Explained: Russia has cut gas supplies to Europe; what happens now?

European leaders and companies are sweating with fear that Russia’s manipulation of the natural gas supply will lead to an economic and political crisis next winter or perhaps sooner. Here are important things to know about the energy pressure game during the Ukraine war.

What happened?

Russia last week cut gas supplies to five European Union (EU) countries, including Germany, the bloc’s largest economy that relies heavily on Moscow’s gas for electricity generation and the energy industry.

Russian state energy company Gazprom has cut supplies by 60% through the Nord Stream 1 pipeline that runs under the Baltic Sea from Russia to Germany, Europe’s main natural gas pipeline. Italy sees its offer halved. Austria, the Czech Republic and Slovakia have also had to deal with supplies.

This is in addition to the gas cut-offs to Poland, Bulgaria, Denmark, Finland, France and the Netherlands in recent weeks. Those shutdowns were initially seen as less of a problem, as Poland, for example, was already phasing out Russian gas by the end of the year, while others had alternative supplies.

However, the latest austerity measures affect countries that are large economies and use a lot of Russian natural gas. Germany is dependent on Russia for 35% of its gas imports; Italy for 40%. At present, the gas supply is sufficient for current needs.

So why are the cuts a concern?

Europe is struggling to fill its underground gas storage for the winter. Gas companies operate at a regular pace, replenishing reserves in the summer when they can hopefully buy cheaper gas, and using it up in the winter when demand for heating rises. The reductions make refilling the storage more expensive and more difficult to achieve.

The move has also brought closer the specter of a complete Russian gas shutdown that would make it impossible for Europe to get all the fuel it needs for the winter. Natural gas is used by several energy-intensive industries, such as glassblowers and steelmakers, which are already experiencing increased costs and reversal of use, helping to slow down the European economy.

For electricity production, gas is the “swinging” energy source that kicks in when renewables such as wind and solar generate less power due to unpredictable weather, and when electricity consumption peaks during cold or warm weather, such as last weekend’s heat wave that caused record highs in Europe.

At present, Europe’s underground storage caverns are 57% full. The latest proposal from the European Commission is that each country must reach 80% by November 1. Germany has set targets of 80% by October 1 and 90% by November 1.

Analysts at the Brussels think tank Bruegel warn that “Bulgaria, Hungary and Romania will not meet the EU target of 80% if they continue at the current pace”, while “Germany, Austria and Slovakia will find it very difficult to upgrade their storage facilities as the gas flows from Russia are stopped.”

What is being done about this situation?

The EU, which got about 40% of its gas from Russia before the war, has outlined plans to cut imports by two-thirds by the end of the year and to phase out Russian gas completely by 2027. The bloc has already said it will block Russian coal from August, and most Russian oil in six months.

The goal is to reduce the $850 million a day that Russia has benefited from its oil and gas sales to Europe to avoid financing its war in Ukraine.
European governments and utilities have bought expensive liquefied natural gas, or LNG, from the United States which is delivered by ship, as opposed to pipeline gas from Russia, which tends to be cheaper. But the war has pushed energy prices up, fueling record inflation in Europe and keeping Russia’s income high.

Efforts are underway to get more pipeline gas from Norway and Azerbaijan, while accelerated renewable energy deployment and savings are expected to play a smaller role. Germany, which has no LNG import terminals, is bringing in four floating terminals, two of which should be operational this year.

Despite a focus on renewable energy, the crisis is forcing countries back to fossil fuels. Germany is rushing through legislation to restart coal-fired power plants as a temporary patch, despite plans to phase out coal completely by 2030.

Vice Chancellor Robert Habeck said it was “bitter” to switch to coal, but that it was “a necessity in this situation”. The government is planning measures to encourage industry and utilities to use less natural gas. Habeck also urged the Germans to conserve energy.

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“Gas consumption needs to be further reduced so that more gas can be stored, otherwise it will be cramped in the winter,” he said.
The Dutch government says it will run coal-fired power stations back to full capacity to conserve natural gas that would otherwise be burned to produce electricity.

Despite all these measures, gas security in Europe is vulnerable. Liquid gas export terminals in energy-producing countries like the US and Qatar are running at full capacity, meaning Europe is bidding against Asia for finite supplies.

What exactly is Russia involved in?

Gazprom says it had to cut flows to Europe via Nord Stream 1 because Western sanctions left a key piece of equipment stranded in Canada, where it had been taken for maintenance. European governments do not accept it and call the gas reduction political.

Gazprom’s moves have pushed natural gas prices up sharply after falling in the wake of the winter heating season. That increases revenues for Russia at a time when it is under pressure from Western economic sanctions and increases the pressure on Europe as it gives Ukraine political and military support.

Gazprom’s measures can also be seen as a pushback on Western sanctions and as a deterrent to the imposition of further sanctions. And larger gas users have been advised that, like smaller ones, they are not exempt from a potential shutdown.

Germany and Italy saw their supplies dwindle around the time their leaders joined French President Emmanuel Macron in Kiev to meet President Volodymyr Zelenskyy and support EU candidate status for Ukraine.

Does all this mean that Europeans could see the lights go out or freeze this winter?

That is unlikely as EU law requires governments to ration gas supplies to industry, thus sparing homes, schools and hospitals. Countries that are short of gas can also ask for help from others who may be better off, but that depends on adequate pipeline connections.
The flip side of rationing would be industrial cuts and shutdowns that could cost jobs and growth in an economy already squeezed by high inflation and fears of a global slowdown if central banks raise interest rates.

Meanwhile, a full shutdown could push gas prices to their record $206 per megawatt hour from March 7, fueling further inflation. In early 2021, before Russia mustered troops on the border with Ukraine, spot gas cost about $19 per megawatt hour.

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