An interruption in the flow of Russian gas to Europe this year is suddenly too easy to imagine.
Europe’s natural gas supply looks much less secure than it did a few weeks ago. Last month, Moscow announced it would end deliveries to Poland and Bulgaria, and the stakes rose further this week, after Ukraine’s gas transport operator announced it would stop transporting gas. Russian gas through a key part of the country’s network. This prompted Moscow to sanction 31 European energy companies.
Liquefied natural gas, or LNG, is Europe’s main fuel source, and prices at the Dutch hub in Europe have been choppy. The benchmark jumped 13% on Thursday as traders rushed to assess the likely effect of new Russian sanctions, before pulling back slightly early on Friday. German Economy Minister Robert Habeck said on Thursday the sanctions would cut around 3% of the country’s Russian gas supplies, which he said could come from other suppliers.
Despite the volatility, the market may not have fully cooked even with a moderate supply disruption. The European LNG benchmark peaked at 227 euros per megawatt hour, or about $236, shortly after Russia invaded Ukraine. It has more than halved since, although prices remain well above pre-pandemic levels.
Some might dismiss this week’s drama as a saber rattle: Russia and Europe remain energy interdependent, and gas has flowed through all sorts of regional conflicts. With the loss of confidence, however, there are now real supply risks. A disruption of Russian gas flows to Europe has been the base case for think tank Eurasia Group, according to analyst Henning Gloystein.
There are physical risks. Ukraine is home to the infrastructure that carried around a third of Europe’s Russian gas imports in the last three months of 2021, as well as some pipelines. As Russian forces have refocused on southeastern Ukraine, missile strikes continue across the country. There is a good chance that some energy infrastructure will be affected, intentionally or accidentally. Hostilities would make repairs tricky, especially since Ukrainian transportation companies and Russian energy producers had acrimonious relations long before the invasion.
The policy could also cause a supply disruption. The initial sanctions did prevent European energy flows, but this is no longer the case. The United States has banned Russian oil purchases and the European Union is finalizing a similar embargo. Those sanctions, or other developments like Finland or Sweden seeking to join NATO, could prompt Moscow to retaliate by cutting off gas to more European countries. Kyiv could also be tempted to stop the flows that help finance the invading Russian forces.
To replace Russian gas, Europe would have to buy all of the LNG spot market, Shellit is
the chief executive said last week. Although technically possible, this is not realistic. Any major disruption in supply would therefore create shortages. A scenario where Russia completely cuts off energy exports to Europe, including gas, would likely lead to extreme prices, a sharp reduction in demand and possibly even power rationing, although blackouts can still be avoided, says Fabian Rønningen of Rystad Energy.
Rystad estimates that current European storage levels would last for most of 2022, barring unexpected weather events. But the outlook for next winter is bleaker. Germany is the most dependent on Russian gas, although estimates of the economic impact of its loss vary widely, ranging from less than 1% of German economic output to 12%, in an analysis that included second-hand effects order.
Pipeline diplomacy has kept Russian gas flowing in Western Europe for decades, but the reasons to think this time is different keep coming.
Write to Rochelle Toplensky at [email protected]
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