How important is Russia’s gas for Europe
Marco Giuli's analysis for Affarinternazionali
Natural gas prices in Europe have reached unprecedented levels in recent weeks. The Dutch Ttf index – European reference for spot gas markets – exceeded 50 euros / MWh in September, after having fluctuated between 5 and 30 euros / MWh in the last decade. This dynamic foreshadows risks for European energy security in the coming winter and for the prospects for post-Covid recovery.
Several factors contributed to the recent price rally. First, a resurgence in global demand for liquefied natural gas (LNG) – particularly in East Asia and Latin America -, combined with various supply bottlenecks, has fostered global price increases. In a gas market that is increasingly globalized and no longer regionally fragmented by the rigid geography of gas pipelines, Europe must now pursue (and exceed) Asian prices to secure supplies.
Second, European demand remained unusually strong during the summer, due to the long previous winter which significantly reduced stocks and imposed the need for their replenishment. Third, the steady rise in emission prices in Europe – from 30 to 60 EUR / tCO2e between January and September – has favored the increase in demand for gas in electricity generation compared to that for coal. Fourth, European buyers have avoided renegotiating long-term contracts, given the uncertainty about possible new restrictions for Covid, the convenience of spot contracts over the past decade, and not least a framework of climatic ambitions that have made prospects particularly uncertain. of gas for the next few decades. This preference for spot markets allows flexibility on volumes, at the price of greater exposure to the risks of the global market.
Finally, the Russia factor weighed. Gazprom is refusing to inject additional quantities of gas into the spot markets beyond those due to long-term contractual obligations. A policy of supply contraction to which various reasons are attributed: to exert pressure to remove the last obstacles (now mainly bureaucratic) to the implementation of the disputed Nord Stream 2 gas pipeline , the only route through which Russia intends to make additional quantities available of gas; a reduction in capacity due to scheduled maintenance and an accident at the Novyj Urengoj gas site, which reduced the flows in the Jamal'-Europa gas pipeline to Poland and Germany by a third; finally, the need to re-supply domestic storage.
For the future, the picture remains uncertain. On the other hand, the EU instruments for energy security , designed for interruptions of individual infrastructures or suppliers, can do very little, but not to address shortcomings in global markets. Europeans can therefore hope for Russia and a mild winter, or agree to see prices rise further to steal gas from Asian markets. In the medium term, the picture appears complex. On the one hand, Chinese and Indian plans to increase LNG import capacity (nearly 27 bcm in addition to the current 141 bcm) could mean further upward pressure, while it is unclear whether Japan – the world's largest LNG importer – will pursue the transition from gas to nuclear power announced by outgoing Prime Minister Suga by 2030, reducing the priority demand for gas over the next decade. On the supply side, further LNG export capacity is expected from Qatar, Russia and the United States, which could add up to 160 bcm in total over this decade, equal to around 20% of LNG traded in 2019.
From a strategic point of view, the gas rally brings to the center of attention the issue of energy security in Euro-Russian relations , deprioritized by the European agenda in recent years thanks to the combination of regulatory interventions and benign market conditions. Paradoxically, the EU's approach to the gas market could come under fire by some states for current risks – in particular, the Commission's preference for spot markets as an alternative to long-term contracts, seen by Brussels as elements of fragmentation of the internal market and anti-competitive conduct.
From the current situation, Russia is gaining short-term benefits, especially on a symbolic level. After years of LNG oversupply and regulatory and infrastructural adjustment had brought the asymmetry in Euro-Russian energy interdependence in favor of Europe, Russia is once again an indispensable partner. Moscow intends to show European consumers that Nord Stream 2 would offer the possibility of mitigating European exposure to the risks of global markets, taking revenge on the political hostility and regulatory obstacles posed by the Commission towards the Russian-German gas pipeline. However, fewer advantages for Russia can be seen in the long term: if gas appears to Europeans as necessary as never before, it also appears less reliable and more expensive than a short time ago. A risky context for exporters, at a time when Europe seems less and less inclined to favor this resource. Furthermore, the current market situation justifies the emergence of new liquefaction capacity and therefore greater competition in the coming years.
From the point of view of the EU's climate objectives, a lot depends on the duration of the high price phase. A protracted super gas cycle could have contradictory effects. On the one hand, in a market characterized by excess demand, Europeans have less room to discriminate against their gas imports on the basis of environmental criteria – such as the French moratorium on US gas imports – or to extend measures such as the green duty (CBAM) proposed by the Commission. Furthermore, already with prices at current levels, an emissions price of around 100 euros / tCO2e would be needed to encourage the transition from coal to gas. On the other hand, with an expensive and unreliable gas it becomes reasonable to accelerate the timing of the energy transition also from the point of view of the individual choices of consumers, who could move more quickly efficiency solutions and available alternatives. In short, the present crisis would give a further blow to the image of "transition fuel" that the industry has tried to build in the last decade and that the European Green Deal seems less and less inclined to recognize.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/russia-gas-naturale-europa/ on Sat, 18 Sep 2021 06:00:54 +0000.