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    From the Editor: No crisis of faith [Gas in Transition]


Brussels is doubling down on its green agenda, even as the crisis exposes the toll that increased renewables has taken on EU energy security. Instead, Russia has become the scapegoat. [Gas in Transition, Volume 1, Issue 7]

by: Joseph Murphy

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Natural Gas & LNG News, Top Stories, Insights, Premium, Editorial, Gas In Transition Articles, Vol 1, Issue 7

From the Editor: No crisis of faith [Gas in Transition]

The energy crisis unfolding in Europe has many causes, from surging gas demand in China to outages at liquefaction terminals and low levels of wind output. But a view is gaining currency that Gazprom has been exacerbating the supply crunch by withholding some gas, and some EU lawmakers are even pushing the European Commission to investigate the Russian gas giant for alleged price manipulation.

Yet Gazprom is by all accounts complying with its contractual obligations, and it is actually sending more gas to Europe now than it was before the pandemic. It is true that Gazprom is not auctioning off additional spot supplies as it typically does. But without pouring over Gazprom’s internal data, which is not publicly available, it cannot be determined whether the company is intentionally holding supply back to boost its profit margins and/or to put pressure on Europe to enable Nord Stream 2’s launch, or if it really is at or near its capacity.

In either case, to say that Gazprom is manipulating prices or abusing its dominant position in other ways simply by ceasing spot sales seems a stretch. And indeed, it was Gazprom’s customers that wanted the company to sell more supplies on a spot basis rather than under long-term contracts. To argue that Gazprom has some sort of obligation to sell more gas now would be to argue that it has that obligation whenever European consumers would prefer to have lower prices.

It is also conceivable that had Gazprom rapidly expanded supplies to Europe in response to the crisis, some of the same European politicians that are now pressing for an anti-trust probe might now be accusing the company of putting Europe’s energy security at risk by expanding its already sizeable share of the continent’s gas market.

Interestingly, while Russia has stepped up supplies to Europe to a near-record level this year, Norwegian pipeline exports have seen limited growth. Yet while Russia faces accusations of withholding supply, Norway has been praised in Europe for its role as a reliable supplier. Equinor finally announced in late September it had secured approval from Oslo to send an extra 2bn m3 of gas to Europe in the current gas year – a move that was publicly welcomed in Brussels.

The scapegoating of Gazprom is likely to continue, especially as European governments are forced to pass some of those higher gas and power prices on to end users and will need an external actor to blame. At the same time, European politicians have avoided confronting some of the internal issues that have exacerbated the crisis – whether that is liberalised gas pricing or an increased reliance on wind power turbines, which have performed poorly this year.

For its part, the European Commission (EC) has rejected notions that its own policies over the years have contributed to the crisis. Announcing a set of measures to protect businesses and consumers from high prices, the EC said overreliance on oil and gas imports was to blame for the crisis, rather than the bloc’s green policies.

“Investments in renewable energy and energy efficiency will not only reduce dependence on imported fossil fuels, but also provide more affordable wholesale energy prices that are more resilient to global supply constraints,” the commission said. “The clean energy transition is the best insurance against price shocks like this in the future, and needs to be accelerated, also for the sake of the climate.”

Some of the short-term measures that the EC has proposed seem practical: various supports for vulnerable energy users and changes to gas storage regulation to ensure that sufficient stocks are always in place. But the EC also called for a step-up in investments in renewables, and the development of batteries and hydrogen. It is expected to take many years for batteries and hydrogen to offer serious storage capacity, however, and in the meantime, Europe will grow increasingly vulnerable to energy shortages as its renewables capacity is expanded.

Taking aim at Arctic oil and gas

Opening up another area of contention between the EU and Russia, the EC on October 13 proposed a ban on Arctic oil and gas exploration and development. Though already an importer for Arctic hydrocarbons produced in Norway and Russia, the commission said the EU should strive to ensure no further projects are developed.

“To this end, the commission shall work with partners towards a multilateral legal obligation not to allow any further hydrocarbon reserve development in the Arctic or contiguous regions, nor to purchase such hydrocarbons if they were to be produced,” the EC said.

This ban is problematic, as Europe currently relies on gas supply from the Arctic Yamal Peninsula in Russia for a considerable share of its gas imports, and nearly all of Russia’s large, undeveloped fields are located on Yamal and elsewhere within the Arctic Circle. As older fields mature, new development in the area will be essential to maintain the current level of Russian supply.

The commission might imagine that it will need much less gas in the future, as it will be sourcing more of its energy from renewables. But when those renewables fail to deliver, the EU will be denying itself a major source of supply at its doorstep. Essentially, while Brussels is criticising Russia for not sending enough gas now, it is also signalling to Moscow that it will not take its gas in the future.

The move will cause Russia some frustration, as it has been taking various steps recently to address its emissions to ensure that Europe and other markets view its oil, gas and other exports as sufficiently clean. Russian president Vladimir Putin announced on October 13 that the country would strive to be carbon neutral by 2060, and Russia intends to launch a national carbon trading system in 2026, coinciding with the launch of the EU’s carbon border adjustment mechanism.

By taking such a hard line against Russian oil and gas, the EU may discourage Russia from making meaningful progress on its emissions, as Moscow could grow to doubt whether this progress will be rewarded.