Europe’s Energy Crunch Set to Worsen as Russia Refrains From Boosting Gas Exports

A week ago, President Vladimir Putin said Russia would be prepared to increase natural gas exports to help Europe with an energy crunch that has triggered soaring prices. But there are no signs he will make good on promise of relief, say energy experts.

This week Russia’s state-owned energy giant Gazprom appeared to have opted not to boost gas exports to Europe and refrained at auctions from reserving additional gas transit capacity on Ukrainian or Polish pipelines, according to Bloomberg data.

Last week, in an interview with American broadcaster CNBC, the Russian president dismissed suggestions the Kremlin was using gas as a geopolitical weapon, saying such talk was “politically motivated blather.”   

But Gazprom’s decision not to reserve additional capacity for gas exports to Europe has prompted anger from European leaders, who accuse the Kremlin of playing a political game.

The European Union’s foreign policy chief, Josep Borrell, told reporters in Brussels Monday that soaring gas prices have deep geopolitical roots. “It’s part of a geopolitical battle,” he said. But Borrell also acknowledged Russia has honored all its contracts. “It cannot be said that they are not delivering when they said they would, but it has not increased the quantities,” he said.

European Commission President Ursula von der Leyen was more restrained in her language Wednesday when briefing the European Parliament, saying, “Gas prices are — and have always been — cyclical, and they are set by global markets. So, it is not a regional or local phenomenon, it is a global phenomenon.”

But she added she thought the Kremlin could do more to help, saying in previous years Gazprom had responded to higher demand.

Russia supplies 43% of the EU’s gas imports. Europe is heavily reliant on natural gas to generate much of its electricity. Gazprom exports actually fell in the first half of October.

Summit

EU national leaders are set to discuss the energy crunch at a two-day summit starting Thursday. In his summit invitation to national leaders, Charles Michel, the president of the European Council, said, “We will address the current hike in energy prices which is challenging the post-pandemic recovery and severely affecting our citizens and businesses.”

Some analysts say that while Russia may be seeking to exploit Europe’s energy crunch, the continent’s leaders have partly themselves to blame for their plight as they shifted away years ago from agreeing long-term contracts, preferring instead to opt for a system of market-based pricing, which can offer lower prices when supplies are in abundance but is highly volatile and can see prices skyrocket when there are shortages. Europeans have also done nothing to diversify suppliers.

The price jumps in natural gas are due largely to a surge in demand in Asia and low supplies of in Europe, which has seen an astonishing 280% increase in wholesale gas prices. Electricity prices are also soaring because natural gas is used across the continent to generate a substantial percentage of its electricity.

The International Energy Agency has called on Russia to boost gas exports. “The IEA believes that Russia could do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter heating season,” it said in a statement earlier this month.

Nord Stream 2 and Ukraine  

There have long been fears, stretching back to the 1990s, that the Kremlin could use Europe’s dependence on Gazprom against it. A succession of U.S. presidents have urged European leaders to be wary and opposed the development of the just completed Nord Stream 2, NS2, natural gas pipeline, which will deliver energy from Russia to Germany while bypassing an older line running through Ukraine and Poland.

Some European politicians suspect the Kremlin is deliberately worsening Europe’s energy crunch as a tactic to pressure the EU into speeding up certification of the just completed NS2 pipeline.

Central European politicians have also opposed NS2 — which runs 1,200 kilometers from Vyborg, Russia, to Lubmin, Germany, snaking under the Baltic Sea — and not only because their countries will lose lucrative transit fees from the older pipeline, but because they feared the Kremlin was building the new pipeline for political reasons and not commercial ones.

“Nord Stream 2 is no ordinary business project,” according to Inna Sovsun, a former Ukrainian minister and now a lawmaker and professor at the Kyiv School of Economics. “On the contrary, it is a geopolitical weapon aimed at the heart of Europe that has been conceived since day one as a tool to isolate Ukraine and strengthen Russia’s position in its confrontation with the Western world,” she said earlier this year in a paper for the Atlantic Council, a U.S. think tank.

She added, “In recent months, Kremlin-controlled gas giant Gazprom has refused Ukrainian offers of additional pipeline capacity, despite surging European demand for gas due to a range of factors including maintenance on alternative Russian pipelines. Moscow prefers to wait for Nord Stream 2 to be commissioned and wants to send a clear message that it expects Russia’s European customers to facilitate this process without delay.”

European energy executives have warned of a difficult northern hemisphere winter ahead. Energy-intensive industries may have to slow down production, which could lead to shortages of fertilizers, steel, and food, they warn. Some energy companies have been trying all year to boost their gas stocks, which were depleted by last year’s exceptionally cold winter. Alfred Stern, CEO of Austria’s energy company OMV, says, “Everything will depend on how cold this winter is.”

On that score, the omens are not good. Meteorologists are forecasting a high risk of colder than normal winter weather this year. If those predictions play out, there will be even greater demand for natural gas and even higher energy prices, boosting overall European inflation which is running currently at 3.4%, the highest level since 2008.
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