Why European energy companies go bankrupt

“And winter rolls into the eyes” – the immortal fable of Ivan Andreevich Krylov just wants to be quoted when you watch the panic reigning in the European gas market

Why European energy companies go bankrupt
10 July 2019, Mecklenburg-Western Pomerania, Lubmin: A worker is standing at the construction site of the Nord Stream 2 Baltic Sea pipeline at the pig farm. The first Russian natural gas is expected to flow through the pipeline by the end of the year. The 1,200-kilometer-long gas pipeline will transport around 55 billion cubic meters of Russian natural gas from Russia to Germany every year. Photo: Stefan Sauer/dpa-Zentralbild/ZB (Photo by Stefan Sauer/picture alliance via Getty Images)

And in general, the situation in the European economy. Gas prices have been hitting records since September, never ceasing to amaze the global oil and gas market. The historical maximum was recorded on September 15, when the cost of one thousand cubic meters soared above $960.

Against this background, BBC News reported that five energy companies have already closed in the UK, and four more may declare bankruptcy in the near future. Companies began to stop working due to gas prices – in retail they grew 3.5 times since the beginning of the year and 70% compared to August. Moreover, Western analysts note that if at the beginning of 2021 there were about 70 energy companies operating in the country, then by the end of the year their number may be reduced to ten.

Moreover, one of the largest fertilizer producers – the American company CF Industries Holdings – has already announced the shutdown of two of its production facilities in the UK due to high gas prices. At the same time, the company cannot yet predict when these production complexes will resume work.

The BBC, citing the words of the executive director of the British Meat Producers Association (BMPA) Nick Allen, said that meat producers called on the government to protect the food supply system to the domestic market due to gas supply disruptions due to sharp price increases. All this threatens to aggravate food inflation, which, of course, will seriously slow down the economic recovery after the pandemic.

Kiev also adds fuel to the fire. As Olena Zerkal, Advisor to the Ukrainian Energy Minister, said in her author’s column, “Ukraine, together with the countries of Europe and the United States of America, must resolutely oppose Gazprom. In particular, Ukraine should be included in the same European risk group with Germany, Slovakia and Poland. As Zerkal explained, if Ukraine is included in this mechanism, some kind of “blackmail” of this country will automatically mean blackmailing Germany.

However, it should be recalled that Ukraine itself chose a liberal market model. This means that, despite the fact that it itself produces gas, which is enough for two-thirds of its consumption, the cost of domestic gas cannot be lower than imported. Therefore, the Ukrainians turned out to be dependent on prices on foreign markets, and for them this is Europe, where they buy gas. And the prices on the stock exchange there are now reaching $900 per thousand cubic meters.

Reacting to the situation, the European Commission announced that it had received a letter from a number of MEPs with a request to analyze Gazprom’s actions on the EU gas market. The International Energy Agency (IEA) issued a statement in which it noted that Russia – read Gazprom – could do more to ensure that European gas storage facilities are filled. The agency warned that in winter Europe may face “stress tests” up to unplanned outages. Against this background, an increase in Russian gas supplies would have a positive effect on the image of the Russian Federation and underscore its reputation as a reliable supplier of energy resources, IEA believes.

Gazprom, in turn, recalled that over 8.5 months of this year, the corporation increased gas exports to non-CIS countries to 138.6 billion cubic meters.

“The company continues to supply gas at a level close to its historic record (141.3 billion cubic meters in the same period in 2018). Growth compared to the same indicator in 2020 – by 17.4%, or 20.6 billion cubic meters”, – noted in Gazprom.

Despite this, there are those who continue to accuse Russia of market manipulation. The fact is that at the end of August a court in Germany confirmed the position of the German regulator that the Nord Stream-2 gas pipeline had not been built by May 2019 and therefore cannot be removed from the EU gas directive. And on the eve it became known that the Supreme Land Court in Dusseldorf rejected the complaint of Nord Stream-2 AG against the decision not to withdraw the Nord Stream-2 gas pipeline from the gas directive.

For Gazprom, this decision means that the project, in which 10 billion euros has been invested, cannot be used by the company 100% – out of 55 billion cubic meters per year, Gazprom has the right to borrow only 27.5 billion, that is, one line. The other, according to the above-mentioned directive, he must transfer for gas the competitors, which the corporation does not have in Russia.

Some time later, Bloomberg reported that Gazprom Export had stopped selling gas on its Electronic Trading Platform (ETP) with delivery in 2022. Sources in “Gazprom” deny the connection of these events. Nevertheless, the West began to link these events, even despite the fact that Gazprom booked 31.3 million cubic meters of capacity for October through the Yamal-Europe gas pipeline, as evidenced by data from platform SA Platform.

To complete the picture, it should be noted that at the beginning of the year, gas prices began to grow in Asian countries, whose economies are recovering faster than others after the pandemic. By the summer, prices in Europe began to catch up with those of Asia, because the import of blue fuel fell by almost a third: many LNG producers, attracted by attractive prices, sent their tankers to the Asia-Pacific region. And in summer, Europe was not worried about the fate of underground storage facilities, which today have replenished only 62% of the volume of gas raised from UGS facilities in the last heating season. Moreover, Norway also sent its LNG to Asia – it is also the largest gas supplier to Europe, like Qatar and Algeria.

Even then, experts warned that if the situation on the LNG market did not change, only the commissioning of Nord Stream-2 could save Europe. But all these arguments today are not an argument for Western regulators and politicians. And this despite the fact that the cost of Gazprom’s gas under long-term contracts, although it varies depending on the discount (for example, for Belarus), is tied to oil prices. Today, buyers of Russian gas under long-term contracts pay several times less. As Russian President Vladimir Putin noted after a September meeting with his Belarusian counterpart, Gazprom is selling its products to Germany at $220 per thousand cubic meters.

On average, Gazprom’s market share in Europe is about 30%. In 2020, the volume of supplies amounted to 175 billion cubic meters, and less than 10% of this volume passed through the electronic platform. So is it worth today to blame Gazprom and Russia as a whole, accusing it of manipulating the market for the sake of launching Nord Stream 2, if first it is worth working on the mistakes ourselves?

Irina Kezik, Izvestia newspaper

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