In autumn, Europe will face a choice: an energy crisis or Russian gas

— Bulgaria, one of the first to refuse to pay Moscow for gas in rubles, has thought about resuming imports of Russian gas. Will Sofia be able to return to her former relationship with Gazprom, because just a few months ago she announced the final cessation of purchases of “blue fuel” from our country?

— Gazprom’s long-term contract has not been terminated and continues to operate until the end of 2022. To resume deliveries of Russian gas, Sofia will either have to conclude a new agreement or make the necessary additions to existing agreements. From the point of view of the contract, they simply did not make the required monthly payment, after which they were cut off from the supply of raw materials. As is known, in the spring of this year, Gazprom stopped accepting payments for fuel shipped abroad in dollars and euros, which caused the suspension of exports to a number of European countries that refused to switch to new payment terms. If Bulgargaz agrees to open an account with an authorized Russian bank, through which it will subsequently exchange currency for rubles, then financially for the Bulgarian national energy company, relations with the Russian monopoly will not change: Gazprom will be obliged to supply hydrocarbons.

– What other countries, which previously categorically refused to supply supplies from our country or pay for fuel in rubles, may change their minds in the near future?

— Let’s remember: despite the harsh rhetoric, soon after Russia announced new conditions for paying for export gas, many European countries switched to rubles. Some of them carried out currency castling at the government level, since it is the state that owns the corresponding energy structures – in particular, Hungary, Slovenia, and Greece did this. Others, in which there are several traders concluding contracts for gas supply to the domestic market, have made a similar transition in private – Germany, France, Italy, Austria, the Czech Republic, Slovakia. It is worth noting that a number of these agreements have not yet been officially confirmed, but the fulfillment of export-import obligations under the scheme formulated by Russia, apparently, will be carried out in its own way. Specifically, the company will not touch the rubles: the currency for gas is transferred to Gazprombank, which itself exchanges it on the Moscow Exchange and credits it to the accounts of the supplier, that is, Gazprom. No trick that complicates the settlement between the manufacturer and the end buyer can be seen in such operations. However, some European states, whose economy was supported for many decades by the supply of cheap Soviet and then Russian fuel, have now decided to challenge this formality through political slogans.

Why was Bulgaria almost the first to back down?

— Bulgaria was one of the first to announce the rejection of Russia’s proposal to pay for “blue fuel” in rubles, since it was this country that was the first to expire the terms of the advance payment for the supplied raw materials. There is reason to believe that in such a situation Bulgaria acted as a “bargaining chip” for the entire European Union. Other Western countries behind the scenes promised Sofia that they would support the rejection of Russian conditions, but then they decided to play tricks and find mechanisms for more loyal relations with Russia, pushing the Bulgarians to the forefront of the energy confrontation between the West and Moscow. Simply put, the main European initiators of the energy conflict with Russia switched to paying for “blue fuel” in rubles, and Bulgaria was left without gas. Sofia has an agreement to supply 1 billion cubic meters of gas from Azerbaijan, but these volumes provide at best only a third of Bulgaria’s consumption and leave gaping holes in the country’s energy balance. The alternative is to purchase LNG through Turkey, which will not only be more expensive, but also unjustified in terms of logistics.

– And what is the position of the most ardent refuseniks, who declared that they had said goodbye to Russian energy resources forever?

“The situation is more difficult for them. Among these “most ardent” were five rather large EU energy consumers, as well as the Baltic republics. Poland is unlikely to return to contracts with Gazprom. Warsaw’s negative attitude towards the Kremlin is aggravated every day, so the Polish side can not count on the resumption of a good-neighborly dialogue with Moscow from the Polish side. The Poles have repeatedly tried to arrange alternative routes for the supply of “blue fuel”. However, most of them run into insurmountable obstacles. LNG supplies from the US are too expensive and are not carried out on a permanent basis. The Baltic Pipe pipeline, which is supposed to link Scandinavian offshore fields with Polish consumers, is only half completed and will, at best, be launched by the start of the 2023-2024 heating season. Nevertheless, Poland has made its political choice and does not intend to abandon its decision.

In the case of Holland, deliveries were suspended only under contracts that were implemented by Shell. A number of other suppliers will continue cooperation with Gazprom on Russian terms. Denmark received small volumes of gas from Russia, which then did not go to the national market, but were resold on European exchanges, so Copenhagen is also unlikely to return to cooperation with Gazprom soon. As for Finland, this country is largely dependent on LNG supplies, in particular, they are building another terminal for receiving liquefied fuel. From Russia, they also received gas in liquefied form, but in small volumes. However, according to the latest information, Helsinki is going to abandon Russian LNG.

Of the Baltic countries, Latvia can be singled out separately. Riga either announces a halt in purchases, or resumes imports from Russia. Meanwhile, the Latvians did not break the contract with Gazprom, but simply did not always select the declared volumes of raw materials, so that Latvia can also formally be included in the list of EU members who agreed to Russian conditions.

