The European Union (EU) is reportedly reconsidering its position on extending long-term natural gas contracts beyond 2049 as part of reforms in its natural gas market to meet the net-zero by 2050 goal. Should the European Commission’s proposal be endorsed by EU heads of state and government this week, putting a timeline to the end of long-term gas contracts would open another rift with Russia, which provides one-third of Europe’s gas supply via pipelines under long-term deals.
The measure, if approved by the EU, would run against Russia’s position that long-term deals are beneficial for Europe and moving away from them and increasing reliance on liquefied natural gas (LNG) was and will be a mistake.
Some EU member states are wary of what they perceive as Moscow using gas as a political tool to influence geopolitics.
However, as it stands, especially with the low levels of gas in storage and surging gas and energy prices, supply from Russia and Russia’s willingness to provide additional volumes to Europe on top of its contractual commitments has been and will be a key driver of the gas market and prices at European hubs this winter.
Despite the current crisis, the EU’s executive branch, the European Commission, is reportedly drafting plans to quit long-term gas supply contracts by 2049. At the same time, it plans to enhance the security of its gas supply, Bloomberg reported this week, citing a draft document prepared by the Commission.
The EU has struggled with insufficient gas supply for months now, and the situation is not about to change as Russia continues to supply precisely what it had committed to deliver under long-term contracts. This has earned it accusations of using gas as a political weapon and increased the EU’s determination to reduce its reliance on Russian gas.
Russia, for its part, denies any accusations about using gas for geopolitics and reaffirms it supplies the volumes of gas to its customers in Europe as per long-term contracts.
And it says Europe’s decisions to move away from long-term deals are one of the reasons for the current gas crisis.
“[T]he practices of our European partners [are to blame]. These practices have reaffirmed that, properly speaking, they have made mistakes. We were talking with the former European Commission; all of its activities were aimed at curtailing the so-called long-term contracts and at transitioning to gas exchange trading,” Russian President Vladimir Putin said in early October during a meeting to discuss Russia’s energy industry.
“It turned out – and today this is absolutely obvious – that this policy is erroneous, erroneous for the reason that it fails to take into account the gas market specifics dependent on a large number of uncertainty factors,” Putin said, per the Kremlin’s website, just as Europe’s gas prices hit record highs.
Weather and Russian gas flows will be the drivers of Europe’s gas market and prices this winter. Limited supply from Russia—which is sending all the gas volumes per the long-term contracts but is not shipping too much extra supply—and a cold winter could leave European gas storage at very low levels, or even deplete the storage sites, analysts say.
With the potential in-service date for the Nord Stream 2 pipeline still in limbo, the EU is scrambling to ensure both its supply and to possibly reduce, in the future, its dependence on Russia.
The leaders of the European Union member states are also expected to discuss this week a new system to jointly buy natural gas in order to create strategic reserves to protect the countries and consumers from gas shortages and soaring energy prices.
Despite the green agenda of the EU, gas will still play an important role in the energy markets on the continent.
At the onset of the gas and electricity crisis in Europe this autumn, the International Energy Agency (IEA) said:
“The links between electricity and gas markets are not going to go away anytime soon. Gas remains an important tool for balancing electricity markets in many regions today.”
By Tsvetana Paraskova for Oilprice.com
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