Europe’s push to cut Russian gas faces winter race

As Europeans bask in the warmth of spring, governments are racing against winter.

Europe is trying to reduce the use of Russian natural gas because of the war in Ukraine, but still finds enough fuel to keep the lights on and the houses warm before it cools down again.

This has caused officials and utilities to rush to fill underground storage with scarce reserves of natural gas from other producers – competition that is driving up already high prices even further as utility bills and Business costs are skyrocketing. Italy has announced new supplies from Algeria, while Germany has outlined an energy partnership with Qatar, a major supplier of liquefied gas which arrives by ship.

While these deals offer a long-term boost, they are likely to have little impact on the crucial winter supplies that will be decided over the next few months. For now, the scramble in Europe is a zero-sum game: there is little or no reserve gas available, and any supply one country manages to secure comes at the expense of someone else. either in Europe or in Asia.

The limited number of liquefied natural gas export terminals in Qatar, the United States and other LNG-exporting countries are full, and it will take years and billions to build new ones. On top of that, a plan for the 27-nation European Union to jointly buy gas sounds good on paper, but runs into practical hurdles.

“There is no additional supply,” said James Huckstepp, head of gas analysis for Europe, Middle East and Africa at S&P Global Commodity Insights. “The increase in LNG we have received is mainly due to demand destruction and switching in Asia. And there are limits to that.”

Asian users have turned to oil or coal, and Chinese demand has plummeted amid COVID-19 lockdowns.

Europe’s energy rush has centered on LNG supply, with supplies hitting a record 10.6 billion cubic meters in April. But there is still a long way to go – Russia sent 155 billion cubic meters of natural gas to Europe every year before the war. Europe wants to reduce that by around 100 billion cubic meters by the end of the year and stay warm this winter.

The EU’s executive board has proposed conservation, renewable energy development and other measures to achieve this goal, with Germany and other countries heavily dependent on Russian gas opposing calls for an immediate cut in gas supply. gas. S&P Global Insight expects Europe will not phase out most Russian gas until 2027.

To support the effort, Italian Prime Minister Mario Draghi last month signed an agreement between Italian energy company Eni and Algeria’s Sonantrach to raise gas via a pipeline under the Mediterranean Sea. Eni said the deal would increase volumes this year and reach up to 9 billion cubic meters per year in 2023-24.

Huckstepp said the deal is unlikely to achieve the full amount “without reducing exports elsewhere or cash sales elsewhere.”

Gas contracts signed by individual countries do not indicate whether the new volumes are new production or would be subtracted from the gas another country expects to receive, said Matteo Villa, an analyst at the ISPI think tank in Milan.

“And you don’t know, is the new gas because Algeria produces more or because they take it from Spain?” Villa said. “If they fail to increase production, they will have to steal it from Spain.”

Italy has also struck deals with Azerbaijan, Angola and Congo, but Villa has doubts: “They will arrive when they arrive here.”

Germany’s energy partnership with Qatar, meanwhile, has yet to result in signed contracts or specified deliveries and appears to be aimed at longer-term supplies rather than this winter.

Key to future supply is new investments, such as planned export facilities on the US Gulf Coast. But those won’t start going live until 2024 at the earliest.

To complicate the race against winter, several minor but disturbing interruptions. The Ukrainian pipeline operator cut off supply through a pipeline to Europe last week, saying it had lost control of a compressor station in Russian-held territory.

Shortly after, Russian state utility Gazprom said it would no longer send gas through a pipeline through Poland after Moscow sanctioned some European energy companies. The amounts of gas lost are small but raise the possibility of escalating disturbances before the cold months.

“Storage levels are currently sufficient to last through most of 2022, even if Russian flows were to stop instantly, barring unexpected weather events – but the outlook for winter 2022 supply is now much more pessimistic” said Kaushal Ramesh, principal analyst at Rystad Energy.

The level of collective gas storage in Europe is 37%, an improvement of 5% compared to the same period last year. The mild weather carried the continent through last winter.

Not all countries are in the same place on reserves. Poland has filled 84% of its storage. And not too soon. Gazprom cut off gas to Poland and Bulgaria after refusing requests for payment in roubles.

Germany’s storage is only 38%. EU law provides for sharing in the event of a crisis, but this would depend on the availability of pipelines running in the right direction, which is not always the case.

Ramesh said the recent disruptions could accelerate plans for an EU-level buyer alliance, which could use the block size to take advantage of reliable supply and stable prices from suppliers.

The “common platform” for gas purchases held a first meeting with representatives of the 27 EU Member States. The panel should coordinate the outreach of foreign suppliers and “allow, where appropriate, to move towards joint purchases”. This framework raises several questions, including how the jointly purchased gas would be distributed.

Draghi, an Italian leader and former president of the European Central Bank, also floated the idea of ​​creating cartels of buyers who would use their purchasing power to set price caps for natural gas.

The tight market “is going to mean high prices for end users in Europe for some time to come, and we’re only starting to see the beginning of that,” Huckstepp said.

High gasoline prices fuel inflation and gradually hit utility bills.

“It will definitely be an interesting winter next winter,” he added.

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More AP coverage of the war at https://apnews.com/hub/russia-ukraine