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Russia halts Nord Stream 1 pipeline: EU Gas prices rocket

Updated: May 2, 2023

05/09/2022



Key Points

  • European gas price up about 400% on a year ago

  • EU states have triggered emergency gas plans

  • Disruptions hinder EU efforts to fill up storage

  • Russia says sanctions hinder pipeline operations

After Russia announced that one of its main gas supply pipelines to Europe will remain closed indefinitely, European gas prices skyrocketed by as much as 30% on Monday, reigniting concerns about shortages and gas rationing in the European Union this winter.


The benchmark gas price increased to as much as 272 euros per megawatt hour (MWh) when the market reopened after Russia said on Friday that the Nord Stream 1 pipeline will remain shut longer than the three days of scheduled maintenance that had been scheduled.


By 0723 GMT, the Dutch TTF October gas contract had dropped to 256 euros, up 23% on the day but nearly 400% higher than a year earlier. The price increase this year has put pressure on already-struggling households and caused several sectors to suspend output.


In retaliation for Western sanctions against Moscow over its invasion of Ukraine, Europe has accused Russia of turning energy supplies into weapons. According to Russia, sanctions have impeded pipeline operations and the West has started an economic war.


Historically, the Nord Stream pipeline, which crosses the Baltic Sea to reach Germany, provided approximately a third of the gas Russia shipped to Europe, but it was only operating at 20% of its capacity last week when flows were stopped for repair.


The amount of Russian gas delivered through Ukraine, another important route, has also decreased, forcing the EU to scramble to find substitute supplies to fill gas storage facilities for the upcoming winter. A number of states have emergency plans that might cause energy rationing and increase the likelihood of a recession.


"Supply is hard to come by, and it becomes harder and harder to replace every bit of gas that doesn't come from Russia," said Jacob Mandel, senior associate for commodities at Aurora Energy Research.


High energy costs have already driven certain energy-intensive companies, such as producers of fertiliser and aluminium, to reduce output, and they have prompted EU governments to invest billions of euros in household assistance programmes.


PREPARING FOR THE WORST


A document reviewed by Reuters revealed that the energy ministers of EU nations are scheduled to meet on September 9 to discuss measures to control skyrocketing energy prices, such as gas price ceilings and emergency credit lines for energy market participants.


Germany, the economic engine of the EU and the biggest gas consumer in Europe, has been prepared for a complete cessation of gas delivery, according to German Chancellor Olaf Scholz, who made the announcement on Sunday.


In the second stage of a three-stage emergency gas strategy, Germany is now. There would be some industry rationing in phase three.


Germany is quickly putting in place temporary liquefied natural gas (LNG) terminals to enable it to receive gas from suppliers further away in its hunt for alternative gas sources, and it plans to construct permanent LNG facilities.


Norway, a major European gas producer, has also been pumping more fuel into European markets.


"There’s plenty of scope to replace that (Russian) gas with LNG imports for now, but when the weather turns cold and demand starts to pick up in the winter in Europe and Asia, there's only so much LNG out there that Europe can import,” Mandel said.


Germany is quickly putting in place temporary liquefied natural gas (LNG) terminals to enable it to receive gas from suppliers further away in its hunt for alternative gas sources, and it plans to construct permanent LNG facilities.


Even if Germany's gas reserves were 100% full, according to Klaus Mueller, head of the country's Federal Network Agency energy regulator, they would run out in two and a half months if Russian gas flows were totally stopped.


Germany's storage facilities are now about 85% full, while facilities across Europe hit an 80% target last week. Although Russian gas has still flowed to Europe via Ukraine, albeit at reduced levels, analysts said those supplies could also become a casualty of the conflict.


"We're shifting focus to the (gas) ... that continues to flow to Europe through Ukraine," James Huckstepp, EMEA gas analyst at S&P Global Platts, said in a Twitter post, adding it was "only a matter of time..." before those faced disruptions.





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