Europe has fallen into a gas trap

Europe has fallen into a gas trap

Gazprom has finally explained in detail how Western sanctions are forcing Nord Stream 1 to run with just one turbine

This is clearly a response to German Chancellor Scholz’s accusations that there is allegedly nothing to stop the turbine being sent to Russia but the Russian side itself. Europe’s refusal to acknowledge the problem threatens not only its economy, but also ordinary people. And it is the Western European countries that will be the first to suffer this winter. Which countries will be hit?

Earlier, the German Chancellor accused Russia of the fact that the repaired turbine remains in Germany instead of pumping gas to Europe. Siemens Energy has explicitly said Gazprom’s claim that the problems with transporting the turbine from Germany to Russia are due to restrictions by the EU, Canada and the UK is untrue.

Gazprom responded in detail as to how the EU, Canadian and UK sanctions are interfering. That a factory overhaul of gas turbines is mandatory after 25,000 hours of operation (the repair schedule is set in advance) is not even discussed. The problem is that the contract to repair the engines at the plant in Canada is with the British company Industrial Turbine Company (UK) Limited, which is part of the Siemens Energy group. It was this British company that breached the contract: the deadline for the repair of engine #073 was in May and it should have been handed over to Gazprom immediately. No Germany – as an intermediate stop – was stipulated in the contract.

Nevertheless, Gazprom says, because of the Canadian sanctions story, the engine was sent to Germany instead of Russia. This is not in line with the terms of the contract. And it was not agreed upon with Gazprom. As for the documents, the Canadian authorities issued the documents for exporting the engine to Siemens Energy Canada Limited. This company is not a party to the contract and the documents have nothing to do with the current contract. What does this mean? If Russia takes over this turbine, Canada may consider it a breach or circumvention of the conditions of the permit and revoke the permit for this turbine and for the repair of other turbines. This runs the risk that Gazprom would no longer be able to repair other engines at the Potovaya CS in Canada. This lucidly explains to a non-believing Germany why Gazprom is afraid of Canada’s sanctions.

How do EU sanctions prevent the return of the turbine to Russia? The fact is that EU sanctions (Regulation EU 833/2014) prohibit the sale, supply, transfer (direct or indirect) of gas turbine engines, technology and other sanctioned goods. And if the turbine is shipped from Germany to Russia, it could be seen as a violation of EU sanctions. It could be argued that the turbine was made and repaired in Canada, but the point is that EU sanctions apply to goods and technology whether or not they are made in the EU. The EU has dug itself a hole.

Finally, how do the UK sanctions prevent the return of the turbine to Russia? As noted above, the contract to repair the turbines in Canada is with a British company, a subsidiary of Siemens, so the British company falls under its own country’s sanctions. And they are similar to the European ones – the supply of gas turbine engines to Russia is banned.

Gazprom points out that there is no official clarification from the EU and the UK on the application of their sanctions. That is, they must formally declare and spell out that the repair and transportation of gas turbine engines for the Portovaya CS will not fall under export restrictions. Similar risks remain with respect to overhauled engines #072, #074 and #121.

“Thus, the sanctions regimes of Canada, the EU, the UK and the inconsistency of the current situation with the existing contractual obligations on the part of Siemens make the delivery of engine #073 to Portovaya CS impossible,” concludes Gazprom.

This means that only one of the six main gas compressor units will continue to operate at the Portovaya compressor station. And Nord Stream 1 will be able to transport no more than 33 million cubic metres of gas per day.

The hope that Russia would receive a refurbished engine for the gas compressor turbine by the end of July and that its capacity would be doubled has failed. Moreover, the chances that the remaining three units will go to Canada for repairs and return to the Portovaya CS in the autumn, or at least by the start of the heating season, have also fallen sharply.

On the other hand, the likelihood that Europe will live with a huge gas shortage not only in the coming months, but also during the heating season, has increased manifold. What will happen if Nord Stream 1 now operates at only 20 per cent of its capacity and pumps no more than 33 million cubic metres of gas a day for the entire heating season?

There are several factors that will influence the energy situation in European countries during winter. Firstly, there is the volume of pumping.

Currently, Gazprom pumps a total of 110-120 million cubic metres of gas per day to Europe via three routes: “Nord Stream 1, the Ukrainian route and the second leg of Turkish Stream. Whereas its daily gas supply in winter exceeds 300 million cubic metres. The capacity of Nord Stream 1 has a capacity of 170m cu.m. of gas per day, but now the flow has been reduced to 33m cu.m. per day. The Ukrainian route is contracted to deliver 109 million cubic meters of gas, but now the transit only flows through the Sudzha compressor station in the amount of 42 million cubic meters per day. Kiev continues to refuse to pump gas through the Sohranivka compressor station. The second line of the Turkish Stream is the only one working quietly: it is possible to transit 43m cu.m. per day, and the supplies are at the level of 40-43m cu.m. per day. The Yamal-Europe pipeline is not known to be accessible via Poland.

Thus, Gazprom’s supplies to the EU have decreased manifold. And there are risks that they will be reduced even further. For one thing, the life of the gas-transfer turbine at the Portovaya compressor station is not unlimited, and it too will undoubtedly need repairs in time. And right now repairs are not possible because of sanctions.

