EU fears of being held to ransom by Russia over fuel turn into a actuality


Russia chopping fuel provides to Europe has lengthy been one of many EU’s biggest fears. This week it grew to become a actuality.

Moscow has blamed the choice to limit volumes on the Nord Stream 1 pipeline to Germany on sanctions imposed after the invasion of Ukraine, particularly these by Canada that left key pumping gear stranded at a Siemens Energy manufacturing unit in Montreal.

But few within the west are shopping for Moscow’s line. Russia has entry to different provide routes to maintain export clients equipped, however declined to utilise them. With the cuts coinciding with a go to by the leaders of Germany, Italy and France to Kyiv this week, Germany’s vice-chancellor Robert Habeck stated any technical points have been clearly a “pretext” for Russia to squeeze Europe’s financial system.

Fatih Birol, head of the International Energy Agency, stated the cuts by state-run Gazprom gave the impression to be a “strategic” transfer by Moscow that might remind Europe that it shouldn’t really feel “too safe or too comfortable”.

Georg Zachmann, senior fellow on the Bruegel think-tank, accused Moscow of “trying to play divide and rule”, saying President Vladimir Putin’s regime wished to “increase its leverage over Europe ahead of the winter, and any eventual settlement in Ukraine.”

Unless Russia restores volumes rapidly the business fears Europe will battle to retailer sufficient fuel forward of the winter months when demand shall be highest. But even when full provide returns then the occasions of this week has lastly sunk the idea as soon as frequent within the business that Russia wouldn’t flip the fuel weapon on its largest clients.

The Freeport LNG plant in Quintana, Texas © Maribel Hill through Reuters

What is evident is that Russia’s choice, which has lowered capability on NS1 by 60 per cent and led to decrease flows to international locations from France to Slovakia, has moved the power disaster into a brand new and harmful part.

“The current situation is one of the worst outcomes we had contemplated,” Edward Morse, analyst at Citi, stated this week as he warned that costs would seemingly must soar this winter to constrain demand if Russian flows don’t return.

Gas costs have already jumped — from very excessive ranges — gaining greater than 60 per cent this week to about €130 per megawatt hour. This has compounded international anxiousness about hovering inflation as central banks battle to get a deal with on rising costs with out triggering a widespread financial slowdown.

For some the Russian fuel cuts have been inevitable. Europe has made clear because the Ukraine invasion in February that it wished to kick its habit to Russian power as quickly as attainable. The share of European fuel consumption that comes from Russia has roughly halved because the conflict to twenty per cent of the whole, in line with consultancy ICIS.

The EU has additionally moved to tighten sanctions towards Russia, banning seaborne imports of crude and transferring in direction of prohibiting insurance coverage for any tanker carrying Russian oil, with the UK additionally onboard.

Laurent Ruseckas, a fuel market specialist at IHS Markit, stated that whereas Moscow might quickly restore provides, there was a threat it could double down on its place and make even greater cuts this winter.

“There’s a growing likelihood that this is a prelude to the main show,” he stated, including that he feared Moscow noticed the potential to weaken sanctions by ramping up the strain on Europe’s financial system.

Line chart of European natural gas wholesale price (Dutch TTF, euros per MWh) showing Gazprom cuts drive Europe gas prices close to recent highs

“If there’s an explicit ‘we’ll cut off the gas if you don’t lift sanctions’ then I’m confident they’ll get a very short answer,” he stated. “But I’m worried there’s enough support for this approach in Moscow to make it a very real possibility.”

If Russian fuel flows don’t recuperate quickly then Europe would want to step up the hunt for extra seaborne cargoes of liquefied pure fuel to interchange it. But the fragility of this feature has been uncovered previously fortnight.

A fireplace at an LNG terminal in Texas that’s chargeable for nearly 20 per cent of all US liquefaction capability has closed the plant for no less than three months and it’s unlikely to be totally again till the tip of the yr.

Europe has benefited from decrease Chinese demand for imported gas because the nation grapples with the way to management coronavirus however it’s unclear how lengthy that “zero Covid” coverage will persist.

With one eye on a probably troublesome winter, Germany has been one of many few main economies to launch an effectivity drive, calling on residents to preserve power this summer time so that there’s extra fuel accessible to enter storage forward of the colder seasons. Italy, the place provides from Gazprom have dropped by 15 per cent, might activate an emergency plan to curtail fuel use subsequent week, together with curbing provides to some industrial customers. But others, together with the UK, have thus far declined to make a conservation push a nationwide precedence.

Another possibility could be to burn extra extremely polluting coal and contemplate different politically difficult insurance policies. The Groningen gasfield within the Netherlands was as soon as Europe’s largest however its output has been capped after inflicting quite a few giant earth tremors that broken buildings. It continues to be considered within the business as one possibility if there are extended shortages.

Long-term the EU will utilise extra renewables however there’s not sufficient time so as to add important capability forward of the winter.

Henning Gloystein, an analyst at Eurasia Group, suggested the EU to plan for Russia to completely finish all fuel provides and ramp up imports from different sources. “In the worst case, it would require some form of gas rationing to maintain supply for essential industries and services,” he stated.

Some have prompt the EU ought to go on the offensive. Zachmann at Bruegel stated Europe might compel its energy utilities to successfully cancel any long-term contracts that they had with Gazprom. The European consumers might then provide to buy a hard and fast quantity of fuel at a hard and fast value, providing Russia higher phrases for larger volumes.

If Russia then determined to halt provides totally Europe might reply, “but just sitting there like a frog in the water and letting the Russians turn up the temperature is not a good plan,” Zachmann stated.

“Russia has said ‘it’s our gas, it’s our game’ but we need to say ‘it’s our money, it’s our game’.”

Additional reporting by Tom Wilson in London and Amy Kazmin in Rome