Why Russia drives European and British gas prices

Europe has historically relied on the Kremlin for around 40 per cent of its natural gas

By Reuters

Published: Mon 11 Jul 2022, 7:53 AM

The Nord Stream 1 pipeline that transports gas from Russia to Germany will undergo planned maintenance from Monday, cutting gas supplies to Europe and raising concerns about a prolonged halt to supply.

Russia has already reduced production to 40 per cent of the pipeline's capacity, which has helped to push up European and British gas prices. Benchmark contracts are trading around 350 per cent -400 per cent higher than this time last year.

Below are some of the factors explaining the impact of Russian supplies on Europe's gas markets, including those that do not rely on Russian gas directly.

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How much gas does Russia supply?

Europe has historically relied on Russia for around 40 per cent of its natural gas, most delivered through pipelines including Yamal, which crosses Belarus and Poland to Germany, Nord Stream 1, which runs directly to Germany, and pipelines through Ukraine.

A network of interconnecting pipelines links Europe’s internal gas markets.

Not all countries get gas directly from Russia, but if countries such as Germany, Europe's top buyer of Russian gas, receive less, they must fill the gap from elsewhere, for instance from Norway, which has a knock-on effect on available gas for other countries.

As a result, changes in Russian supplies can cause as much gas price volatility in Britain as the rest of Europe, even though Britain typically gets less than 4% of its gas from Russia. Lower Russian supply means less could be available from its largest supplier Norway.

What is happening now?

Russian gas flows to Europe have already fallen in the first half of 2022, with flows through the three main pipeline routes down around 50 per cent compared with the first half of 2021.

Flows through Yamal, which historically transported gas from Russia to Europe have been flowing eastwards, to Poland from Germany since the start of the year.

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Flows through Nord Stream and via Ukraine, which were already down on last year, began falling in March after Russia’s attack on Ukraine.

This year, Moscow has cut gas flows to Bulgaria, Finland, Poland, Danish supplier Orsted, Dutch firm Gasterra and Shell for its German contracts, after they all rejected a Kremlin demand to switch to payments in roubles.

Several companies such as Germany’s Uniper and RWE and Italy’s Eni made payments under Russia’s new scheme and continued to receive gas.

But many companies, including Uniper and RWE have since seen their supply curbed after Russia cut the capacity of the Nord Stream 1 pipeline.

While Italian Prime Minister Mario Draghi accused Moscow of using its gas supplies for political reasons, Russia said supply reductions were necessary because of the delayed return of equipment that had been sent for repair.

Germany’s Economy Minister Robert Habeck said Moscow could continue to suspend gas flows through the pipeline beyond the planned maintenance shutdown in an effort to destabilise Europe.

The Nord Stream cut has driven up European and British gas prices, which analysts said could rise further if flows do not return after the maintenance that is scheduled to end on July 21.

What about the alternatives?

The European Union aims to end reliance on Russian fossil fuels by 2027 and has begun looking for alternatives, such as by increasing imports of global liquefied natural gas (LNG).

European imports of LNG rose about 56 per cent in the first half of 2022 compared with the same period in 2021, Refinitiv data showed, reflecting more capacity in the United States and high prices in Europe attracting more cargoes.

But Europe has limited capacity to receive LNG and supply concerns deepened after production was halted at a major US export plant owned by Freeport LNG following an explosion.

Freeport said late last month it hopes to resume operations in part in early October with a return to full production by year-end but it will first have to satisfy the regulator it is safe to do so.