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It is not the summer heat that has made European leaders and business leaders sweat.
It is feared that Russia’s manipulation of the natural gas supply will lead to an economic and political crisis during the winter season. The consequences can be felt even faster, if suddenly Russia completely cuts off the supply.
In the following, we are listing some of the main aspects that we need to know regarding the energy pressure game due to the war in Ukraine.
WHAT HAPPENED?
European Commission President Ursula von der Leyen warned on Wednesday that countries and the economy must prepare in case Russia completely cuts off its already limited supply of natural gas. Fears are already growing that the Nord Stream 1 pipeline, which connects Russia to Germany, passing under the Baltic Sea, will not resume work after it is shut down this month for previously scheduled maintenance procedures.
Russia has already cut gas supplies to around a dozen EU countries, including Germany, which is the union’s largest economy and relies heavily on energy from Russia to generate electricity and supply its sectors. industrial. The restrictions have sparked accusations from business and political leaders that Russia is punishing Europe for its support of Ukraine, which Russia has been attacking militarily for four months.
Russian state-owned energy giant Gazprom has cut 60% supply through the Nord Stream 1 pipeline, which runs from Russia, runs under the Baltic Sea, and reaches Germany, serving as Europe’s main source of natural gas. The supply to Italy has been halved. Germany relies on Russia to provide 35% of its gas imports and Italy 40%.
WHY ARE RESTRICTIONS A CONCERN?
Europe is scrambling to fill underground gas storage before winter arrives. Gas companies fill their tanks in the summer, as they can buy cheaper gas, which they put into use during the winter when demand increases. The current restrictions will make it more difficult and expensive to create reserves.
The decline in energy supplies has brought closer the possibility of a complete gas cutoff from Russia, which would make it impossible for Europe to secure all the fuel it needs for the winter. Natural gas is used by several energy-intensive industrial sectors, which are already facing higher costs. This has forced them to reduce consumption, which has contributed to the slowdown of the European economy.
Currently, Europe’s underground deposits are filled to the level of about 60%. The European Commission’s latest proposal aims for each country to reach the 80% level by November 1.
Economists Holger Schmieding and Salomon Fiedler, with Berenberg bank, say that if Russia does not resume supplies via the Nord Stream 1 pipeline after July 24, the EU “would face empty tanks before the end of winter. In order to take the measures, it will be necessary to set gas consumption rations in advance”.
Among others, a fire at an export terminal in the Texas city of Freeport blocked a fifth of US export capacity for several months, causing another strain on the gas market. Most of the exports from this terminal had Europe as its epicenter, says the research firm “Rystad Energy”.
HOW IS IT WORKING?
The European Union, which provided about 40% of gas imports from Russia before the war, has unveiled plans to cut imports by two-thirds by the end of the year and to eliminate the use of Russian gas entirely by 2027.
The EU has also said that, starting in August, it will cut off imports of Russian coal and, in six months, the vast majority of oil. The purpose of the blockade is to reduce the profits that Russia provides, which were estimated at 850 million dollars a day from the sale of oil and gas, before the start of the aggression.
To replace dwindling Russian imports, European governments and supplier companies have been buying liquefied natural gas, LNG, from the United States. This type of gas, LNG, is expensive as it is shipped by tanker, compared to Russian gas that is shipped by pipeline and usually costs less.
But the war has driven up energy prices, fueling record levels of inflation in Europe while helping to maintain a stable source of income for Russia.
Europe is continuing its efforts to secure greater gas flows from the pipelines of Norway and Azerbaijan, while conservation and the rapid spread of renewable energy will play a minor role.
Germany, which has no import terminals for LNG fuel, is deploying four plug-in terminals, two of which are expected to be commissioned this year.
Despite the focus on renewable energy, the crisis is pushing countries back to fossil fuels.
Germany is rushing to pass laws to restart coal-fired power plants as a temporary measure, despite plans to phase out coal entirely by 2030. The German government has urged people to conserve energy.
The Dutch government says it will allow full operation of coal-fired power plants in order to conserve natural gas, which would be used for power generation. Despite the measures, gas security in Europe is fragile.
LNG export terminals in producing countries such as the United States and Qatar are operating at full capacity, meaning Europe is competing with Asia for supplies.
On Wednesday, the European Parliament approved a proposal to designate natural gas as environmentally friendly energy, sparking outrage among environmentalists and making it easier for private investors to inject money into gas-related projects.
RUSSIAN GAME
Russia’s Gazprom says it had to cut shipments to Europe through the Nord Stream 1 pipeline because Western sanctions blocked an important piece of equipment in Canada that had been sent for overhaul. European governments do not accept this as a reason and say that the decrease in shipments has a political background.
The measures taken by Gazprom have significantly increased the prices of natural gas after they fell with the start of the summer season and preparations for winter. This has increased revenues for Russia, at a time when it is under pressure from Western economic sanctions, and added stress on Europe, which is supporting Ukraine politically and militarily.
Gazprom’s maneuvers can also be seen as a response to Western sanctions aimed at preventing the imposition of further sanctions. Larger gas users have also been notified that, like smaller users, they will not be exempt from a possible gas cut.
Germany and Italy faced a reduction in supplies around the time their leaders, along with French President Emmanuel Macron, met in Kiev with President Volodymyr Zelenskyy and supported Ukraine’s EU candidate status.
“The reduction in the amount of gas coming from Nord Stream 1 to Europe is clearly an attempt by Putin to hinder Europe’s efforts to secure gas reserves during the summer period“, says Tim Ash, market expert at BlueBay Asset Management.
The questions that are asked are: Will Europeans face the loss of lights or will they “freeze” from the cold this winter?
This is unlikely to happen because European Union laws make it mandatory for governments to rationalize gas supplies to industry in order to save on powering homes, schools and hospitals. Also, those countries that have a shortage of gas can ask for help from others that may be in better condition, but this depends on the connections they have with pipelines for its transportation.
The negative side of the rationed use of gas would be the reduction of work in industry and for this reason the reduction of jobs or the reduction of economic growth at a time when countries are facing major problems from high inflation. Such a situation could lead to a recession.
Meanwhile, a complete cutoff of gas could lead to an even greater increase in prices and inflation. If that happens, gas prices would go to the record high of 206 euros per megawatt hour that was recorded on March 7. At the beginning of 2021, before Russia deployed troops to the border with Ukraine, gas in the country cost around 19 euros per megawatt hour./VOA
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