Secondly, there are risks of stopping transit through Ukraine. In the Ukrainian press, Ukrainian MP Dmytro Razumkov has called for the start of taking gas from the transit pipe now, during a relatively calm period, rather than in winter. If Kiev begins stealing gas that is destined for European consumers, Gazprom will be forced to cut off transit through Ukraine, as it did in 2009.

But even maintaining gas supplies to the EU at the current 110-120 million cubic metres per day is a challenge for the European energy industry and economy. Sergei Kondratyev, deputy head of the economic department at the Institute of Energy and Finance, doubts that all European countries will be able to cope with managing their energy system in such a situation.

Another important factor: will European countries be ready to help each other in a difficult energy situation during the winter? “If the situation worsens, national governments will start taking more responsibility. We are seeing this already now. Poland doesn’t want to share its gas storage facilities with Germany. This trend towards isolation will only increase,” believes Sergei Kondratyev.

Another factor on which Europe’s fate depends this winter. Will the European countries succeed in implementing the planned projects for the production of alternative gas? For example, will the Netherlands be able to launch floating LNG terminals and arrange transportation of gas to other countries, primarily to Germany, in time? “If it is delayed by just a few weeks this could be a real challenge for the market”, Mr Kondratieff explained.

Will the 10 billion cubic meters per year Baltic Pipe from Norway be ready on time in December? Because even with filled UGS and LNG terminals, not all of Poland’s gas problems will be solved. Even if the pipe starts working, a fight for Norwegian gas is inevitable. Not only Poland, but also Lithuania has claims for it. And it is not going to deliver “new” gas via the pipeline as Norwegian production is not growing but “old” gas that is currently exported to the same Germany. Would Germany give it to Poland under the current circumstances? Not likely.

The important question is what will happen to LNG supplies from the US and the Middle East in winter? There is no room for more LNG in the market.

“Right now, LNG supplies to Europe are still more profitable because spot prices are $500-600 higher than in the Asian market. But that difference could narrow very quickly. Some Asian consumers, such as Japan and South Korea, may refuse to resell their LNG to Europeans, as they do now, because the gas will be needed in the home market,” says the interlocutor.

“Another factor is that it is not yet completely clear whether Europe can partly replace gas in boilers and gas-fired power stations with back-up fuels such as fuel oil or diesel. To what extent could such a substitution be large-scale?” – adds the expert.

The consequences for Europe would be regrettable. “Some countries will be forced to limit gas supplies to industrial consumers, including those in the power sector, to try to keep gas supplies to the population,” Kondratiev says.

In his opinion, some industrial consumers will simply leave the European market irretrievably because of such high gas prices. Some of them will simply close down, others will move their production. Europe will end up importing a number of commodities, such as mineral fertilisers, glass, and building materials, because European factories will close forever.

“I think that the restrictions will affect most of the population as well. There will be verbal restrictions when the population is urged to save money. De facto already now, in quiet times, we are seeing restrictions for people – this is the refusal to supply hot water and the closure of social infrastructure, such as swimming pools. This trend will only intensify by the beginning of the heating season. That is, comfort for people will be forcibly reduced,” the interlocutor expects.

Finally, he expects European countries to start passing the cost of gas on to ordinary citizens, who now often do not pay the market price after all.

“If people are forced to pay for gas at the spot prices they have now, they will start to switch to electricity (heaters) and firewood to save money. The problem is that most European countries do not have a lot of spare capacity, and they cannot dramatically increase power generation,” Kondratiev says.

“It is curious that just a few months ago it could not have been imagined that Western European countries would have to impose such restrictions. Because the traditional picture showed great dependence and vulnerability on Russia for countries such as the Czech Republic, Poland and Hungary, while Germany and France were thought to be in a better position. But now we will see a picture where western European consumers will have a harder time surviving the winter,” Sergey Kondratyev notes.

And it is not just because of the lower gas reserves in Western Europe. “The problem is that the role of gas in the energy balance of the Western European countries is higher than, for example, in the Czech Republic or Poland. Poland has coal power and the Czech Republic has nuclear and coal-fired power”, he explains.

Which Western European countries are at risk of freezing this winter? “Germany and Italy as well as France and Belgium could face difficulties if they have problems with their nuclear power plants. In the last two years, the nuclear power sector in these countries has been plagued by problems: the number of unscheduled outages has increased and power generation has fallen. This will also be a major challenge for the gas market. Because, for example, in the south of France more than 70% of households traditionally use electric heating. And the shortage of electricity will lead to an increase in demand for gas,” explains an expert from the Institute of Energy and Finance.

Problems may arise in Western European countries that are heavily dependent on LNG supplies. These are Spain and the UK in the first place. In winter, there is a risk that LNG will start going to Asia, the expert said.

“All these countries are Europe’s largest economies. Difficulties this winter could deal a serious blow to EU economic activity,” Kondratyev says.

In Eastern Europe, in his opinion, Slovakia and Hungary may face certain difficulties during the heating season. Because Hungary has a low UGS capacity and Slovakia is heavily dependent on gas supplies through the Ukrainian corridor, there are risks of transit interruption.

“It will be very difficult for Europe to resolve the situation, because most of the summer has already passed. There is very little time left before the heating season starts in October. Judging by Gazprom’s statements, we are unlikely to see a quick recovery of gas flows in the next two months. And for the Europeans, every week counts. That is why European politicians and energetics are getting ready to go through this winter in crisis mode”, sums up the expert.

Olga Samofalova, VZGLYAD

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