake of the winter heating season. That boosts Russia’s income at a time when it is under pressure from Western economic sanctions and heightens tension in Europe as it provides political and military support to Ukraine.
Gazprom’s moves can also be seen as a pushback against Western sanctions and as a deterrent to imposing more sanctions. And large gas users have been warned that, like small ones, they are not exempt from a possible cut.
Germany and Italy saw their supplies cut off as their leaders joined French President Emmanuel Macron in Kyiv to meet President Volodymyr Zelenskyy and endorse Ukraine’s EU candidate status.
“Cutting off Nord Stream 1 flows to Europe clearly looks like an effort by Putin to stop Europe’s efforts to build up gas reserves over the summer, ready presumably for another delivery in Europe’s energy wars this winter,” said Tim Ash, strategist Sovereign Emerging Markets Senior at BlueBay Asset Management.
WILL EUROPEANS SEE THE LIGHTS GO OUT OR FREEZE THIS WINTER?
That is unlikely because EU law requires governments to ration gas supplies to industry so that homes, schools and hospitals are saved. Countries running out of gas can also ask for help from others that may be better off, though that depends on proper pipeline connections.
The downside of rationing would be industrial cutbacks and closures that could cost jobs and growth in an economy that is already battered by high inflation and could be headed for a recession.
Meanwhile, a full cut could see already-high gas prices soar toward a record 206 euros ($217) per megawatt hour from March 7, further fueling inflation. In early 2021, before Russia massed troops on the Ukrainian border, spot gas cost around €19 per megawatt hour.
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