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.
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.
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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