Expensive mistake: Russia’s “gas boomerang” hurt Europe

Europe’s desire to reduce dependence on Russian gas by pegging contracts to spot prices has turned into a disaster amid shortages of blue fuel and oil, writes RIA Novosti columnist Natalia Dembinskaya

Expensive mistake: Russia's "gas boomerang" hurt Europe

“Liberalization of the gas market is first of all a change in the pricing mechanism. Most of the contracts used to be tied to oil quotations. The EU decided about 20 years ago that this should be phased out. The alternative is gas hub prices. It is, in fact, a fuel exchange where everything depends on supply and demand”, –  the expert noted.

Dembinskaya reminded that hubs were created in the Netherlands and Britain and there were increased supplies of liquefied natural gas (LNG) from the United States and Asia. The financial crisis in 2008 led to a fall in the price of energy, which convinced the EU of the right decision to link imports to spot gas prices.

As of 2019, more than half of Gazprom’s contracts with the EU were based on spot or forward prices, saving European countries about $70 billion. However, in 2021, listed gas prices have risen by 300-400%.

“The strategy worked when there was enough gas. But as soon as a shortage emerged and prices soared, it failed immediately. According to calculations of the International Energy Agency (IEA), the EU in 2021 will pay about $30 billion more than it would have had to under the previous rules”, – Dembinskaya said.

According to independent industrial expert Leonid Hazanov, energy crisis was provoked by EU authorities which emphasized rapid development of alternative energy by restricting access of “Gazprom” to OPAL gas pipeline. He noted that as a result of these actions the volume of the Russian gas transported decreased considerably and Moscow preferred to sell the raw material at auctions.

The RIA Novosti columnist added that the cost of LNG is still about 30% more expensive than pipeline gas. In addition, the infrastructure for the use of liquefied gas is underdeveloped. As a result, about 90% of the gas consumed by the EU is imported fuel, half of which is Russian.

“Long-term contracts ensure stability of supply and transparent pricing over several years, even if the revenues are lower. In the case of spot trading, there may be high volatility on the background of relatively small purchases with unclear financial results. Accordingly, a long-term contract is more advantageous than a spot deal”, – Hazanov concluded.

According to Dembinskaya, the European Union may decide to return to the old system of purchase of fuel, but it may be more profitable for Gazprom to negotiate with major European companies, offering them the prices not related to either oil or spot.

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