Gas prices in Europe are breaking all the unthinkable records: $ 970 per thousand cubic meters. Half-empty gas storage facilities in the EU on the eve of winter, a shortage of LNG and coal, and even calm weather played a role. Electricity tariffs are also at their maximum, they are trying to contain them with emergency measures. Izvestia figured out how long the unprecedented gas rally would last, and what the consequences would be for Europe and Nord Stream 2.
Since the spring of 2021, gas prices in Europe have already quadrupled. The dynamics of the last days is already panic. Last week, 1,000 cubic meters of gas reached the $ 700 mark. And on September 15, during trading on the London ICE exchange, the price of gas in Europe exceeded $ 970 per thousand cubic meters – this is the maximum in history – coming close to the critical level of $ 1000.
Blue fuel began to rise in price noticeably since mid-August – after Gazprom sharply cut supplies to the EU via the Yamal-Europe pipeline. One of the key reasons for the price explosion is the low inventory in European underground gas storage facilities (UGS). There are now 10-15 billion cubic meters less than it should be by winter, and 16% less than the average for five years. At the same time, the occupancy rate is a record low for September. According to Gas Infrastructure Europe, the filling level of UGS facilities in Europe as of September 15 is 70.92%, while the norm is 92% at the beginning of the heating season (October 12).
Yamal-Europe gas pipeline facility in Poland
Photo: RIA Novosti / Alexey Vitvitsky
Another factor is the acute shortage of liquefied natural gas. LNG actually flows to Asia, where prices are even higher than in Europe. Therefore, LNG producers are striving to supply there in order to earn more.
“All LNG went to Asia, and throughout 2021 Europe is sitting without supplies. Moreover, even in those contracts where it is stated that a tanker must come to Europe, it often came to Europe, was loaded onto another tanker and still left for Asia. That is, they resold, realizing that they could make money in this way, ”explained Igor Yushkov, a leading analyst at the National Energy Security Fund.
In combination with the shortage of natural gas, dependence on wind energy played a cruel joke on the Europeans. As writes The Wall Street Journal, the wind in the stormy North Sea suddenly stopped blowing. As a result, the production of electricity from wind turbines collapsed. To make up for the deficit in wind power, gas and coal power plants were involved. But here again there is a problem: there are too few coal-fired generation capacities left in Western Europe.
Finally, the uncertainty surrounding the launch of Nord Stream 2 adds fuel to the fire. On September 13, the Federal Grid Agency of Germany (Bundesnetzagentur) announced that it had received documents from Nord Stream 2 AG for certification of Nord Stream 2 (SP-2) as an independent gas transmission operator. As noted by the press secretary of the agency Fité Wulf, it may take up to four months to consider the documents and make a decision.
This statement was superimposed on the fact that Gazprom has booked only a small portion of the proposed solid additional capacity for gas transit through Ukraine for September. All this, according to experts, finally scared the market participants, provoking a real panic.
Photo: REUTERS / Nord Stream 2
“Taking into account that the construction of the Nord Stream 2 gas pipeline has been completed, the volatility of gas prices in Europe will depend, among other things, on how quickly the pipeline will be able to obtain the necessary certification and permits to start deliveries,” said Mikhail Bespalov, an analyst KSP Capital “.
The uncontrollable gas rally has led to the fact that Europe is actually gripped by an energy crisis – electricity tariffs are breaking records. According to the analytical company ICIS, in the UK, the price per megawatt-hour has almost tripled since the beginning of August, and almost sevenfold since September 2020, to € 331o. This is the maximum since 1999. In Germany, a megawatt-hour has risen in price by 30% in a month – to almost € 130.
Several EU countries are already introducing emergency measures to cap gas and electricity tariffs. For example, in Spain, where electricity is one of the most expensive in Europe, the authorities have promised to channel the super-profits of energy companies to reduce prices.
According to Prime Minister Pedro Sanchez, it is “unacceptable for energy companies to benefit from higher market prices for electricity”. Therefore, the authorities will distribute the huge profits that energy companies receive to consumers. It is estimated that € 2.6 billion, which will be redirected from firms to consumers in the next six months, will reduce the monthly electricity bill by 22%.
According to observers, the trend of explosive growth in gas prices is already too strong. In winter, the cost of fuel can reach $ 1000 per 1,000 cubic meters.
“I think that prices [на газ в Европе]are already close to some of their more or less ceiling values, because here, in addition to the previous prices, which people are guided by, there are also prices in other markets, “independent analyst Nikolai Podlevskikh told Izvestia.
Photo: Izvestia / Dmitry Korotaev
However, while the price dynamics is such that the “ceiling” will be broken much earlier and prices will continue to go up. The closer the heating season is with the minimum storage capacity, the greater the growth potential.
Another thing is that Europe is not able to buy so expensive gas, and it will only be able to keep prices at such high levels in the short term, observers say. The market will inevitably balance itself.
“Such prices on the European gas market will bring new players to it, wishing to receive a part of the gas surplus profit. First of all, these are large players in the liquefied natural gas (LNG) market, which currently supply most of their products to markets in Asia. Therefore, following such a serious supply crisis with high prices for natural gas, the European market may cover the demand crisis due to increased supplies from the Russian Federation and other countries, ”explains Valdis Plyavins, an analyst in the oil and gas industry.
Financial expert Grigory Pakhomov does not exclude alternative scenarios for the development of the situation on the European gas market. For example, it will be more profitable for Europe to switch to coal heating, which can be supplied by Russia in a similar way. In this case, a flow of funds from the gas sector to the coal sector may occur. But such a scenario is unlikely: Europe will have to rebuild its capacity to use coal.
There is another option – the transition to the use of heavy hydrocarbons, namely oil, but it is even less likely, since the cost of its implementation is much higher than the economic effect of savings from switching from gas. Russia, as an exporter of gas, coal and oil, can become a beneficiary in any scenario.
Photo: TASS / UIG
Anyway, the current situation on the European gas market creates unprecedented opportunities for Russia. Gazprom’s revenues from gas sales to Europe have already exceeded the pre-pandemic level and are likely to continue to grow, said Vitaly Kirpichev, an analyst at TradingView.
Finally, the price shock will accelerate the approval of the launch of Nord Stream 2. It is obvious that it will stabilize the market situation, and it is in the interests of the Europeans to hurry up with all the formalities. And besides, to show great compliance on the issue of how much gas will be allowed to be pumped through the pipe. So, according to the decision of the Dusseldorf court, they want to leave Nord Stream 2 half empty – in accordance with the requirements of the EU Gas Directive. It requires that there be an alternative supplier or another owner of the GTS. However, the approach of winter can put everything in its place and force to abandon artificial restrictions.