Europe Faces “Red Alert” For Gas Supply As Russia Reduces Flows

The risk of a tough winter of gas rationing for industries and another rise in energy bills for consumers in Europe only increased as Russia escalated its gas spat with the EU by cutting supplies to major customers.

The significantly lower supply from Russia since last week and the upcoming annual maintenance to Nord Stream that will completely stop deliveries through the pipeline for two weeks in July, prompting Europe to make an effort to fill its gas storage depots to sufficient levels for the winter.

It was a race against time to fill the storage to 80% even with normal Russian deliveries, but now the race continues uphill as injections into the storage will at least slow down in the coming weeks.

The gas war between Russia and Europe caused European benchmark prices to jump 50% in just a week, prompting governments in Europe to consider energy-saving measures and switch to some decommissioned coal-fired electricity capacity to conserve as much gas as possible. .

The reduced Russian flows and the outage at the Freeport LNG export terminal in the US, which not expecting to return fully operational until late this year highlighted Europe’s vulnerable position in sourcing gas and filling its gas storage sites in a timely manner to avoid a winter of rationing within a few months.

“Our product, our rules.”

Russia alleges that the reduction in gas supplies is for “technical reasons” because a gas turbine being repaired in Canada could not be returned in time due to Western sanctions against Moscow. European leaders, including the prime ministers of Germany and Italy – Russia’s main customers and those hardest hit by gas supplies – said Russia’s move to curb supplies was a political decision and that Russia’s “technical reasons were ‘lies’.

Europe did not have to wait for a response from Russia.

“Our product, our rules. We don’t play by rules we didn’t make,” Alexei Miller, Gazprom’s CEO, said last week on the gas supply to Europe.

This message added to existing concerns that Europe cannot rely on Russian supplies to fill its gas storage in time for next winter, and governments have started announcing measures to save energy and gas this summer, even if this means that shut down coal-fired power stations must be started up.

“Red Alert” for EU gas supply

Europe will face a “red alert” for gas supplies next winter, Fatih Birol, the executive director of the International Energy Agency (IEA), said last week.

“Recent disruptions to natural gas supplies, especially Russia drastically cutting flows to EU countries, will remove about 35 billion cubic meters of gas from the market this year, posing major challenges to storage replenishment efforts. This is a red warning for the EU for next winter”, Birol tweeted on Friday.

Russia is not only restricting supply via Nord Stream, it is also refusing to commit to additional capacity via Ukraine. During an auction on Monday, Gazprom did not book additional capacity to ship gas via Ukraine to Europe in July, according to results of capacity bookings cited by Bloomberg As a result, gas supplies to Europe from Russia will be low for an extended period of time and could fall further if Moscow decides to deepen supply restrictions.

Return to coal

Faced with low Russian supply, Europe is turning to coal-fired power generation in an effort to replace gas in power generation as it seeks to send gas to storage.

EU Member States are now needed to reach a gas storage level of at least 80% by November 1 to protect against possible supply interruptions. In 2023, the target will be increased to 90% full gas storage by November 1.

Related: China Could See Another Power Crisis This Summer

On June 20, gas storage in the EU was nearly 55% full, with Germany 58% and Italy 55%, according to data of Gas Infrastructure Europe.

Germany will be more dependent on electricity generation of coal to save gas and fill the gas storage by winter, Commerce Secretary Robert Habeck said this weekend.

Neighboring Austria plans to convert a reserve gas-fired power station to run on coal, while the Netherlands is ready to easing current restrictions on coal-fired power stations.

Europe’s storage fill in jeopardy

Unless Europe takes additional measures for supply and demand, this year’s stock replenishment is at risk, Wood Mackenzie said on Friday.

“In both cases, if Gazprom continues to restrict flows, storage will run out throughout the winter unless other supply or demand measures are taken, or Gazprom sends additional gas through Ukraine via the available booked capacity, although we believe this is highly unlikely.” , says Kateryna Filippenko, director. analyst, global gas research for Wood Mackenzie.

“The situation is evolving rapidly and Europe could end up in a world without Russian gas sooner than expected, so preparations must start now,” Filippenko noted.

Europe’s race to fill gas storage is pushing up European benchmark gas and LNG prices, fueling the global rise in energy prices.

By Tsvetana Paraskova for Oilprice.com

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