Europe failed the first test to refuse Russian gas

MOSCOW, October 3 – PRIME, Oleg Krivoshapov. Europe is not coping with the task of abandoning natural gas – the first autumn cold snap caused a sharp increase in consumption despite the exhortations of the authorities to save money. This is recognized, among other things, by the specialized regulator in Germany. What is the reason and how it will turn out in the winter, I decided to find out “Prime”.

MISSION IMPOSSIBLE

Europe has “failed” its first energy efficiency test and there is no sign that it will be better able to cope with the challenges it faces in January. This opinion was expressed by Bloomberg columnist Javier Blas.

Despite heavy imports of liquefied natural gas (LNG) aimed at replacing supplies from Russia, Europe needs to reduce consumption, and significantly, if it is really going to survive the winter. Just increasing supplies will not be enough, the journalist insists.
In different EU countries, it was possible to achieve different indicators of consumption reduction, but the European Commission (EC) recommended reducing the need of the participants in the association for natural gas by an average of 10-15%. Germany and some other countries that were previously heavily dependent on Russian gas must cut consumption even further, by 20%.

With fixed targets for energy cuts, a warmer winter will make Europe’s task easier. However, colder winters are much more difficult. And in any case, Europe needs to consume less gas than in 2021 and on average over the past five years, Blas said.

So far, high prices have forced European industries to reduce their consumption. In some cases, especially in the chemical sector, some companies have simply stopped production. As a result, gas demand in Europe is currently 20% lower than usual.

When the first autumn cold snap hit the continent, households and small companies in Germany increased their gas consumption by 14.5% compared to the five-year average, Bloomberg noted. The head of the country’s Federal Network Agency (Bundesnetzagentur, BNetzA), Klaus Müller, called these figures “sobering”. Energy consumption rose as temperatures in northwest Europe fell below 30-year averages, which are more typical of mid-October.

Thus, European countries clearly need additional fuel volumes. However, in the context of the strategy of refusing supplies from Russia, the sabotage of the Nord Stream and Nord Stream 2 pipelines, and the general shortage of energy on world markets, Europe is clearly choosing the most painful option for itself – a sharp reduction in consumption.

SIMPLY CLINIC

Director General of the National Energy Security Fund (NESF) Konstantin Simonov points to the complete separation of the EU energy policy from common sense. He recalled the investigation against the former head of the German company Wintershall, who later headed the Austrian OMV. “OMV fired him last year, and then conducted an investigation on whether cooperation with Gazprom caused harm to the company,” the specialist is amazed. Burbock is not aware, but it was. And now it turns out that getting the right amount of energy at comfortable prices is almost a crime. Everything has been turned upside down. I used to think that the main task was to fight energy poverty, but now it turns out that the main task is to completely abandon energy consumption. As Mr. Macron recently said, the best type of energy is unused energy. This is the official ideology of the EU. In my opinion, of course, this is clinical idiocy.”

“There is a complete destruction of market mechanisms, and I agree that in the case of gas in its purest form, there are attempts to build some kind of “socialist” economy in the European Union,” Simonov ironically. “Moreover, this is presented as something temporary, but we know that there is no nothing more permanent than temporary.”
And in fact, the European Commission is simply pulling over colossal powers, the head of the FNEB points out.

Commenting on the energy policy of the EC, which seeks to limit gas consumption in Europe and set ceiling prices for volumes from Russia, he agrees that the logic of Brussels officials is incomprehensible.
“This is a cognitive dissonance,” says the specialist. “It seems not offensive, but it is also not very clear to us, economists.”

“In the eighties, these“ Groningen ”contracts were not profitable for us,” recalls Leonid Grigoryev, professor at the Department of World Economy at the Higher School of Economics. “They looked very nice, the Soviet Union received some money. In fact, they were not profitable, because that no one considered the economics of the project.”

Nevertheless, the resistance to these gas pipelines was very serious. “There is an article in 1982 in the New York Times on this topic about how all European countries chipped in for gas pipelines because they needed cheap gas,” says the specialist. “Soviet gas. Only they were embarrassed to call it Soviet, it was called not “Russian” , not “Soviet”, it was called “Siberian”. And it was needed in order to bring down the price of Norwegian and Algerian”.

Now the opposite situation is observed – Russia is being pushed aside so that it does not compete with Qatar, Norway, Algeria and the United States, while Europeans receive natural gas at three thousand dollars per thousand cubic meters, Grigoriev argues.

RESERVES AND LNG

The total volume of gas storage facilities in Europe is just over 100 billion cubic meters. This is enough for about two months of consumption, depending on how warm or cold the winter turns out to be. They were largely filled with Russian gas, when there were still supplies via Nord Stream, but now countries can purchase gas on the spot market. The sources are varied – pipeline gas from Azerbaijan, Norway, supplies under the Mediterranean Sea from Algeria, and, of course, LNG.

At the same time, spot prices today are $2,000-3,000 per thousand cubic meters. Even a discount, if any, does not eliminate the need to purchase volumes that are significantly more expensive than pipeline gas.

Interestingly, even expensive LNG is currently cheaper than the spot price. The increase in the price of futures contracts at the key European hub, the Title Transfer Facility (TTF) in the Netherlands, is not 100% translated into the cost of LNG that arrives in the EU. “This is especially true of southern Europe, which receives LNG and pipeline gas from Algeria at contract prices,” says Alexei Kokin, chief oil and gas analyst at Otkritie Investments. In northwestern Europe, prices are higher, but in any case, LNG is sold at a significant discount to the “monthly” contract.

TEST FAILED

The difficulty is that the prompt replacement of Russian volumes that have fallen out of the European energy balance is impossible at any price – there is simply no such amount of free gas in the world at once.

Thus, Europe, in the face of an acute shortage of natural gas and its high cost, will have to prepare for an extremely difficult winter. Neither storage facilities filled to 90%, nor convulsive purchases of LNG, the shortage of which Europe can to some extent compensate for by the willingness to purchase it at any price, do not guarantee a comfortable passage of the heating season. And undermining the Nord Streams sharply reduces Europe’s room for maneuver in matters of diversifying natural gas supplies in the foreseeable future. And if in the next two months the provision of the coveted energy carrier is practically guaranteed, regardless of the LNG market situation, then in the future, European consumers will apparently have to rely on the mercy of nature in the form of a warm winter.