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Weekly comic: Putin’s whistle brings relief to Europe’s gas markets

© Investing.com

By Geoffrey Smith

Investing.com – An energy crisis is ringing alarm bells in Europe. Can Vladimir Putin turn them off? And if so, does he even want that?

Prices for both and the electricity it produces are skyrocketing due to a combination of factors, threatening to stall a fragile economic recovery by restricting energy supplies and putting a strain on consumer wallets.

The spot prices for electricity in Great Britain exceeded 400 pounds (552 US dollars) per megawatt hour on Monday, while the October benchmark futures for natural gas on the German exchange EEX rose by 50% to the record value of 61.09 euros since the beginning of August / MWh have increased.

There are many reasons for this drama: old fields in the British North Sea had long unplanned maintenance outages this year; Groningen, the largest Dutch field in Europe, will be permanently closed due to the risk of earthquakes; rising carbon prices have encouraged power producers to burn gas instead of coal at almost any cost; Demand for industrial gas has been stronger than expected due to economic policies that have supported household consumption, while a cold spring heated households longer than usual. To make matters worse, the UK faced an acute supply shortage as unplanned nuclear power plant outages coincided with a surprising drop in the availability of wind power.

A nightmare scenario, especially for households. Their energy bills skyrocket just as governments begin shutting down the employment programs that have kept them from layoffs for the past 18 months.

Governments across Europe are panicking. Spain’s Prime Minister Pedro Sanchez said Monday he would cut € 1.4 billion (US $ 1.7 billion) in taxes on electricity bills and divert another € 650 million in “excess” profits from energy companies. Shares in the two largest utilities in the country, Endesa (MC 🙂 and Iberdrola (OTC 🙂 were down 5.4% and 1.9%, respectively. Meanwhile, France’s finance minister indicated that it would extend a loan for household electricity bills, which already costs around 800 million euros per year.

One might think that a perfect moment for Russia to open its shiny new gas export project: the Nord Stream 2 pipeline, which can transport 55 billion cubic meters of gas annually directly from Russia to Germany under the Baltic Sea.

Gazprom (MCX :), the operator, announced last week that the laying of a pipeline that has been delayed for years has finally been completed. It said in August that it could deliver 5.6 billion cubic meters this year.

However, things are unlikely to go that quickly. Before you can start, the pipeline must first be tested for leaks and other security issues. It must be certified by an internationally qualified company. Only then can it receive a final operating license from the Federal Network Agency, the German infrastructure regulatory authority.

This is going to be difficult as previous US sanctions to stop Nord Stream 2 have deterred all potential candidates to conduct and audit the work, such as Baker Hughes and Norway’s DNV GL. A deal between the outgoing German Chancellor Angela Merkel and US President Joe Biden at the beginning of the summer did not solve this legal problem.

Sensing that time is on their side, the Kremlin and Gazprom have contented themselves with letting the EU stew in its own juices. Deliveries in the summer, when utilities typically replenish their gas storage facilities, have been lower than usual, and Europeans are skeptical of Russian claims that this, too, is due to purely technical failures. As a result, the continent is entering peak season with just 76 billion cubic feet of gas storage, 18% below the five-year average, according to data compiled by Celsius Energy.

There will also be silent (or not-so-silent) amusement in Moscow as the US, having pushed so hard to tie Europe to its LNG exports, will not be able to increase supplies just when Europe needs them most as Hurricane Nicholas disrupts terminals in Houston.

None of this automatically condemns Europe’s gas markets to a winter full of bottlenecks and prices forcing its factories to close. Winter can be milder than expected. The British fields are already starting up again. The Federal Network Agency can issue a preliminary permit for transport if it sees Germany’s energy supply at risk. In the medium term, the International Energy Agency expects that the growth in demand will slow down over the next three years and that it will be well covered by new export projects in the Middle East and, uh, Russia.

The current drama makes it clear, however, that Europe – as a massive net importer of energy – is now even more susceptible to supply shocks as a result of a series of political decisions in the last decade: the accelerated phase-out of nuclear energy in Germany, the crackdown on fossil fuels in the new EU Directives and, last but not least, the aggressive antitrust measures against Gazprom in recent years, which have strongly induced the Russian giant to teach Europe a lesson in energy security. None of these challenges will go away anytime soon.

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