Europe is running out of time to find alternatives to Russian gas – CNN

London CNN Business  — 

The security of Europe’s energy supplies is looking shakier by the day.

Just 24 hours after Ukraine reduced the flow of natural gas across its territory into Europe, blaming interference by Russian troops, Gazprom suspended supplies through the Yamal-Europe pipeline running across Poland, and stopped sending gas to a distributor in Germany.

While the volumes affected are small, in total accounting for just a few percent of Europe’s overall gas consumption, each knock to supplies underscores the region’s vulnerability — and the urgent need for the European Union to untangle itself from Russia’s vast energy reserves.

“Now we start to see these different issues coming up, this is an illustration of why Europe should not take gas supplies for granted,” Simone Tagliapietra, a senior fellow at think tank Bruegel, told CNN Business. “Governments need to act now as if they are in an emergency situation,” he added.

Russia imposed sanctions on 31 foreign companies on Wednesday, according to state news agency RIA Novosti. Gazprom Germania and EuRoPol Gaz, the operator of the Polish section of the Yamal-Europe pipeline, were on the list.

“There will be no relations with these companies, they are simply prohibited,” Kremlin spokesperson Dmitry Peskov said Thursday.

German Economy Minister Robert Habeck — whose country is a major buyer of Russian gas — said that Russia was no longer supplying the subsidiaries of Gazprom Germania, but that alternative supplies had been secured.

Futures prices for Dutch natural gas, the European benchmark, briefly spiked 14% on Thursday morning, but have since fallen back down, according to data from the Intercontinental Exchange.

The developments show an increasing boldness by Russia to disrupt its energy exports to Europe.

Last month, Moscow turned off the taps to Poland and Bulgaria, making good on President Vladimir Putin’s promise to halt gas flows to “unfriendly” countries refusing to pay their bills in rubles, rather than the euros or dollars stated in their contracts.

Russia accounted for about 45% of Europe’s total gas imports in 2021. The European Union is proposing to slash its consumption of Russian gas by 66% by the end of the year, but it has yet to present a detailed plan on how to achieve that.

Ukraine turns down the taps

Even as the war has raged for more than two months, gas from Russia had continued to flow westward, much of it via pipelines in Ukraine. But late Tuesday, Ukraine’s gas transmission system operator said it had suspended gas shipments through its Sokhranivka transit point, which processes as much as 32.6 million cubic meters per day. That’s about a third of Russia’s gas flowing through Ukraine to Europe.

The Ukrainian operator blamed “interference by the occupying forces” in announcing the route’s suspension. It accused Russian forces of tampering with the transit point and siphoning off gas. As a result, the operator said the “stability and safety of the entire Ukrainian gas transportation” had been compromised, and it was forced suspend gas flows.

It wasn’t clear when gas flows through Sokhranivka would resume.

The broader impact has so far been limited. While Ukraine transports in total about 30% of Russia’s gas supply to Europe, according to the Independent Commodity Intelligence Services, the pipeline affected accounts for just 2.3% of Europe’s overall gas supply.

The modest market reaction was largely thanks to healthy gas storage levels, mild weather and a record volume of liquefied natural gas imports into Europe last month, said Tom Marzec-Manser, head of gas analytics at ICIS.

“The market is actually pretty well supplied at the moment, all things considered,” he said.

But the shutdown raises the uncomfortable prospect of further disruptions to Europe’s gas supply as the fighting continues. The consequences could rattle markets and send already-elevated energy prices even higher.

Redirecting gas flows

The Sokhranivka shut-off creates a shortage of 16 million cubic meters a day, said Kateryna Filippenko, principal analyst for global gas supply at Wood Mackenzie. But “there is enough physical capacity to fully compensate for this disruption,” she told CNN Business.

Ukraine’s gas operator said it could ramp up gas volumes at another transit point, called Sudzha, which is located farther west in territory the Ukrainian government controls.

But Gazprom has refused to book additional flows along this alternate route — saying that would be “technically impossible.”

Nonetheless, Filippenko said the impact would be slight and Europe should still just about meet its gas storage targets for later this year, she said.

EU gas storage facilities are about 37% full, according to data from Gas Infrastructure Europe. That’s about normal for the time of year, but a way off the 80% target the bloc has set for November.

Further shut offs?

Still, with the war raging, further shutdowns of key transit routes can’t be ruled out, analysts say.

Tensions could rise further next week, when more European energy companies are due to make gas payments to Russia, said Tagliapietra at Bruegel.

“We are still waiting for EU Commission to say whether payment in rubles is a breach of the sanctions or not,” he added. “So over the next two weeks we could see potential interruptions happening, we can’t take gas supplies for granted.”

Kaushal Ramesh, a gas and LNG analyst at Rystad Energy, told CNN Business that the European Union should set up a buyer’s alliance, in which countries would jointly procure gas shipments from all suppliers, “as soon as possible” to prevent countries from competing for the same gas supplies and driving up prices.

Central and Eastern European countries would be most directly affected by the drop in Russian gas flows through Ukraine, according to a research note by consultancy Eurasia Group.

Germany, the bloc’s biggest economy, is particularly reliant on Russian natural gas, but it is relatively insulated by the Sokhranivka latest shutdown. Most of its gas imported from Russia is carried via the Nord Stream 1 pipeline through the Baltic Sea, Susanne Ungrad, an economy ministry spokesperson, told CNN on Wednesday.

— Benjamin Brown, Nadine Schmidt and Anna Chernova contributed to this article.

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