Rising gas prices pose risks to the energy crisis in Europe

What is driving up gas prices?

The rise in wholesale gas prices was driven by declining storage capacity, given last year’s long winter in Europe and lower natural gas exports from Russia to north-western Europe before the controversial Nord Stream 2 pipeline was launched. US Energy Minister Jennifer Granholm recently said that reducing Russia’s gas flows through Ukraine was Moscow’s attempt to force Germany to approve the commissioning of the newly completed Nord Stream 2 gas pipeline. Yuri Vitrenko, head of the Ukrainian state gas company Naftogaz, is also convinced that the Russian gas giant Gazprom is manipulating the gas crisis in the region in order to speed up the start of gas flows through Nord Stream 2. The Nord Stream 2 gas pipeline connects Russia and Germany along the Baltic Sea bed.

In addition, countries are increasingly relying on natural gas to heat their homes and operate plants as part of their efforts to move away from coal and increase the use of more environmentally friendly energy sources. However, there is currently not enough gas to support economic recovery from a pandemic and to replenish reduced gas stocks before the onset of the cold months. Countries are trying to outdo each other in terms of supply, as exporters such as Russia choose to keep more natural gas domestically. This situation will only get worse when it gets colder.

Gas volumes in European storage are currently at an all-time low due to limited gas pipelines from Russia and Norway. This situation is worrying, as calmer weather has also reduced the amount of energy produced by wind turbines, while Europe’s aging nuclear power plants are being phased out or more prone to disruption, further increasing the importance of gas.

Negative effects of rising gas prices

This increase has already led some fertilizer producers in Europe to reduce their production, and the number of such companies can only increase, creating the risk of rising costs for farmers and contributing to rising global food prices. In the UK, high energy prices have already forced several suppliers to close down.

Even a normally cold winter in the northern hemisphere could further increase gas prices in most countries. In China, gas consumers such as ceramic, glass and cement producers could react to rising prices, Brazilian households will have higher electricity bills, and economies such as Pakistan or Bangladesh, which cannot afford gas, will experience difficult times.

Utilities and politicians are already asking God that winter not be harsh because it is too late to increase supplies. Forecasts of rising energy costs, combined with limited supplies and higher food prices over the past decade, could lead central bankers to question their earlier statements that rising inflation will be short-lived.

“If the winter is cold, I am worried that we will not have enough gas to provide heat in part of Europe,” said Amos Hohstein, senior energy security adviser to the US State Department, in an interview with Bloomberg on September 20.

There are also concerns about the depletion of Inčukalns stocks

Meanwhile, representatives of the Latvian unified natural gas transmission and storage operator JSC “Conexus Baltic Grid” (“Conexus”) have already expressed concern about the actions of natural gas traders, except for gas from the Inčukalns underground storage, as there is a possibility that it will be emptied by January next year.

“Let’s assume that this winter turns out to be similar to last year. Considering the high price risk or the risk of price difference, there may also be a situation that Inčukalns is emptied by January,” said Jānis Eisaks, Head of Corporate Strategy at Conexus.

Thus, according to him, only the amount of gas that is currently reserved in accordance with the regulations of the Cabinet of Ministers on the procedure for supply and sale of fuel to energy users during the announced energy crisis and in case of state threat would remain. According to him, these are three terawatt hours.

Energy crisis

The energy crisis in Europe has been raging for several years, as Europe increasingly relies on volatile energy sources such as wind and solar, while investment in fossil fuels is declining. Environmental policies have also forced a number of countries to close coal-fired and nuclear power plants, reducing the number of power plants that can be used as a back-up in the event of energy shortages.

“The situation could become very unpleasant unless we act quickly to fill the storage facilities,” explains Marko Alvera, head of Italian energy infrastructure company Snam SpA. “You can survive a week without electricity, but you can’t survive without gas.”

Energy demand is rising around the world as economies recover from the global pandemic, boosting industrial production and raising concerns about rising inflation. Norwegian state-controlled oil and gas company Equinor has announced that it will increase gas supplies to Europe by increasing production in two North Sea oil fields. The company is also considering other opportunities to increase exports. Norway is the largest supplier of natural gas to the European Union (EU) after Russia.

The Spanish government has also called on the EU to centralize the purchase of natural gas in order to resist the market power of traders and build up strategic reserves. Meanwhile, other energy companies warn that there are no quick fixes for Europe’s supply problems. Claudio Decalzi, head of Italy’s Eni, says that while countries have done the right thing in accelerating the use of renewable energy, they have decided to limit the supply of fossil fuels before demand is resolved, thus adversely affecting the market.

Related news

The US warns Europe that it could face gas price manipulations caused by Russia

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Kremlin: Nord Stream 2 will help curb gas prices in Europe

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Conexus is concerned about the emptying of the Inčukalns natural gas storage facility already in January

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“You cannot reduce supply without reducing demand,” says Decalzi, stressing that pressure from governments, activists and investors has made it very difficult for energy companies to invest in gas supplies.