- European gas prices have soared by as much as 50% in just one week.
- The surge in prices was spurred by reduced Russian flows and an outage at a key LNG export terminal.
- Germany warned that limits to flows via the Nord Stream pipeline were a strategy from Putin to rattle the market.
Just as a lull was settling on the European gas market after the winter and the rubles-for-Russian-gas dramas ended, Moscow this week limited natural gas flows to its two biggest customers in Europe, Germany and Italy. Combined with the prolonged outage at a U.S. LNG export facility that met 2.5% of Europe’s gas demand in May, the Russian cut to flows sent European natural gas prices soaring as the threat to the security of supply returned. Europe’s natural gas prices jumped by as much as 50% in just one week, settling on Wednesday at their highest level in two months. On Wednesday alone, the spot European benchmark gas price at the Dutch hub TTF surged by 24% to 120 euros, or $125, per MWh, and gas for the 2022/2023 winter soared to 119 euro/MWh.
The reduced Russian flows and the outage at the Freeport LNG export terminal, which is not expected to return to full operations until late into this year, highlighted Europe’s vulnerable position in procuring gas and filling its gas storage sites in time to prevent a winter of rationing in a few months. The reduction of Russian gas supply also sparked renewed fears that Russia will increasingly use its gas—and Europe’s dependence on it—as a geopolitical and energy weapon against the West.
Europe’s biggest economy, Germany, the top buyer of Russian gas, warned on Wednesday that limits to flows via the Nord Stream pipeline were a strategy from Putin to rattle the market, sow uncertainty, and push up gas prices.
Analysts say that Europe now should be prepared for the increasing likelihood of “zero Russian gas” despite the fact that many customers in Europe, including in Germany and Italy, have bowed to Putin’s demand to open accounts in rubles for dealings with Gazprom.
Russia Slashes Nord Stream Gas Flows To Germany
Germany had just started to fill its natural gas storage, as all the favorable factors for faster inventory building were in place—European prices dropped for most of April and the entire month of May amid strong LNG imports, while many European companies opened accounts at Gazprombank, as demanded by Vladimir Putin, for a euro/dollar-to-rubles payments for Russian gas.
The relative calmness in the European gas market turned out to be very premature and short-lived. On Tuesday, Gazprom said it would limit gas supply via the Nord Stream pipeline to Germany by 40 percent compared to planned flows because of a delay in equipment repairs. On Wednesday, Gazprom said the cuts would deepen to 60% of the daily throughput because Siemens delayed the return of a repaired gas turbine.
Siemens Energy, for its part, said that “Due to the sanctions imposed by Canada, it is currently impossible for Siemens Energy to deliver overhauled gas turbines to the customer. Against this background we have informed the Canadian and German governments and are working on a viable solution.”
Still, German Economy Minister Robert Habeck said that the limited flows appeared to be a political decision.
“The Russian side’s argument is simply a pretext. It is obviously a strategy to unsettle and drive up prices,” Habeck said on Wednesday, as quoted by Reuters.
Gas Flows To Italy Cut, Too
While Gazprom had a readily-prepared reason for the cut to German gas supply, it didn’t give any for the 15% reduction in its gas deliveries to Italy.
Italian major Eni, which by the way has opened accounts at Gazprombank, confirmed on Wednesday that Gazprom had “communicated a limited reduction in gas supplies for today, amounting to approximately 15%.”
Italy and Germany are Russia’s two biggest customers, and Russian gas accounted for 40% of gas consumption in those countries before the war in Ukraine. Both Germany and Italy have been actively pursuing alternative supply, including by starting construction of the first LNG import terminals in the case of Germany, and securing deals for more supply with gas producers in North Africa, the Middle East, and Africa in Italy’s case.
The threat to supply in Europe returned this week, just as the EU is looking to stock up on gas and possibly avoid gas rationing for industries next winter.
EU member states are now required to reach a minimum 80% gas storage level by November 1 to protect against potential interruptions to supply. In 2023, the target will be raised to 90% full gas storage by November 1. As of June 15, gas storage in the EU was 52% full, with Germany at 56% full and Italy at 54%, according to data from Gas Infrastructure Europe.
LNG Outage Adds To Supply Concerns
Europe still has a long way to go to rebuild gas inventories to the required levels, but the pace could slow in the coming weeks amid rallying prices, limited Russian supply to the two biggest economies, and the Freeport LNG outage.
Freeport shipped 30 million cubic meters of gas a day to Europe in May, which means it met 2.5% of European demand last month, analysts at Rystad Energy told The Wall Street Journal.
There is also the upcoming annual maintenance at Nord Stream in July, which will halt supply via the pipeline to Germany for around two weeks.
All these factors could lead to a slowdown in gas inventory building in Europe. That is assuming Gazprom doesn’t notify another customer of additional supply reductions. Then storage filling could stall, further straining Russia-Europe relations.
“The industry must prepare for zero Russian gas,” Thierry Bros, a former energy analyst and a professor at the Paris Institute of Political Studies, told Bloomberg, commenting on the latest supply cuts from Gazprom.
“EU companies that accepted to twist the contract to continue to receive gas should now understand that political diktats can come anytime from the Kremlin.”