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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Russia Warns Europe: Natural Gas Price Cap Means Full Supply Cut-Off

  • EU gas imports from Russia have dropped to around 9 percent in recent weeks from its total imports.
  • German Chancellor, Olaf Scholz, dropped his opposition to the imposition of an EU gas price cap.
  • Qatar will not divert any gas that is already under contract with Asian buyers to Europe this winter.
Gas pipeline

As Europe heads into winter, the threat of sharply rising gas prices and sustained supply failures increases. The European Union (EU) is in the midst of working through a multi-pronged solution to ameliorate the negative effects of the present situation, which in the short term was a direct result of international sanctions on Russian energy following the invasion of Ukraine on 24 February this year. In the longer term, the long-running over-reliance on cheap Russian gas on the part of many EU states, including its de facto leader, Germany, is the key reason for the current disastrous energy crunch across the region. One key element of this multi-pronged EU plan is the imposition of a price cap on gas prices. However, three developments last week from Russia, Qatar, and China threaten to undermine the EU’s efforts to bring some stability to its gas market over the winter period, and to reduce the energy risk premium being priced into their economic outlooks and the pricing of their financial asset markets. The first of these is that Russia’s state-owned gas behemoth, Gazprom, has threatened to halt all of its gas supplies to the EU if a price cap on gas is introduced. Broadly speaking, gas imports from Russia made up around 40 percent of the EU’s gas supply in 2021, with the more specific details analysed by OilPrice.com recently, but have dropped to around 9 percent in recent weeks. According to Gazprom’s chief executive officer, Alexei Miller, last week, any such gas price cap would be a breach of contract on the part of EU buyers of Gazprom’s gas that would result in a suspension of gas supplies from the company. Although Russian gas deliveries to the EU via its Nord Stream and Yamal-Europe pipelines have been subject to repeated disruption since the invasion of Ukraine, and both routes are still currently closed off to Europe, Russian gas is still being delivered to selected European buyers through the Sudzha entry point on the border with Ukraine and the TurkStream pipeline. 

Related: Oil Tanker Market In Disarray As EU Ban On Russian Crude Nears
On 18 October, the EU’s executive arm, the European Commission (EC), proposed further emergency measures to reduce the high energy prices that have caused a spike in inflation across the region and beyond, and a sharp rise in interest rates to combat it, with the economy- crimping effects that these can cause. Although steering clear of an outright cap on gas prices at that point, the EC did ask for the EU member states’ approval to draft a proposal to set a temporary ‘maximum dynamic price’ on trades at the Title Transfer Facility (TTF) Dutch gas hub, which serves as a benchmark price for European gas trading. Other measures discussed at the meeting included energy regulators being tasked with launching an alternative benchmark price for liquefied natural gas (LNG) by 31 March 2023, and the launching a joint gas buying program among EU countries, in an effort to refill depleted storage caverns in time for next winter, and to allow for the negotiation of lower gas prices in the future. 

However, in a subsequent EU meeting that began on 20 October, German Chancellor, Olaf Scholz, dropped his opposition to the imposition of an EU gas price cap, and EU leaders then agreed to work towards a cap that would “immediately limit episodes of excessive gas prices.” 

EC President, Charles Michel, underlined that the EU’s leaders had reached an agreement that would bring down prices, and added: “I think that we sent a clear signal to the markets that we are ready to act together, that we are able to act together.” According to the official minutes of this latest meeting, the EU’s leaders formally request that the EC works “urgently…on a temporary dynamic price corridor on natural gas transactions.” The previously floated idea of a mechanism to limit the price of gas used for electricity generation is also present in the minutes, as is the notion that member states pursue joint purchasing of gas, the development of a new benchmark for gas prices, and the increasing of efforts to reduce gas demand. 

Related: Colombia Is On The Brink Of An Energy Crisis

All of which likely means that Russia will indeed cut off all supplies of gas to Europe at some point in the very near future for as long as it wishes, which, in turn, means that the EU will need to find other sources of substitute supply to bridge any supply transition gaps in the short-, medium-, and long-term. Qatar had been top of the list of such alternative supply sources, as highlighted by OilPrice.com, but, in the second setback for the EU’s energy security plans, it said last week that it will not divert any gas that is already under contract with Asian buyers to Europe this winter, regardless of any other considerations. Saad al-Kaabi, the chief executive of state-owned QatarEnergy, and also Energy Minister, said: “Qatar is absolutely committed to [the] sanctity of contracts... When we sign with an Asian buyer or European buyers, we stick to that agreement.” This statement of policy is a blow to hopes held by the EU in general, and by Germany in particular, that the emirate could be persuaded to do precisely the opposite of its stated intention, and divert supplies that had been destined for Asia to Europe instead, breaking contracts if necessary, for a hefty premium if required. 

