Typically at this time of year, energy utilities across Europe fill their tanks, replace old cables, lock down gas contracts, and perform the kind of routine maintenance needed to prepare for the downturn. winter ahead.
This year is different.
Natural gas prices are on the rise; reserves are declining; winter is around the corner; and energy traders, political observers and regional experts are getting nervous. And they are looking to Moscow, where Europe’s biggest supplier, Russian gas giant Gazprom, already has a strong grip on the market.
And that grip will tighten with the impending completion of Gazprom’s $ 12 billion Nord Stream 2 submarine pipeline.
“The shortages may have been caused by a number of reasons – commercial interest, supply constraints in the internal market, political interests to force Europe to speed up the approval of” Nord Stream 2, said Aura Sabadus, journalist Senior Energy Officer at Independent Commodity Intelligence Services, based in London
” And maybe, [it’s] good old Russian posture to reinforce the message that Europe continues to remain dependent on Russian gas despite the rise of the United States [liquefied natural gas] in recent years, “she said in an email to RFE / RL.
“Is there a political element here? It’s actually a very difficult judgment call,” said Graham Freedman, senior analyst at Wood MacKenzie, an Edinburgh-based energy consultancy.
Gazprom did not immediately respond to emails seeking comment.
The European Union’s natural gas reserves are well below normal levels for this time of year. This is due in part to the unusually cold late winter and early spring, which shortened the storage season.
This year, supplies are around 12%, up from 64% in previous years, according to Maria Shagina, postdoctoral researcher and political risk researcher at the Center for Eastern European Studies at the University of Zurich. In Germany, gas storage facilities only hold 50% compared to previous years.
This could put the EU in a troubling position ahead of winter if storage does not fill up by October, when the filling season ends. Russia itself is also struggling to fill its own storage ahead of the winter season.
“Because gas stores are usually filled in the summer before the heating season in the fall, the situation has become of concern to Europeans,” Shagina said.
Tight supplies have caused prices to skyrocket; last month, gas prices at a key exchange point in the Netherlands hit a 17-year record.
Current gas prices are about three times what they were in 2019, Freedman said; and five times compared to last year, when the COVID-19 pandemic slowed or shut down much of industrial production.
Liquefied natural gas, or LNG, from North America would generally help bolster European supplies. This year, however, much of that has instead been directed to Asia, where prices are even higher; up to 80 percent more than in Europe, according to some measures.
“A perfect storm”
Katja Yafima, a senior researcher at the Oxford Institute for Energy Studies, cited a combination of factors buffering the markets: natural disasters, technical outages at many LNG plants, a cold winter and increasing industrial demand as economies resume after COVID- 19 stops.
“Come all together at the same time, [they] have created a perfect storm, when there is just not enough gas available in the world, ”she said. “Gazprom’s supply is one factor among many.
In a normal market economy, a large gas supplier would be expected to take advantage of high prices by contracting more contracts, thereby generating more revenue.
In Gazprom’s case, however, that would involve using what has long been its main export pipeline network: that of Ukraine.
This year, however, Gazprom failed to do so, and experts say there isn’t a single clear explanation.
Nord Stream 2
In Ukraine, however, which has been battling with Russia over gas supplies and transit charges for nearly two decades, the explanation is crystal clear to many.
“Even without the completion of Nord Stream 2, we are already seeing who is pushing up gas prices in Europe,” Ukrainian President Volodymyr Zelenskiy said said at a press conference on August 22 alongside visiting German Chancellor Angela Merkel. “The project is only beneficial for Russia.”
Russia has tried for years to reduce its dependence on Ukrainian networks, an effort primarily driven by the fallout from the 2014 Maidan revolution in Kiev. Thus, the push to bypass Ukraine with submarine pipelines, both in the Baltic Sea and the Black Sea.
Before the opening of Nord Stream 1 in 2011, about 80% of Russian gas exports to Europe passed through Ukraine, according to the Congressional Research Service. By 2019, that figure had fallen to around 45%.
Ukraine is categorically opposed to the construction of Nord Stream 2, which will double the total capacity of the entire Nord Stream complex. This is mainly due to the transit revenue which it stands to lose if Russian gas bypasses it, but also for fear that Moscow will directly cut off supplies to Ukraine – which has happened in the past.
In 2020, Ukraine generated around $ 2.1 billion in transit revenue for Russian gas.
Ukraine biggest ally in the fight to block Nord Stream 2 was the United States. Construction, which began in 2015, proceeded quickly under President Donald Trump’s administration, although Congress passed several sanctions measures in an attempt to block it, and the State Department opposed it. vigorously.
In May, Trump’s successor Joe Biden angered Republicans in Congress and surprised Ukrainians by choosing to drop sanctions on major companies involved in construction. This paved the way for the realization of the project.
Biden’s decision came after talks with Merkel, who disagreed with the US position, arguing that more Russian gas for German industrial customers and European markets does not necessarily make Europe more submissive. to Russian political whims.
Merkel has also pledged to push Moscow to extend an existing supply contract with Kiev which is due to expire in 2024 – an effort to allay Ukraine’s discontent with Nord Stream’s approval.
Although nearing completion, Nord Stream 2, also known as NS2, hit a major speed bump this week when a German court dismissed operators’ argument that the pipeline was financially, if not physically, full. and therefore was not obliged to follow him. EU rules to ensure competition in block energy markets.
The rules, adopted in 2019, include an “unbundling” requirement on the production, transport and trade of gas to the European Union, prohibiting a single company from exclusively using its own pipelines to transport its own gas. Gazprom is opposed to the abandonment of control.
German regulator BNetzA is reviewing part of these rules and could issue a decision by early next year, or even before.
Play at the market?
Experts say there is no sign that Gazprom is not honoring its contracts under long-term delivery agreements. However, the company seems unwilling to provide swing supplies despite the high price appeal.
“Gazprom’s production has remained high this year and the company has fulfilled all of its contractual supply obligations in Europe,” Yafima said in a message to RFE / RL. “My view is that Gazprom took advantage of the tight market, but it did not abuse or manipulate it.”
Other analysts have speculated that Gazprom could suspend supplies to European markets in order to put upward pressure on prices, which in turn pushes up electricity prices, angering consumers. large industrial customers.
This in turn could lead powerful German industries to pressure the German government to speed up the licensing process so that Nord Stream 2 flows faster.
“This geo-economic strategy appears to be used to exert additional pressure to accelerate the certification of NS2,” Shagina told RFE / RL.
“Gazprom just wants NS2 up and running,” Freedman said. “I don’t know if the goal is to upset German industrialists. And it’s not just Germany, it’s European industrialists more broadly.”
If it turned out that Gazprom was rigging the markets, deliberately pushing prices up in a monopolistic manner, that would be a major political concern, Freedman said.
“If exposed, it would reveal the very problems that the United States has been complaining about for a few years, namely that Gazprom uses energy as a tool and not just in the energy sector,” he said. he declares.
“It would be a very dangerous game to do that,” Freedman told RFE / RL. “There would be consequences.