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Wednesday, October 20, 2021

Europe gas prices: How far is Russia responsible?


Gas prices have been soaring in countries across Europe, and there have been accusations that Russia may be seeking to exploit the situation for its own advantage.

The US National Security Adviser, Jake Sullivan, recently expressed concern that Russia may be using energy as a political weapon.

“I believe they [Russia] should respond to market demands for increased European energy supplies,” he said.

But how much of the current shortages and price increases can be blamed on Russia?

How much gas does Europe get from Russia?

Russia supplies about 50% of Europe’s natural gas. Most of the rest comes from Norway and Algeria.

Russia transports gas to Europe via several major pipelines, including the Nord Stream, the Yamal-Europe, and the Brotherhood.

The gas is gathered in regional storage hubs before being distributed to various countries across the continent.

Because there was less demand during the pandemic, overall gas exports from Russia to Europe fell.

Although it has recovered in Europe, the downward trend has continued, with lower supply this year, particularly through the Ukraine and Belarus pipelines.

As a result, stocks across Europe have been depleted, driving up prices.

Has Russia been meeting its commitments?

Gazprom, Russia’s majority state-owned energy company, supplies gas to Europe under two different arrangements:

  • Long-term contracts often lasting from 10 to 25 years
  • “Spot” deals or one-off purchases for a fixed amount of gas

Long-term contracts, according to Gazprom, are “fundamental to stable and sustainable gas supplies.”

And it is believed that it has met its obligations to European buyers under these contracts this year.

However, the International Energy Agency’s executive director, Fatih Birol, recently stated that if Russia wanted to, it could supply 15% more gas.

Nord Stream 2 would double gas exports to Germany

Some analysts have suggested Russia could be holding back supplies to speed up approval of the newly-built Nord Stream 2 pipeline running directly from Russia to Germany.

This bypasses Ukraine and has been met with geopolitical and environmental opposition, despite Russia’s desire for it to be operational.

“A significant portion of the mainstream European media has attributed this to Gazprom purposefully withholding supplies in order to force the German regulator and the European Commission to approve Nord Stream 2,” says Jack Sharples of the Oxford Institute for Energy Studies.

However, he adds that this analysis is “questionable.”

German Chancellor Angela Merkel has stated that she is unaware of any instances in which Russia has failed to meet its contractual obligations.

“Russia can only deliver gas in accordance with contractual obligations, not arbitrarily,” she was quoted as saying.

However, according to data from Gazprom’s own electronic sales platform, “spot” sales do not appear to be occurring in significant quantities.

“This leads to the conclusion that Gazprom is supplying the volumes… under its long-term contracts – but it is not providing additional volumes beyond those contracts,” Dr. Sharples says.

That view was also expressed by the EU’s Energy Commissioner, Kadri Simson.

“Our initial assessment suggests that Russia is fulfilling its long-term contracts while not providing any additional supply.” she told MEPs on 6 October.

Russia’s deputy foreign minister, Sergey Ryabkov, told the BBC: “Gazprom has in fact started pumping out from its reserves into pipelines to stabilise the market.”

And he added: “We have never been in a position to exert pressure through our energy supplies.”

What’s happened to stocks in Europe?

Gas storage across Europe is well below the 10-year average, with levels currently at about 75% of storage capacity, according to Gas Infrastructure Europe data.

The UK’s gas storage is currently at full capacity – but Russia only provides about 5% of the country’s usage, so it’s less reliant on Russian imports than other European countries.

Russia’s own gas storage is also down.

Adeline Van Houtte, a Europe analyst at the Economist’s Intelligence Unit, says: “Currently, the Russian domestic gas market remains tight, with output already near its peak and winter is looming… limiting gas export capacity.”

There are several other factors affecting the situation in Europe, such as:

  • cold weather at the start of 2021 depleting stocks
  • rising prices in spring and summer put traders off buying to sell later in the year
  • limited supply from Norway because of maintenance issues
  • reduction in other energy sources such as wind power
  • growing demand for gas elsewhere in the world

Why is there a surge in demand for gas?

The economic recovery following the coronavirus pandemic has caused factories to ramp up production, increasing demand for energy.

Other parts of the world are also increasing their competition for gas in Europe.

Gas demand has risen dramatically in some regions, such as Asia and the Middle East, in recent decades.

This has repercussions on the market for liquefied natural gas (LNG), which accounts for roughly a quarter of Europe’s imports.

When there is a high demand for LNG, supplies are often diverted to Asia to take advantage of rising prices.

In addition, Russia has been expanding its gas exports to China, and in June inaugurated a gas processing plant in the far east of the country, which is predicted to become one of the biggest in the world.

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