Just last month, Qatar’s Deputy Prime Minister and Minister of Foreign Affairs, Sheikh Mohammed bin Abdulrahman Al Thani, said that his country was in talks with several German companies about new liquefied natural gas (LNG) supplies and sources spoken to last week by OilPrice.com confirmed that included among them are utilities giants, RWE and Uniper. The specific deals followed on from two major initiatives implemented by Germany in the wake of the sanctions on Russia. The first is focused on enhancing gas delivery mechanisms into Europe, with a declaration of intent on energy cooperation signed in May between Germany and Qatar aimed at ramping up LNG supplies going into Germany through existing importation routes augmented by new infrastructure. This includes the deployment of four floating LNG import facilities on its northern coast, and two permanent onshore terminals, which are under development, according to sources within the EU’s energy security apparatus exclusively spoken to by OilPrice.com. These plans, said one of the sources, will run in parallel with plans for Qatar to also make available to Germany sizeable supplies of LNG from the Golden Pass terminal on the Gulf Coast of Texas, in which QatarEnergy holds a 70 percent stake, with ExxonMobil holding the remainder. However, the sources added, the delivery timelines and volumes under discussion would offer only a partial solution to the gas crunch Europe faces and even this will not occur any time soon. 

This said, both Germany and France have been busy seeking further alternatives, although how reliable in the energy or political sense of the word they will be remains to be seen. According to local UAE sources, following the visits of Scholz and Germany’s Economy Minister, Robert Habeck, as part of a new Energy Security and Industry Accelerator agreement signed between the UAE and Germany, the Abu Dhabi National Oil Company (ADNOC) will supply RWE with an LNG cargo in late 2022 to be used in the country’s floating LNG import terminal in Brunsbuttel. ADNOC has also earmarked several other LNG cargoes for German customers for delivery in 2023, the same sources said. France’s TotalEnergies, meanwhile, recently signed a partnership agreement with ADNOC that includes cooperation in trading, product supply and carbon capture, utilisation and storage. As TotalEnergies stated at the time of the signing of the partnership agreement with ADNOC: “[The agreement includes] the development of oil and gas projects in the UAE to ensure sustainable energy supply to the markets and contribute to global energy security.” 

The final of the three potential setbacks for the EU’s new multi-pronged energy initiative, although itself entirely predictable, given the zero-sum game of energy, economics, and geopolitical dominance currently being played out between the West and the East, is that China will not help Europe out at all. According to several reports last week, China has told its state-owned gas importers to stop reselling LNG to buyers in Europe (and in Asia) as it seeks to ensure its own supply for the winter season. As highlighted for some time by OilPrice.com, China has been busily securing long-term contracts for LNG supplies for months – well before Russia invaded Ukraine – with a key target seller being, of course, Qatar. This remarkably coincidental level of prescience – almost impossible to believe, in fact - means that not only has China tied up much of the gas supplies that Europe has found itself needing but also that it has done so at the rock-bottom gas prices that pre-dated the Russian invasion of Ukraine.

By Simon Watkins for Oilprice.com


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  • AlainBelanger on October 24 2022 said:
    Incoherent policies Lots of peoples will get cold maybe other virus Europe should. not depend on NATO do oil company’s have to be bigger than politics or USA greeds Every countries should developed theirs owed oil reserve If you need will help just business Gold coins Bitcoins maybe help again discorded . Using oil for peace Cheers
  • Mamdouh Salameh on October 25 2022 said:
    Neither an EU proposed cap on the price of Russian gas exports nor one on the price of Russian crude will succeed for the simple reason that Russia will immediately cut supplies of both gas and crude to countries implementing the cap. On the contrary, it will reduce supplies of both gas and oil in the market and push prices even higher.

    There is not a single LNG producer or group of producers capable of replacing Russian gas now or twenty years from now.

    The United States can’t raise its LNG supplies to the EU further because of rising demand back at home. Moreover, there are growing complaints among some EU members particularly Germany about the exorbitant prices the US is charging for its LNG supplies. Even French President Emmanuel Macron was driven to accuse the US with double standards in its dealings with the EU leaving Europe paying higher prices for LNG while the US is enjoying low energy prices at home. Whilst U.S. LNG exports to France increased 421% during the first eight months of 2022, the value of that LNG increased by 1094% in August alone due to the higher prices of LNG. The French President is going to raise energy prices with his US counterpart during his visit to Washington in early December.

    Qatar, the world’s largest exporter of LNG made it clear that it will not divert any gas that is already under contract with Asian buyers to Europe this winter regardless of any other considerations. Qatar said it is absolutely committed to the sanctity of contracts.

    China, on the other hand, has told its state-owned gas importers to stop reselling LNG to buyers in Europe (and in Asia) as it seeks to ensure its own supply for the winter season.

    Now the Netherland and the EU are now trying to revive production from the virtually depleted Dutch Groningen gasfield from which they could still extract 2.8 billion cubic metres (bcm) of gas annually against huge public opposition and at the risk of earthquakes damaging thousands of houses and buildings.

    In view of the above, wouldn’t it be far more rational and practicable for the EU to cut its losses by halting shipments of weapons worth billions of dollars to Ukraine and lifting sanctions against Russia thus opening the door anew for cheap Russian gas supplies?

    Unfortunately there is no chance of this happening as the EU countries have let their venomous enmity to Russia cloud their judgement and that is why their economies are now teetering on the edge.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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