It is not the summer heat wave that is making European leaders and businesses sweat. There are fears that Russia’s rigging of natural gas supplies will lead to an economic and political crisis next winter. Or, in the worst case, even sooner.
Here are important things to know about the energy pressure play on the war in Ukraine:
Russia last week cut gas supplies to five EU countries, including Germany, the largest economy in the 27-country bloc that relies heavily on Moscow’s gas to generate electricity and its power industry.
Russian state-owned energy giant Gazprom has cut supplies by 60% of Europe’s major natural gas pipeline – from Russia to Germany via the Nord Stream 1 pipeline that runs under the Baltic Sea. Italy is seeing its supply cut in half. Reductions have also been seen in Austria, the Czech Republic and Slovakia.
This comes on top of gas shutdowns in Poland, Bulgaria, Denmark, Finland, France and the Netherlands in recent weeks. Those shutoffs were initially seen 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.
However, the latest cuts affected countries that are major economies and use a lot of Russian natural gas. Germany is dependent on Russia for 35% of its gas imports; Italy for 40%. At present the supply of gas is sufficient for the present needs.
Why are deductions a concern?
Europe is scrambling to replenish its underground gas storage before winter. Gas utilities operate on a regular rhythm, filling reserves in the summer—when, hopefully, they can buy gas cheaper—and then pulling it down in the winter as heating demand increases. The reduction would make refilling storage more expensive and more difficult to meet.
The move has also brought closer to the specter of a full Russian gas shutoff that would make it impossible for Europe to get all the fuel it needs for the winter. Natural gas is used by many energy-intensive industries, such as glassmakers and steel makers, which are already facing high costs and are turning back use, helping slow the European economy. .
For electricity generation, gas is a “swing” energy source that generates less electricity due to unpredictable weather such as wind and sun and less renewable energy when power usage spikes during cold or hot weather, such as the heat wave last weekend. Which raised the record high Europe.
Right now, Europe’s underground storage caves are 57% full. The European Commission’s latest proposal is for each country to reach 80% by 1 November, while Germany has set a target of 80% by 1 October and 90% by 1 November.
Analysts at the Bruegel think tank in Brussels warned that “Bulgaria, Hungary and Romania will not meet the EU’s 80% target if they continue at the current pace,” while “Germany, Austria and Slovakia will need to scale up their storage facilities.” It will be very difficult to fill up. If the flow of gas from Russia stops.”
What is being done?
The European Union, which obtained about 40% of its gas from Russia before the war, has outlined plans to cut imports by two-thirds by the end of the year and completely phase out Russian gas by 2027. The bloc has already said it will stop the introduction of Russian coal. Most of the Russian oil in August and in six months.
The goal is to reduce the $850 million a day Russia is cutting from oil and gas sales to Europe to halt its war funding in Ukraine.
European governments and utilities have purchased expensive liquefied natural gas, or LNG, from the United States, which is delivered by ship, unlike gas that comes from Russia by pipeline and is generally cheaper. But the war has raised energy prices, fueling record inflation in Europe and helping to keep revenues high for Russia.
Efforts are being made to get more pipeline gas from Norway and Azerbaijan, while the accelerated rollout of renewable energy and conservation is expected to play a smaller role. Germany, which does not have any LNG import terminals, is bringing in four floating terminals, two of which should be operational this year.
Despite the focus on renewable energy, the crisis is pushing countries towards fossil fuels. Germany is legislating to restart coal-fired power plants as a temporary patch, despite plans to go completely out of coal by 2030.
Vice Chancellor Robert Hebeck said turning to coal was “bitter” but “in this situation, it is very necessary.” The government is planning measures to encourage industry and utilities to use less natural gas. Habeck also urged the Germans to save energy.
“Gas usage should be further reduced, so that more gas can go into storage, otherwise in winter, it is going to be tight,” he said.
The Dutch government says it will allow coal-fired power stations to operate at full capacity again to conserve natural gas that would otherwise be burned to generate electricity.
Despite all these measures, Europe’s gas security remains fragile. Liquefied gas export terminals in energy-producing countries such as the US and Qatar are running at full speed, meaning Europe is bidding against Asia for limited supplies.
In addition, an explosion and fire at an export terminal in Freeport, Texas, took a fifth of US export capacity offline for months sending another shiver through the gas market. Most of the terminal’s exports were going to Europe, Rystad Energy said.
“The situation in the European natural gas market is moving forward,” said Carsten Fritsch, commodities analyst at Commerzbank Research, pointing to the explosion of Nord Stream 1 and a scheduled maintenance shutdown, which could mean an 11-year run through the pipeline. No gas is flowing on 21st July. So “the creation of an urgent need for gas stocks for the winter months could falter” and prices are likely to rise even higher.
What is the game of Russia?
Gazprom says it had to cut flow to Europe via Nord Stream 1 because western sanctions halted a vital equipment in Canada, where it was moved for maintenance. European governments are not buying it and call the gas cuts political.
Gazprom’s move has caused natural gas prices to rise sharply as they fell in the wake of warmer winter weather. It increases revenue for Russia at a time when it is under pressure from Western economic sanctions and increases tensions on Europe as it provides political and military support to Ukraine.
Gazprom’s moves can also be seen as a deterrent to push back against Western sanctions and impose further penalties. And the big gas users have been given notice that, like the smaller ones, they are not exempted from the potential cutoff.
Germany and Italy saw their supply cuts come as their leaders joined French President Emmanuel Macron in Kiev to meet with President Volodymyr Zelensky and return EU candidate status for Ukraine.
Will Europeans see the lights go out or freeze this winter?
This is unlikely because EU law mandates that governments supply ration gas to industries so that homes, schools and hospitals are spared. Countries that lack gas may seek help from others who may be in a better position, although this depends on adequate pipeline connections.
The downside of rationing would be industrial cuts and shutdowns, which could impact jobs and growth in an economy already suffering from high inflation and fears of a global recession as central banks raise interest rates.
Meanwhile, an absolute cutoff could send gas prices toward their record high of 206 euros per megawatt hour from March 7, further driving inflation. In early 2021, before Russia’s troop rush to the border with Ukraine, spot gas cost about 19 euros per megawatt hour.