An EU-wide plan is needed to cope
“Social peace in Germany is being challenged,” declared Robert Habeck, Germany’s vice-chancellor, on July 7th. The villain: natural-gas prices. Russia is throttling Europe’s supplies in revenge for its support for Ukraine. In Germany, which relies on Russia for around one-third of its natural-gas imports, energy bills are expected to rise dramatically. Gas prices will cause firms huge losses; ultimately, Mr Habeck fears, they could trigger a financial meltdown. Germany’s parliament has just passed an energy-security law that lets the government bail out firms hit by the energy shock. The ultimate threat—a complete Russian cut-off—looks ever more plausible.
Gazprom, Russia’s state-controlled gas goliath, has been squeezing the Europeans for months. s&p Global, a research firm, reckons that in June Russia piped just 4.7bn cubic metres (bcm) to Europe, barely a third of the level in early 2021. The biggest gas flows come via Nord Stream 1 (ns1), which links Russia to Germany via the Baltic sea. (Nord Stream 2, a new pipeline on the same route, was denied approval by Germany as punishment for Russia’s aggression.)
Now Russia is squeezing even harder. On June 16th it slashed exports via ns1 to 40% of capacity, citing technical snags. Big European buyers such as Italy’s Eni, Austria’s omv and Germany’s Uniper were hit hard: they must make up the shortfall by buying pricey gas on the spot market. Uniper, which is losing some €30m ($30.5m) a day by one reckoning, is now in line for a bail-out.
On the morning of July 11th Russia shut down all gas exports via ns1 for about ten days of maintenance. A vital turbine does need fixing, and Siemens Energy, its manufacturer, had shipped it to Canada for repair. But because of Canadian sanctions, it was reluctant to send the turbine back to Russia. Mr Habeck urged Canada to release the kit to Germany, sidestepping the sanctions, to “take this turbine excuse away from Putin”. On July 9th Canada relented.
Jonathan Stern of the Oxford Institute for Energy Studies, a think-tank, thinks Mr Putin is delighted by the row, which makes sanctions look counter-productive. Now that the West has backed down, he thinks, Mr Putin will resume some of the gas flows on ns1 and Europe will get a reprieve. But Mr Putin may then use the gas weapon as the weather grows colder, at a moment of maximum leverage. “My expectation is that the Russians will make the Europeans pay this winter,” says one Big Oil boss.
Preparing for the shock
The European Commission wants to organise an eu response to such a nightmare, not least to avoid the sort of beggar-thy-neighbour policies which member states initially pursued when covid hit. “We need to make sure that in case of full disruption, the gas flows towards where it’s needed most,” said Ursula von der Leyen, president of the commission, on July 6th. The commission’s plan should be announced by July 20th. A ministerial summit on energy security is being planned later this month.
Europe’s response has four pillars: boosting gas-storage levels, diversifying energy sources, encouraging demand reduction and rationing. The most important is boosting storage. Last year many firms refused to buy gas at prices inflated by Russian manipulation. Levels in storage tanks remained precariously low, but Europe was saved by mild weather. This year, a plan passed by the eu in June mandates a minimum 80% fill rate in gas storage by November 1st, rising to 90% in future years. Member states that lack gas storage must keep at least 15% of their annual consumption in facilities in other countries.
The good news is that the eu’s tanks are now almost 60% full, with about 60bcm stored, up from some 50bcm a year ago. Before the shutdown of ns1, Michael Stoppard of ihs Markit, a research firm, reckons the eu was on track to “reach and exceed” the goal of an 80% fill rate by November 1st. Fresh modelling done by a group of German think-tanks led by the Kiel Institute suggests that Germany could cope this winter even if Russia cut off all gas in July. In April, when less was in storage, it thought this impossible.
But not all countries have stored gas equally. Those at or below 50% today (Bulgaria, Romania and Hungary are laggards) would suffer badly in a cut-off, and all would suffer if winter is abnormally cold. Mr Stoppard reckons that a cold winter could add up to 25bcm of extra demand. Even countries that scrape by this winter would be in a terrible position come spring.
As for alternative energy supplies, liquefied natural gas (lng) imports have surged dramatically. High European prices have lured tankers away from Asia. Morgan Stanley, a bank, estimates some 41bcm of lng entered Europe in the first quarter, up 70% year on year. Nearly 30% of the world’s exported lng has gone to Europe lately, up from below 20% in 2021.
Whether this can be sustained is an open question. Europe has already sucked up so much of the world’s lng that can be redirected away from Asia that there is now not enough left to cover a complete Russian cut-off—especially if China’s economy recovers from its covid lockdowns. Meanwhile, lng cannot reach Germany directly because it has no regasification facilities. It has acquired floating regasification ships for which Mr Habeck’s government is fast-tracking approval. But they are unlikely to be up and running till early 2023, reckons Jaime Concha of Energy Intelligence Group, an industry publisher. Ironically, in the three months after the invasion, some 15% of the lng entering Europe to replace piped Russian gas also came from Russia, notes Mr Stoppard. He estimates Russia has earned nearly $400m a day of late from sales of piped and frozen gas to Europe.
The eu’s medium-term plan is to scale up wind, solar and green hydrogen to more than replace Russian imports. But that will help little if the gas is cut off in a few weeks. To the chagrin of greens, filthy coal is on hand now. With Eurocrats’ blessing, member states including the Netherlands and Germany are issuing environmental waivers for coal plants to crank out more power.
Then comes demand response. High gas prices have already cut some demand. Leslie Palti-Guzman of Leviaton, an energy-data firm, estimates that industrial consumption in Europe has dropped by 20bcm in the past few months. German industry, which depends on cheap gas and accounts for 37% of the country’s total use, will be hit hard, she thinks. Simon Müller of Agora Energiewende, a German think-tank, wishes his government had got serious about conservation back in March. Subsidising firms struggling with high prices, a policy recently blessed by the commission despite rules on state aid, creates a perverse incentive to continue using gas, he notes.
Finally there is rationing of energy. Germany talks openly about this dread prospect, but most countries have shunned it. Now the commission is preparing a “crisis-management framework”. Plans already exist for helping neighbours in a brief emergency, but not for one that could be region-wide and last for months. One proposal would have the commission co-ordinate gas-demand reductions in all member states. Beyond protecting hospitals and grannies, different countries have different priorities; one might refuse to send its gas to help a neighbour meet needs it does not consider urgent. Without a harmonised scheme, says one insider, “we’ll have a complete halt of a single market within a few months.”
The pain of rationing may not be equally shared, worries Agata Loskot-Strachota of the osw Centre for Eastern Studies, a Polish think-tank. Poland never trusted Russia, so it started to diversify away from Gazprom’s gas early on. But other countries in eastern Europe were slower to kick the habit, and will be hit harder by a shock. Ms Loskot-Strachota’s nightmare is a resurgence of energy nationalism, protectionism and distrust of neighbouring countries and European institutions.
Xi Nan of Rystad Energy, a research firm, agrees. The commission’s attempts at co-ordination will be undercut by a chaotic market response, she worries. For example, some European countries and companies refused Russia’s demand to be paid in roubles for energy exports, but others caved in. Europe does not have an integrated gas market; every country has its own policies. These are likely to diverge if gas is cut off, she reckons, and a Lehman-style crisis is not impossible.
Liberalisation of energy has been one of the great achievements of the eu’s common market. Now it is being put to the test by protectionism, state intervention and resource nationalism. “Of course you can survive,” says Ms Nan. “But the question is how, and at what cost.”