EXPLAINER-Why Russian exports drive European gas prices

by Reuters
Friday, 21 January 2022 10:29 GMT

By Susanna Twidale

LONDON, Jan 21 (Reuters) - Escalating tensions on the Russia Ukraine border have led U.S. President Biden and other Western leaders to threaten severe economic sanctions on Russia if it attacks Ukraine https://www.reuters.com/world/blinken-arrives-berlin-ukraine-talks-with-european-allies-2022-01-20.

As part of possible measures, Germany has said it could halt https://www.reuters.com/world/europe/germany-signals-it-could-halt-gas-pipeline-if-russia-invades-ukraine-2022-01-18 the new Nord Stream 2 gas pipeline from Russia that was expected to increase gas imports to the bloc, underlining Europe's energy dependence on Russia.

Below outlines why Russia has such an impact https://www.reuters.com/business/energy/gazprom-fails-book-more-gas-transit-europe-despite-kremlin-reassurance-2021-11-02 on Europe's gas markets, even in countries that Russia does not supply directly.

HOW MUCH GAS DOES RUSSIA SUPPLY?

Europe relies on Russia for around 35% of its natural gas. The bulk comes through pipelines including Yamal, which crosses Belarus and Poland to Germany, Nord Stream 1, which goes directly to Germany, and pipelines through Ukraine.

Europe's internal gas markets are linked by a network of interconnecting pipelines. Not all countries get supply directly from Russia, but if countries such as Germany, the biggest consumer of Russian gas, receive less from Russia they must replace this from elsewhere, for instance, Norway.

That has a knock-on effect on how much gas is available from other sources for other countries, and for transit.

News about Russia triggers just as much volatility in British gas prices as in those in continental Europe, even though Britain typically gets only around 5% of its gas from Russia. Lower overall Russian supply to Europe means less could be available from its largest supplier Norway.

Europe's energy chief says European countries have enough gas to meet their needs over the peak demand winter season to the end of March. The issue is how much they will need to pay.

Several European countries have already pumped billions into measures to shield households from record high gas prices, which have in turned pushed up electricity costs.

WHAT HAS HAPPENED TO RUSSIAN SUPPLY?

In 2020 volumes of gas from Russia fell in response to lower economic output as lockdowns designed to limit the spread of the coronavirus led to a slump in demand. When economies recovered last year, supplies to Europe failed to increase to match the rise in consumption.

Flows in 2021 through Russia's three main pipelines to Europe totalled 37,409 gigawatt hours/day (GWh/d) Refinitiv Eikon data showed, down from 41,263 GWh/d in 2020 and 49,431 GWh/d in 2019.

Gas supplies via the Yamal-Europe pipeline, which typically sends Russian gas west into Europe, have run in reverse, with flows going from Germany to Poland, for more than the last 30 days.

WHAT DOES RUSSIA SAY?

Gazprom has said it is fulfilling all its long-term contracts, and European companies contacted by Reuters confirmed contractual obligations had been met.

Russia prefers long-term gas contracts, which can last for several years, to the short-term spot market, which is based on one-off purchases. This is a way of ensuring it can retain market share and secure a consistent price, especially when Europe has said it is seeking new sources of gas.

Russian President Vladimir Putin said Europe's gas crisis is partly of its own making because of the shift to short-term spot deals.

WHAT IMPACT DOES RUSSIA HAVE ON PRICES?

Less Russian gas has been available on the spot, day-to-day market, exacerbating the overall supply crunch in Europe.

Any significant changes in expectations of flows through the main Russian-EU pipelines or political declarations from Russia can have a major impact on daily EU gas prices.

European benchmark gas prices hit a record 155 euros per megawatt hour (MWh) on Oct. 6, but plummeted the same day after Putin said Russia would send more gas to Europe, closing 26% down from the high at 114 euros/MWh.

WHAT ABOUT NORD STREAM 2?

Russia has said Nord Stream 2, which could double Moscow's annual gas export capacity in the Baltic, could provide relief to the European gas market.

The pipeline has divided opinion as some European countries complain it will only increase Europe's energy dependency on Russia. Some European lawmakers have said Russia deliberately reduced flows to Europe to stoke demand for the project and smooth its progress.

The route, which runs in parallel to the existing Nord Stream pipeline, will double annual export capacity to 110 billion cubic metres, around half of Russia's total gas exports to Europe a year.

Although construction has been completed, flows through Nord Stream 2 cannot start until German authorities give their approval.

Should the pipeline not go ahead for political reasons, longer term fears over Europe's gas supplies are likely to send prices soaring, analysts have said.

WHAT ABOUT OTHER SOURCES?

Globally there has been a scramble for gas supplies, which particularly in Asia sent prices soaring last year. That made it harder for Europe to attract international liquefied natural gas (LNG) cargoes that are often directed to whichever region is willing to pay the most.

Typically gas storage sites are replenished in the summer when demand and prices are lower, but months of consistently high prices meant less gas was sent to storage sites and owners with gas in storage tended to keep it in case demand and prices rise even more. The result is Europe has lower stocks than usual.

All these factors led benchmark European gas prices to rise more than 300% year-on-year from the end of 2020 to the start of 2021.

Although LNG prices have fallen in Asia, it is unlikely more LNG supply to Europe could make up for a shortfall from Russia. U.S. LNG terminals are operating at full capacity and Russia itself accounts for around a fifth of Europe's LNG imports.

(Reporting by Susanna Twidale; Editing by Veronica Brown, David Holmes and Barbara Lewis)

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