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What if Russia turns off the gas? Europe assesses its options amid Ukraine crisis

A worker adjusts a pipeline valve at Gazprom PJSC Slavyanskaya compressor station, the starting point of the Nord Stream 2 gas pipeline, in Ust-Luga, Russia, on Thursday, January 28, 2021. Nord Stream 2 is a 1,230 kilometer (764 mil) gas pipeline that will double capacity of the existing submarine route from Russian fields to Europe – the original Nord Stream – which opened in 2011.

Andrey Rudakov | Bloomberg | Getty Images

Escalating tensions between Russia, Ukraine and the West have raised concerns about the future of Russian gas flows to the EU, with lawmakers and energy providers struggling to draw up contingency plans.

It comes as President Joe Biden warns that there is a “special opportunity” for Russia to invade Ukraine as soon as next month, and when the Kremlin says there is “some reason for optimism” after the United States has rejected their main demands to resolve the crisis.

Russia has put together an estimated 100,000 troops near the border with Ukraine, but refuses to plan to enter the former Soviet republic.

“European natural gas supplies are well below their typical standards and inventories, so a key question to ask is whether Europe has enough natural gas reserves to survive,” said Rob Thummel, senior portfolio manager at energy investment firm TortoiseEcofin, in a research note.

“Given that there is a lot of winter left, I think there are scenarios where it can get really challenging and stocks can get really low. Europe needs Russia from an energy point of view, and energy is so important that it will be very difficult to just cut off supplies to both sides, “he added.

For several months, Russia has been accused of deliberately disrupting gas supplies in order to exploit its role as a major energy supplier to Europe in the midst of an escalating conflict with Ukraine.

Russian gas flows to Europe have been lower than normally expected for a long period, with political analysts suggesting that Moscow has purposefully withheld supplies in an attempt to speed up the certification of the highly controversial Nord Stream 2 pipeline.

In fact, Russia’s alleged role in exacerbating Europe’s energy crisis was even the subject of a rare public reprimand from the International Energy Agency, in which the group called on Russia to increase gas availability to Europe and ensure that stock levels were filled to appropriate levels during a period of high winter demand.

The Kremlin has repeatedly denied allegations that it uses gas as a geopolitical weapon, and state-owned Gazprom has said it has fulfilled its contractual obligations to customers.

Now that tensions between Russia and Ukraine are reaching a fever level, energy analysts are deeply concerned about the risk of a full supply disruption to the EU – which receives about 40% of its gas via Russian pipelines, and several of them run through Ukraine.

What can Europe do if gas flows are disrupted?

The prospect of a supply disruption of Russian gas is considered to result in profound public health and economic consequences, especially as such a scenario could come in the middle of winter and in the midst of the coronavirus pandemic.

Energy analysts at the political risk advisory firm Eurasia Group believe that the worst-case scenario, in which Russia abruptly cuts off all supplies to Europe, is also the least likely scenario. This is partly due to the fact that such a move would have major economic costs for Moscow, while at the same time triggering a coordinated effort on the part of the EU states to permanently reduce gas imports from Russia.

“Even if a full cessation of Russian gas exports to the EU remains unlikely, officials and energy providers there have made contingency plans,” said analysts at Eurasia Group.

For example, European utilities have increased orders for shipped liquefied natural gas cargo during the Christmas and New Year period, mainly from the US and Qatar, which have around 100 cargoes scheduled to arrive in Europe in January alone. Eurasia Group said, citing ship tracking data, that this reflected an increase of around 40% from the previous record in March 2021.

View of piping systems and shut-off devices at the gas receiving station on the Nord Stream 2 Baltic Sea pipeline.

Stefan Sauer | picture alliance | Getty Images

These inflows of natural gas supplies, although expensive, are likely to “significantly” help the regions of Western Europe and the Mediterranean, but are not thought to be as useful for inland areas of Central and Eastern Europe.

In the event of a total shutdown of Russia’s gas supply to the EU, Eurasia Group analysts said the incoming fleet of LNG would be “insufficient” to meet Europe’s gas demand, with gas prices seen rising “to unprecedented levels” in this scenario.

In addition to ordering as many LNG cargoes as possible, Eurasia Group analysts said Europe’s ability to mitigate a complete supply disruption would consist of asking alternative pipelines such as Algeria, Azerbaijan and Norway to maximize pipeline pressure, a total blowout of all available gas storage throughout the EU, activation of any alternative power and heat supplies, and, if necessary, ordering demand constraints.

The oil and gas terminal at the port of Odessa in Odessa, Ukraine, Saturday, January 22, 2022.

Christopher Occhicone | Bloomberg | Getty Images

What is perhaps more likely, as tensions escalate, is a partial disruption of Russian gas flows to the EU via Ukraine.

“This would still cause significant economic damage and possibly lead to some localized heat and power shortages, particularly in south-eastern Europe, which already suffered similar disruptions during a Russian gas supply disruption through Ukraine in 2008/2009,” analysts at Eurasia Group said.

“If this happened, Moscow would probably try to protect its biggest customers, Germany and Italy, from the worst impact,” they added, noting that US or EU sanctions would probably avoid targeting Russia’s remaining gas exports to Europe, as this would also cause. much damage.

Redirectable capacity

“The most likely scenario is that flows will continue,” Tom Marzec-Manser, senior European gas analyst at energy consulting firm ICIS, told CNBC by telephone.

“Gazprom has consistently provided the EU and its customers in the EU with long-term contracts for decades, regardless of the state of relations between the West and Russia and / or the Soviet Union,” he added.

“And it will be extremely important for Russia to continue to supply its core customers primarily in places like Germany and Italy and to a lesser extent places like France and Austria.”

Marzec-Manser said that a scenario in which Russia was unable but willing to supply gas to European customers – due to economic sanctions or if it is considered unsafe to supply gas through Ukraine – would not necessarily result in in a sudden interruption of supplies.

“There is certainly diversifiable capacity on other routes to the market,” Marzec-Manser said, noting that volumes currently transiting through Ukraine could be redirected through Poland instead.

The forward gas price of the Dutch TTF hub, a European benchmark for natural gas trading, rose Friday morning by about 0.5% to 92.8 euros ($ 103.3) per megawatt-hour, according to the New York Intercontinental Exchange.

The TTF month ahead index has fallen from a high of 113 euros in December, but remains at elevated levels, partly due to persistent concerns over Russia and escalating tensions with Ukraine.

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