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    AP Explains: What happens after Russian gas cut to Europe?


    June 21, 2022 - CE Noticias Financieras

     

      What is making European leaders and businessmen sweat is not a heat wave. It is the fear that Russian manipulation of natural gas supplies will lead to a political and economic crisis next winter. Or, at worst, even sooner.

      Here are some things to know about the pressure game around the war in Ukraine.

      WHAT HAS HAPPENED?

      Russia last week cut gas supplies to five European Union countries, including Germany, the largest economy in the 27-nation bloc and one that relies heavily on Moscow's gas to generate electricity and keep its industry running.

      Russia's state-owned energy giant Gazprom has cut 60% of supplies from the Nord Stream 1 pipeline, Europe's largest natural gas pipeline and which runs through the Baltic Sea from Russia to Germany. Italy has seen its supply cut by half. Austria, the Czech Republic and Slovakia have also seen reductions.

      Add to that cuts to Poland, Bulgaria, Denmark, Finland, France and the Netherlands in recent weeks. Those supply cuts were initially seen as less problematic because Poland, for example, already had plans to abandon Russian gas by the end of the year, while others had alternative supplies.

      But the new cuts affected countries that are large economies and consume a lot of Russian natural gas. Germany relies on Russia for 35% of its gas imports, Italy 40%. Right now there are sufficient supplies for current needs.

      WHY ARE THE REDUCTIONS A CONCERN?

      Europe is trying to fill its subway gas storage facilities for the winter. In their usual rhythm of work, distribution companies fill up reserves in summer - when, if they are lucky, they can buy the cheapest gas - and use them up in winter when heating demand rises. Supply reductions make filling reserves more expensive and harder to come by.

      The decision has also raised the specter of a total cut-off of Russian gas, which would make it impossible for Europe to get all the fuel it needs for the winter. Natural gas is used in several energy-intensive industries, such as glass and steel manufacturers, which already face higher costs and are reducing their consumption, contributing to a slowdown in the European economy.

      For electricity production, gas is the backup energy source that comes into play when renewables such as wind and solar generate less power due to weather, or if energy consumption spikes due to cold or heat, as it did last week when a heat wave broke records in Europe.

      Right now, European subway storage is at 57%. The European Commission's latest proposal is for each country to reach 80% by November 1, while Germany has set targets of 80% by October 1 and 90% by November 1.

      Analysts at the Bruegel think tank in Brussels have warned that "Bulgaria, Hungary and Romania will not reach the EU's 80% target if they continue at the current pace," while "Germany, Austria and Slovakia would find it very difficult to fill their storage facilities if gas flows from Russia stop."

      WHAT IS BEING DONE?

      The EU, which before the war received 40% of its gas from Russia, has put forward plans to cut imports by two-thirds by the end of the year and abandon Russian gas altogether by 2027. The bloc has already said it will veto Russian coal from August and most Russian oil in six months.

      The aim is to reduce the $850 million a day that Russia has been bringing in from gas and oil sales to Europe, and avoid financing its war in Ukraine.

      European governments and supply companies have been buying expensive liquefied natural gas from the United States that is delivered by ship, as opposed to gas that arrives by pipeline from Russia and is usually cheaper. But the war has sent energy prices soaring, driving record inflation in Europe and maintaining a lucrative source of revenue for Russia.

      Efforts are underway to get more pipeline gas from Norway and Azerbaijan, while accelerating conservation and renewable energy projects are expected to play a minor role. Germany, which has no liquefied natural gas terminals, has commissioned four floating terminals, two of which should come online this year.

      Despite the emphasis on renewables, the crisis is pushing countries back to fossil fuels. Germany is pushing legislation to reactivate coal-fired power plants as a temporary stopgap, despite its plans to abandon coal altogether by 2030.

      Vice Chancellor Robert Habeck said that returning to coal was "bitter," but that "in this situation, it is pure necessity." The government plans measures to incentivize industry and power companies to use less natural gas. Habeck also urged Germans to save energy.

      "Gas must be reduced further, so that more gas can be stored, otherwise in winter it's going to be just right," he said.

      The Dutch government said it will allow coal-fired power plants to operate at full capacity to save natural gas that would otherwise be burned to produce electricity.

      European security is fragile despite all these measures. LNG terminals in energy-producing countries such as the United States and Qatar are operating at full capacity, so Europe is competing with Asia for limited supplies.

      In addition, an explosion and fire at an export terminal in Freeport, Texas, wiped out one-fifth of U.S. export capacity for months and dealt another blow to gas markets. Most of the terminal's exports were going to Europe, Rystad Energy said.

      "The situation in the European natural gas market continues to escalate," said analyst Carsten Fritsch of Commerzbank Research, who cited the explosion and scheduled maintenance shutdown of Nord Stream 1, which will mean no gas flows through the pipeline between July 11 and 21. "Therefore, the urgent build-up of gas reserves for the winter months could fail" and that will likely raise prices further.

      WHAT IS RUSSIA'S BET?

      Gazprom said it had had to cut the flow to Europe via Nord Stream 1 because Western sanctions left a piece of equipment blocked in Canada, where it had been moved for maintenance. European governments reject that argument and see the flow reductions as a political move.

      Gazprom's measures have further pushed up natural gas prices, which had fallen after the winter heating season. That increases revenues for Russia at a time when it is under pressure from Western economic sanctions and adds pressure on Europe, which provides military and political support to Ukraine.

      Gazprom's moves could also be interpreted as a reaction to Western sanctions and a deterrent to further sanctions. And it has alerted large consumers that, like small consumers, they are not exempt from a possible supply cut.

      The cut in supplies to Germany and Italy coincided with a trip to Kiev by their leaders and French President Emmanuel Macron to meet Ukraine's President Volodymyr Zelenskyy and support the country becoming an aspiring EU member.

      WILL EUROPEANS BE LEFT FREEZING OR IN THE DARK THIS WINTER?

      That is unlikely because EU legislation mandates that governments ration gas supplies to industry so that homes, schools and hospitals are spared. Countries running short of gas can ask others in a better position for help, though that depends on adequate pipeline connections.

      The downside of rationing would be closures and production cuts in industry that could cost jobs and growth to an economy already strained by high inflation, as well as fears of a global slowdown as central banks raise interest rates.

      For its part, a total supply cut would send gas prices soaring toward their March 7 record high of 206 euros per megawatt hour, further boosting inflation. In early 2021, before Russia built up troops on the Ukrainian border, gas cost about E19 per megawatt hour.

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