Throughout the Cold War and in the decades that followed, Russia was a stable supplier of gas to Europe. That changed this week.
Russia has cut gas supplies in apparent retaliation for Europe’s support for Kyiv. After its biggest moves yet to use energy as a weapon, gas rationing in the region is now a very real prospect.
The pressure has caused prices to spike, added strain on the region’s economy and could strain European solidarity – all victories for the Kremlin that came as European leaders stressed their support for Ukraine during a highly publicized trip to the country.
As European utilities are forced to tap reserves to cover winter needs, government controls on gas distribution could begin within months. If Russia completely shuts down its main link, the region could run out of supplies by January, according to consultant Wood Mackenzie Ltd.
“It’s a serious situation, a tense situation,” German Economy Minister Robert Habeck said in an interview with ARD television on Thursday. “It’s a showdown between Western allies and Russia.”
The heightened alarm was triggered after the Kremlin cut flows by around 60% through the Nord Stream gas pipeline, which pumps gas directly to Germany. The decrease in deliveries had a knock-on effect on France, Austria and the Czech Republic.
Germany’s Uniper SE, the largest buyer of Russian gas in Europe, receives 60% less gas than the quantity ordered. On Friday, Italy’s Eni SpA only received half of the volumes requested by state-owned Gazprom PJSC, and France’s Engie SA and Austria’s OMV AG were also affected.
President Vladimir Putin has upended decades of reliable energy relations by gradually cutting supplies in small steps since the war began in late February, then accelerated moves this week.
“This further reduction aims to make stock-filling difficult at the EU level and to test the fragile unity of the EU,” said Thierry Bros, a professor at the Paris Institute of Political Studies. “This will continue until the tap is fully closed.”
Propelled by tensions, natural gas prices in Europe jumped about 50% to reach the biggest weekly gain since the start of the Russian war in Ukraine. The region has little alternative to Russian pipelines, especially during the critical winter months. There is little available capacity in Norway and the Netherlands, and liquefied natural gas shipments are expected to tighten.
China, the world’s top LNG importer in 2021, has cut spot purchases this year after COVID-19 restrictions sapped demand. But usage is expected to rebound this winter, pitting China against Europe for a dwindling amount of reserve LNG. Repairs to a key Texas export terminal will further hamper supplies.
The European Commission on Friday recommended that Ukraine be granted candidate status, a day after German Chancellor Olaf Scholz, French President Emmanuel Macron and Italian Prime Minister Mario Draghi visited Kyiv and pledged their support to effort.
Even in the middle of the support demo, gas was an issue. After meeting Ukrainian President Volodymyr Zelenskyy, Draghi accused Russia of “lies” in blaming technical maintenance for inferior Nord Stream deliveries. Italy could trigger an emergency gas plan as early as next week if Russia continues to limit supplies, a move that could mean greater reliance on dirtier fuels.
Germany, which is in the first tier of its own three-stage crisis plan, is considering a series of options to reduce demand, such as allowing homeowners to reduce heating in winter and setting up a platform for auctions allowing companies to sell their consumption rights. Europe’s biggest economy, which depends on Russia for more than a third of its supplies, called for solidarity and urged people to save energy to thwart Putin.
“It all depends on the EU gas sharing mechanism between countries and regulatory decisions on how to share available gas within countries,” said Jonathan Stern, a senior researcher at the Oxford Institute for Energy Studies. “A cold, windless early winter would create early problems.”
In Germany, the network regulator, known as BNetzA, would implement rationing if the government declared a national gas emergency. The Bonn-based agency said leisure venues would likely see cuts, while consumers and essential public services such as hospitals would be protected. Businesses could face disruption.
“The current cuts in Russian gas deliveries can put us all – consumers and industry – in a very serious situation,” Klaus Mueller, the head of BNetzA, said on Twitter. “While we can, we need to avoid this through gas savings and storage.”
The squeeze will irritate economic policymakers as they try to contain record inflation. A further rise in energy costs risks undermining the European Central Bank’s efforts to rein in price increases by starting to raise interest rates next month.
Concerns about economic growth are also increasing. Consumers are squeezed by the rising cost of living, and the prospect of energy rationing and rising gas bills could further shake confidence. For Germany’s oversized manufacturing sector, the problem exacerbates the input shortages that have plagued it.
In an effort to respond, Group of Seven officials are laying the groundwork for leaders to possibly discuss introducing a price cap on energy imports from Russia, according to people familiar with the matter.
Top negotiators from G-7 member states explored the mechanism as part of preparations for a summit in the Bavarian Alps later this month, said the people, who asked not to be identified when speaking about private conversations.
While Europe has moved to ban imports of Russian coal and oil, gas has been harder to replace due to supply relationships that have been built over decades.
“Even taking countermeasures into account, it could be unavoidable that some demand rationing has to take place,” said Massimo Di Odoardo, vice president of gas research at Wood Mackenzie.
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