EU braces for supply shortages amid growing doubts over Nord Stream gas flows
The executive arm of the European Union (EU) has raised the prospect of supply shortages this winter, revealing it does not expect the Nord Stream 1 pipeline to restart after its annual ten-day maintenance, which is scheduled to conclude on Thursday.
European Budget Commissioner Johannes Hahn told the Wall Street Journal that the European Commission is now “working on the assumption that it doesn’t return to operation.”
Hahn’s gloomy warning follows reports from news agency Reuters that Gazprom has already warned customers on the continent it can no longer guarantee supplies due to “extraordinary circumstances.”
The Kremlin-backed gas giant revealed in a letter seen by Reuters, dated 14 July, it was retroactively declaring force majeure on supplies from 14 June.
Known as an “act of God” clause, force majeure is standard in business contracts and defines extreme circumstances that release a party from their legal obligations.
The declaration does not mean that Gazprom will necessarily stop deliveries, but instead established its view that it should not be held responsible if it fails to meet contract terms.
The letter escalates fears in Europe that Russia may not restart the Nord Stream 1 pipeline at the end of its current maintenance period, in retaliation for sanctions imposed on Russia following its invasion Ukraine.
The country has already cut off gas flows into 12 EU member states which refused to pay for gas supplies in euros, heightening an energy crisis that risks tipping the bloc into recession.
Currently, Nord Stream 1 undergoing ten days of annual maintenance – which is scheduled to conclude on Thursday.
Gazprom puts pressure on Europe after sanctions
Nord Stream 1 is the continent’s key pipeline, delivering Russian gas under the Baltic Sea to Germany and beyond, with the bloc dependent on Russia for around 40 per cent of imports.
Russian gas supplies have been declining via major routes for some months, including via Ukraine and Belarus as well as through Nord Stream 1.
A trading source confirmed to Reuters that the force majeure concerned supplies through Nord Stream 1 – which reported 60 per cent shortfalls in supplies to Germany last month.
In fact, Gazprom cut Nord Stream 1 capacity to 40 per cent on June 14, the date that Gazprom said in the letter to buyers would be the start of the force majeure.
German utility giants such as Uniper and RWE have both revealed they received a letter, with the two companies among Gazprom’s biggest customers.
Gazprom has blamed sanctions for reductions in supplies in Nord Stream 1, citing the delay in the return of a gas turbine from maintenance in Canada by equipment supplier Siemens Energy.
Canada sent the turbine to Germany by plane last weekend, exempting the turbine from sanctions and angering Ukraine’s President Voldomyr Zelensky, Kommersant newspaper reported on Monday,
However, the newspaper also revealed it will take another five to seven days for the turbine to reach Russia – provided there are no problems with logistics and customs.
Meanwhile, a spokesperson for the German Economy Ministry told Reuters the turbine was a replacement part, and was meant to be used only from September.
This meant its absence could not be the real reason for the fall-off in gas flows prior to maintenance, nor a key factor in returning flows to the pipeline.
Europe vulnerable to Russian supply disruption
The EU has imposed heavy sanctions on Moscow, targeting its central bank, financial institutions, oligarchs and energy supplies such as coal imports and seaborne oil shipments.
However, it has stopped short of sanctioning Russian natural gas due to its high dependence on the energy source to meet consumer needs over the winter months.
While it aims to stop using Russian fossil fuels by 2027, the bloc needs supplies to continue for now as it develops alternative sources.
The IEA warned yesterday that if Russia turned off the taps into Europe, the EU would need to both reconsider coal usage and ensure gas supplies were topped up at 90 per cent of capacity levels across the continent.
Currently, the bloc has reached 65 per cent storage levels heading into winter, according to Gas Infrastructure Europe.
Chief executive Faith Birol believed gas storage could only be replenished if Europe reduced its consumption levels, raising the prospect of rationing.
He said: “The first immediate step towards filling European gas storage to adequate levels before winter is to reduce Europe’s current gas consumption, and to put the saved gas into storage. Some of this is happening already because of sky-high gas prices, but more is required. Significant additional reductions are needed to prepare Europe for a tough winter ahead.”
According to new IEA analysis, 12bn cubic metres of gas needs to be saved over the next three months – enough to fill about 130 LNG tankers.
However, Birol raised doubts over whether supplies from other countries such as Norway, Azerbaijan, US, UK and Qatar could make up the shortfall.
He concluded: “It is categorically not enough to just rely on gas from non-Russian sources – these supplies are simply not available in the volumes required to substitute for missing deliveries from Russia.
Russia’s ability to re-route supplies to other buyers is limited, and Europe remains its biggest buyer, but the Kremlin seems prepared to take a risk it could outlast Europe in any war of attrition over sanctions.
Experts fear risk of rationing this winter
Germany has already triggered the second stage of its three-phase emergency plans, which could eventually lead its government to taking hold of supplies and redistributing them across the country. “
Local authorities within the country have already started rationing power supplies amid the looming possibility of supply shortages.
Meanwhile, Uniper has already engaged in potential bailout talks with the government amid reduced gas flows, raising the prospect of the taxpayer taking a stake in the company.
Ole Hansen head of commodity strategy at Saxo Bank, told City PM a ‘restart’ on the Nord Stream 1 pipeline to previously reduced levels was still possible, as the ‘force majeure’ referred to June reductions triggered by the turbine.
He said: ” Anything less than that would be due to a political decision to squeeze the European economy even harder in retaliation for the support provided to Ukraine. One development that support the worst-case scenario of no gas has been Russia’s refusal to book additional capacity on other pipelines, especially through Ukraine, while NS1 underwent maintenance. However, that situation may be explained by the war and Gazprom and Russia’s unwillingness to pay additional transfer fees to Ukraine.”
The energy expert warned that Europe risked a “winter of supply disruptions and rationing” if supplies remain at current low levels – especially due to competition from Asia for key supplies.
Craig Erlam, senior market analyst at OANDA, told City PM that Gazprom was “laying the groundwork for gas not to flow again later this week following the planned maintenance on Nord Stream 1.”
Commenting on the prospect of further disruption, he said: “This would not be unexpected as many have long suspected that Russia is already/planning to weaponize gas supplies going into the winter, hence the urgency to fill reserves. A failure to do so would be extremely disruptive, depending on just how much gas stops flowing.”
He grimly concluded rationing was now a plausible scenario across the continent this winter.
He said: “Rationing is looking increasingly likely now along with a campaign to encourage households and businesses to reduce waste and save energy. Blackouts still look unlikely but not impossible. Either way, it’s shaping up to be a tough winter for Europe.”