Pressure from Europe to relax Russian influence on gas prices is felt
For years, the European Union has attempted to loosen Russia’s grip on its gas supplies by fostering a competitive import market. These efforts have exploded this year as supplies run out, triggering an energy crisis across the continent.
EU energy ministers met on Tuesday to address the shortage, which is stinging homeowners and pushing up prices for goods, from metals to fertilizers. But there is little they can do to increase supplies immediately, and Russia is not helping.
Over the past decade, European officials and companies have successfully lobbied Russian energy giant Gazprom PJSC, which is by far the bloc’s largest supplier, to replace long-term contracts. linked to the price of oil by sales based on the real-time market price of gas.
It was part of a larger effort, opposed by Gazprom, to foster a deeper market where a variety of gas suppliers competed for Europe’s business. But he only came part of the way. Russia remained the dominant supplier, giving Moscow enormous influence over one of the main sources of electricity and home heating in Europe.
When there was enough gas, the switch paid off. For much of the past decade, gas was cheaper than oil. As gasoline is now scarce, prices are skyrocketing.
EU members will pay around $ 30 billion more for natural gas in 2021 than they would have done with old oil-indexed prices, according to the International Energy Agency. The world energy adviser still believes the change was worth it, estimating that the bloc has saved $ 70 billion in reduced gas import costs over the past decade.
“The Russians have told us for centuries: don’t do it, it’s stupid, respect oil prices,” said Jonathan Stern, a researcher at the Oxford Institute for Energy Studies. “They’ve always been wrong over the past 10 years, but this year they’re right.”
Gazprom has refused to send more gas than its contracts require. President Vladimir Putin has tied additional shipments to Europe, giving final clearances for a controversial new pipeline to Germany.
Russia is pushing for final approvals for a new pipeline to Germany, Nord Stream 2; a receiving station in Lubmin, Germany last month.
Photo:
john macdougall / Agence France-Presse / Getty Images
After two winter supply interruptions in the 2000s, the EU decided to reduce the influence of the Kremlin by liberalizing its gas market. One of the tools was to move away from oil-indexed contracts, which had existed since the 1960s, when gas began to replace oil in power generation and home heating.
The bloc’s efforts have been aided by the ramp-up of new gas clearinghouses in the Netherlands and the UK and increased competition from liquefied natural gas shipped from the US and Qatar. The collapse in demand during the 2008 financial crisis made gas cheap and reinforced Europe’s preference to tie its import deals to spot gas prices, rather than more expensive oil.
In 2012, the Netherlands suffered a magnitude 3.6 earthquake. It was caused by one of the world’s largest gas fields, known as Groningen, and it sparked a chain of events that are contributing to today’s sky-rocketing energy prices. Shelby Holliday of the WSJ explains. Illustration: Sébastien Vega
Gazprom backed down but finally gave in. In 2019, more than half of its contracts were tied to spot or forward gas prices, according to a presentation to investors.
The Kremlin says Europe is to blame for the current shortages, and countries that kept old oil-related contracts with Gazprom, especially Turkey, are now getting cheaper gas.
“They made mistakes,” Putin said at a government meeting this month. “It has become absolutely evident today that this is wrong policy. This leads to problems and imbalance.
Russia’s friendly Hungarian government signed a 15-year supply agreement with Gazprom last month. The former Soviet republic of Moldova, which recently elected a pro-EU government, declared a state of emergency last week amid a payment dispute with Gazprom.
The EU says its current gas problems are temporary and caused by a confluence of factors as economies emerge from pandemic lockdowns. Its leaders have shown no desire to revert to the old system.
Europe’s hopes of a significant increase in gas supplies from other sources, from Central Asia to shale gas trapped in European rock formations, have failed. Production in the EU itself fell, driven by the rapid closure of the huge Groningen field in the Netherlands. Ninety percent of the gas consumed in the block comes from outside its borders, nearly half of which comes from Russia.
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European Commission President Ursula von der Leyen said last week that the bloc should diversify its suppliers and accelerate its transition to cleaner energy. “Europe is now too dependent on gas, it is too dependent on gas imports,” she said. “It makes us vulnerable. “
Ukraine, which Russia has sought to replace as the main gas transit route to the EU, says the bloc has not gone far enough to break Gazprom’s dominance. Russia’s new pipeline, Nord Stream 2, has encountered opposition from the United States in part because it bypasses Ukraine.
“It’s not quite an efficient market at the moment,” said Yuriy Vitrenko, managing director of Ukrainian state-owned energy company Naftogaz. “There is still a dominant player, Gazprom.”
Write to James Marson at [email protected] and Joe Wallace at [email protected]
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