Analysis-In the Russia-Europe gas standoff, both sides lose


Even at the height of the Cold War, Moscow never cut the gas to Europe, but on Thursday Mr Putin signed a decree ordering foreign buyers to pay in rubles instead of euros from April 1, under hard to do without Russian supplies.

European capitals rejected the ultimatum and on Friday Kremlin spokesman Dmitry Peskov said he would not affect the regulations until the end of the month.

Although the threat of shortages comes after the peak of demand in the European winter season, Europe still has a lot to lose as its businesses and households are already reeling from record energy prices, while Moscow could cut power. one of its main sources of income.

Russia exported about 155 billion cubic meters (bcm) of gas to Europe last year, supplying more than a third of its gas supply.

Without it, Europe would have to buy more gas on the spot market where prices are already around 500% higher than last year.

Germany and Austria, both heavily dependent on Russian gas, have activated contingency plans, which include rationing if necessary, and other European countries have plans in place.

“Buyers’ refusal to comply with (Putin’s) order risks halting supplies. Both buyers and Gazprom will suffer losses as a result,” said Dmitry Polevoy, analyst at Moscow-based brokerage firm Locko-Invest. .

DASH FOR GAS

European countries will have to compete with Asia to attract additional liquefied natural gas (LNG) from Qatar or the United States, and even among themselves for alternative pipeline supplies from places like Norway and Algeria.

US LNG exporters are already big winners from Europe’s supply crisis, while Norway has also benefited.

Greece said Friday it could avoid gas supply problems if Russian flows are stopped, provided enough gas is available on the world market.

Last week, the United States said it would strive to supply 15 billion cubic meters of LNG to the European Union this year, but that would not entirely replace what Russia sends to Europe via pipelines.

As well as trying to get more out of an already stretched global gas market, several European countries have also said they will need to use more coal, potentially extend the life of nuclear power plants and increase renewable energy production.

“A disruption in Russian natural gas flows to Europe remains a tail risk. Europe has more options for alternative supplies, and with seasonally weak demand for the coming months, it is unlikely to run out of gas. supply this year,” said Norbert Rcker of Swiss private bank Julius Baer.

But this risk would increase towards the winter months, when the demand for gas usually increases.

The gas stored in Europe could be sufficient for spring and summer without a reduction in demand, but Europe is likely to enter next winter with only around 10% gas stored by the end of October without certain energy-saving measures, said Kateryna Filippenko, principal analyst at Wood Mackenzie.

To attract more LNG from elsewhere, wholesale gas prices in Europe should remain higher than the benchmark LNG price in Asia. Soaring gas prices are already hurting consumers and industries, and governments have spent billions of euros on measures to try to protect them.

“We have to be aware that companies that have signed long-term contracts with Gazprom receive gas prices that are significantly lower than what we have to pay on the LNG market. So there will be an impact on our energy prices,” EU Energy Commissioner Kadri Simson told EU lawmakers last month.

SELF SABOTAGE?

Russia is facing the loss of an important source of revenue for its internal finances.

In the first nine months of 2021, the latest available data from Russian gas producer Gazprom shows its revenue from sales to Europe, Turkey and China amounted to 2.5 trillion rubles ($31 billion). thanks to the export of 176 billion cubic meters of gas between January and September.

“For Russia, a decision to restrict supply would be like shooting itself in the foot,” said analysts at SEB Research.

If the payment mechanism is designed to support the ruble, this could also be short-lived. Prior to the invasion, the Russian central bank required that 80% of foreign currency from gas be converted into rubles. From now on, everything will have to be converted into Russian currency.

“This move will cut off Russia from a vital source of foreign currency at a time when sanctions have already significantly restricted the Russian central bank’s access to its foreign currency reserves,” Fitch Solutions analysts said.

European buyers have repeatedly called the move a breach of contract. Gazprom risks being involved in arbitration proceedings where it could be forced to pay heavy fines in the future.

Another question is what Russia can do with the gas it usually supplies Europe. The speaker of Russia’s upper house of parliament, Valentina Matviyenko, said last week that Moscow could redirect supplies to Asian markets, among other places.

However, there is no gas pipeline allowing Russia to send the gas supplied from Europe to Asia. A gas pipeline linking Russia to China sends gas from other fields that do not supply Europe and there is no interconnector to reroute these flows.

Asian markets may also be reluctant to buy more.

“You are making yourself impossible as a supplier of gas to other countries. How likely is it, for example, that China or India will choose to rely on Russian gas if Russia shows so clearly that it does not hesitate not use gas as a weapon?” said analysts at SEB Research.

Instead, Russia could be forced to pump the gas into national storage sites that can hold around 72 billion m3. Storage sites belonging to Gazprom in Europe could contain an additional 9 billion m3.

Gazprom expects domestic gas demand to rise to 260 billion m3 by 2026, from 238 billion m3 in 2020, and plans to expand storage.

But in the short term, if European gas were redirected to the existing storage, it would be full in three or four months and part of the gas production could then be stopped, which would harm long-term growth, according to analysts.

($1 = 81.5210 rubles)



Source link -88