Europe braces for energy rationing as Russia moves towards full gas cut-off
Originally published at Europe in Review on August 2022
State-owned Russian company Gazprom has halted all gas shipments to Latvia, reinforcing fears that Moscow may fully cut off such supplies to EU nations in retaliation for Western sanctions over the war in Ukraine.
Gazprom stopped gas shipments to Latvia on July 30 after the country refused Moscow’s demands to open dual euro and rouble accounts at Gazprom bank to pay for supplies. Gazprom had already halted all gas shipments to Poland, Bulgaria, Finland and the Netherlands for identical reasons in April and May. [Reuters 1] [Reuters 2] [Reuters 3] [AP News]
Supplies through Nord Stream 1, the Gazprom pipeline supplying Germany via a 1,200 km link under the Baltic Sea from Russia, were interrupted completely for ten days from July 12 to July 21 due to scheduled maintenance. [Financial Times] [Nord Stream Pipeline]
German Vice Chancellor and Economy Minister Robert Habeck warned during this period that Russia may not restore gas flows at all. [AP News]
EU and Canadian sanctions waivers were provided to Siemens to enable it to send a critical component repaired at its facilities in Canada to Russia through Germany to enable gas service via Nord Stream 1 to be restored on time. [CBC]
However, Russia announced it would only restore 20 percent of the supply levels contracted with German utility company Uniper on July 27, after restoring flows to the previous 40 percent level on July 21. [Financial Times]
The same week Russia signed an international agreement to unlock a blockade of Ukrainian grain shipments, and then bombarded the country’s main grain port, Odessa, the next day. [Financial Times]
Russia appears to be reneging on agreements in order to disrupt world commodity markets as well as regional energy supplies and thereby increase pressure on Europe to remove war sanctions.
Russian gas supply reductions may result in rationing in Germany and elsewhere in Europe. This could mean rolling blackouts, at least for commercial customers, while domestic customers would be required to conserve gas.
Full gas cut-off by Russia ‘likely’: EU Commission chief
European Commission President Ursula von der Leyen has warned that a full cut-off of Russian gas in response to continued EU sanctions on Moscow and Western material support for the Ukrainian government is a “likely scenario” this year. [Washington Post]
Current German winter gas stores are at 66 percent compared to the official EU goal for each member state to reach 90 percent for 2022. [New York Times]
However, current gas flows do not appear sufficient to reach this target. EU members agreed in Brussels to reduce current gas usage by 15 percent starting on July 26. [Council of the EU]
Natural gas prices have risen over 50 percent since the beginning of the Ukraine war, causing catastrophic business losses and severe consumer price increases. [Financial Times]
The German government bought a 30 percent stake in German utility Uniper to prevent bankruptcy and service operation interruptions caused by sudden war-induced gas price rises on July 22. [WSJ]
The rest of Europe is suffering from additional energy issues. The French government announced the nationalisation of the Paris Bourse-traded 16 percent share in utility Electricite de France that it does not already own. [WSJ]
This will completely nationalise the owner of the nation’s 57 nuclear plants, supplying 70 percent of French energy. Freedom from stock market pressures will maintain the government’s ability to absorb the large financial losses required to maintain a cap on electricity prices, which are soaring due to a large spike in summer demand.
In total, 31 reactors comprising nearly 40 percent of French generating capacity were taken offline during the greatest heatwave in European history due to scheduled maintenance, making the country a net energy importer just when the EU could have benefited the most from previously reliable nuclear-powered French energy exports.
Italy is compensating for a decrease in Russian gas with an increase in direct imports of Algerian supplies, but this type of option is not available for most of Europe. Meanwhile, the UK government is providing the equivalent of EUR 18 billion to individual citizens to subsidise their energy bills. [Financial Times] [Financial Times]
Energy price shocks
Energy price shocks continue across Europe as the European benchmark gas futures price for one megawatt hour equivalent at the Title Transfer Facility (TTF) Virtual Trading Point, operated by Gasunie Transport Services (GTS), the Dutch natural gas transmission system operator, rose to nearly EUR 200 in the last week of July. [Trading Economics]
The current natural gas price is almost seven times higher than the average 2021 price of EUR 30, and reapproaching the March 8, 2022 high of nearly EUR 300 reached when Russian Deputy Prime Minister Alexander Novak announced Moscow would consider completely shutting down the Nord Stream 1 pipeline in retaliation for German refusal to commission the Nord Stream 2 link. [Quantum Commodities Intelligence]
Opening Nord Stream 2 would have expanded alternative natural gas pipeline capacity to the point where gas shipments through Ukraine would no longer have been necessary to supply European contracts. That would have enabled Russia to shut down pipelines through Ukraine, providing more operational latitude for Moscow’s war effort.
(rw/pk)