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    From the Editor: Europe braces for complete cut-off in Russian gas [Gas in Transition]


The EU is proposing steep cuts in gas consumption, to prepare for a potential winter without Russian gas. [Gas in Transition, Volume 2, Issue 7]

by: NGW

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From the Editor: Europe braces for complete cut-off in Russian gas [Gas in Transition]

Nord Stream is once again up and running, despite fears that Russia might keep the vital route closed in order to tighten its stranglehold on the European energy system. The pipeline went offline for routine, annual maintenance on July 11 – which in a normal year would have garnered little attention – and resumed operations as planned on July 21.

However, as was the case before its closure, Nord Stream is running at only 30-40% of its 55bn m3/year capacity. The Russian side claims that this is due to technical problems relating to Western sanctions – namely Siemens’ delay in returning a turbine to the Portovaya gas compressor station that had been shipped to Canada for repairs. In a decision that has sparked some controversy, Canadian authorities have granted a sanctions exemption that will enable its return, and the return of future Nord Stream turbines sent off for repair. The unit is now understood to have arrived in Germany, although it may take until the end of July or early August to arrive on site and be recommissioned.

The steep drop in flow via Nord Stream in June led several EU member states to complain that Gazprom was not sending the contractual level of gas, including Germany, Italy and France. Russia’s claims that technical problems are the cause of the pipeline’s restricted capacity seem likely to be at least partially true. But irrespective of that, Russia could have diverted gas flow to other routes such as Ukraine. The conclusion is clear: Russia’s latest curtailment in supply to European customers is political in nature, as has been the case in previous months.

The result of this curtailment has been European gas prices once again rocketing up to close to $2,000/’000 m3, prompting several EU member states to switch coal-fired power plants back on, to conserve gas for winter, confounding the bloc’s climate objectives. The crisis has also brought several energy utilities to the brink of bankruptcy, and the hardest hit has been Uniper, which has lost its Russian gas supply and is having to purchase costly volumes on the spot price to keep to its contractual obligations with customers. The company is in bailout talks with the German government, which have dragged on because of its Finnish majority owner Fortum’s refusal to pick up part of the bill. It has already burned through an emergency €2bn ($2bn) state credit, and reported on July 18 it was seeking an increase. It has also asked the government to introduce emergency stabilisation measures, including allowing the company to pass on its increased procurement costs.

The fear is that, if Uniper collapses, it could trigger a series of other such cases across the European energy system.

Thus far, Europe still seems on track to reach its target of filling gas storage facilities to 80% of capacity by October 1, and potentially 90% by November 9, from 65% at present. But Russian supply cuts, exacerbated by outages in the US and Norway, are making this a more challenging and certainly more costly effort.

Still, fears of a complete stoppage of Russian gas are mounting. Warning that Europe faced a “long, hard winter” ahead, International Energy Agency chief Fatih Birol on July 18 outlined five steps European leaders could take to prepare for the coming heating season. To safeguard against the Russian threat, he called for industrial energy users to be given an incentive to cut consumption via an auction system, for gas use in the power sector to be minimised by substituting it temporarily with coal and oil, and for maximum cooling and, later, heating levels to be introduced to lower household demand. Gas and electricity operators should work together to maintain the system’s stability, he said, and emergency planning should be harmonised on a national and EU level.

Similar measures were then proposed by the European Commission, which wants to see member states cut their gas consumption by 15% from the start of next month until the end of March next year. The commission wants to see all consumers, from public administration, households and the owners of public buildings, to power suppliers and industries, take part in delivering this cut. Brussels has also proposed regulation that would give it the power to declare a “Union Alert” when the risk of gas shortages is too great, allowing it to impose mandatory cuts on member states.

Member states will be required under the proposal to update their national emergency plans by the end of September to show how they intend to reduce demand, and then report on their progress every two months. Those who are seeking supply from their neighbours by citing the solidarity principle in EU energy regulation, must first demonstrate they have taken measures to curb their own consumption.

Whether or not Russia would take such a drastic step as to completely cut off gas supply to Europe is anyone’s guess. Such a move would cause Europe significant economic pain, with the IMF estimating that it could shave as much as 6% off the GDP in 2022 of countries most reliant on Russian gas. Germany, Europe’s largest economy, would lose 1.5% of its GDP. This could well force the EU to make concessions in the Ukrainian conflict.

On the other hand, Russia would instantly lose one of its largest sources of export revenue, at a time when the Kremlin is estimated to be spending some $900mn per day on its war in Ukraine. It could also backfire, by hardening the EU’s resolve to sever all energy ties with Russia for good.