— What is happening with European underground gas storages (UGS) — do they continue to be filled on the eve of the autumn season? To what extent will the EU countries have enough created energy reserves?

— Europe maintains a high rate of filling its underground storage of natural gas. I think that by November 1 they will reach the proper level of 80%, theoretically necessary for the safe passage of the autumn-winter season. Another question is that earlier the cost of a full UGS load cost the Europeans $5 billion, but now the price has risen to $50 billion.

— But deliveries from Russia are constantly declining…

– Everything goes to the fact that Nord Stream-1 can be stopped altogether. Siemens not only does not return the already repaired turbine, but also does not carry out maintenance and repair work on other units necessary for the operation of the pipeline. Gazprom is demanding guarantees that sending turbines for repair and further receipt of repaired equipment will not be the subject of a sanctions attack by the West. Currently, the German company and the Russian monopoly have entered into a clinch that does not allow Nord Stream 1 to operate at the level allowed by European regulators. The confrontation caused by bureaucratic costs is clearly not in the hands of the countries of the Old World, which in the course of the proceedings will lose the volumes of raw materials necessary for the heating season.

– A number of experts argue that in addition to the necessary preventive maintenance, turbines are equipped with special sensors during scheduled repairs that allow them to stop their work remotely. In other words, are European companies that ensure the operation of the Russian export gas pipeline capable of independently regulating the shipment of “blue fuel”?

This assumption is by no means a fantasy. Such a possibility does exist. Gazprom has already encountered precedents when monopolies remotely interrupted the export of raw materials. True, such cases were related to financial, and not to sanctions circumstances. In order to insure itself against the recurrence of such excesses, Gazprom also requires counterparties, who are responsible for ensuring the stable operation of the pipeline, to provide paper-based guarantees of non-recurrence of situations that are critical for all parties, which, in the event of a litigation, can be presented in the relevant legal instances.

— The German energy concern E.ON has downgraded its investment in Nord Stream 1 by €700 million. How can a change in the financial program of one of the European shareholders of the gas pipeline affect the operating conditions of the pipeline?

— The Germans are warning about the reduction of profits from participation in the Russian export project. This is logical, because due to a number of circumstances, the gas pipeline continues to be used at a level far from full-fledged design capacity. Such statements may soon be made by other shareholders of Nord Stream 1: another German company Wintershall, the Dutch Gasunie and the French GDF Suez. These will be purely their losses, which do not directly affect the operation of the gas transportation route, but can make the Europeans think that they are cutting their own income with the sanctions imposed on Russia.

– Many experts predict an inevitable energy crisis for Europe as the cold weather sets in in the autumn-winter season. How realistic is such a scenario?

– A serious problem for European consumers may be precisely the volumes of filling underground storage facilities: will the continent have enough accumulated 80% in the current conditions, or will some industrial consumers have to be cut off from energy supplies if fuel supplies from Russia continue to remain at a minimum level? At the end of July, the EU countries announced a program to reduce energy consumption, which implies a voluntary reduction in gas consumption by 15% compared to the average for the past five years. This agreement will last until the end of March 2023. Members of the EU are allowed to choose the measures by which they intend to save on the distribution of “blue fuel”. So far, such agreements are advisory in nature. But if in autumn or winter European governments begin to decide to limit the supply of fuel to industrial enterprises to meet the needs of households, then it can be argued that Europe is only one step away from the biggest energy crisis in its history.

– Even an increase in the import of liquefied gas from Qatar, Algeria and the USA will not save?

The extractive industries of Algeria and Qatar are already operating at full capacity, and the United States is having difficulty exporting “blue fuel” due to a number of accidents at its energy facilities, primarily due to the disaster at the Freeport liquefied gas plant in Texas coast of the Gulf of Mexico. If initially the Americans promised to resume the work of the enterprise in October, now it becomes clear that the process of resuscitation of the complex will be delayed until next year. In general, it will not be easy for Europe to find alternative sources of raw materials with a sharp reduction or complete halt in gas supplies from Russia.

– To what level can gas prices in Europe reach if the problems with supplies from Russia are not resolved?

— Rise of exchange quotations is uncontrollable. The cost of a thousand cubic meters can reach $5,000, but who will buy fuel at such prices? The production of any marketable product in such a price environment will be unprofitable. Not individual factories and enterprises will be closed, but entire industries and segments of the continent’s economy. Europeans will no longer have to think about large-scale savings in energy resources, but about strict regulation of the remaining stocks of raw materials, subsidizing the most vital social and consumer sectors. However, it is still too early to assume such a catastrophic scenario, because, I believe, in the extreme case, the EU countries will still give up political principles and go towards Russia. Although, it is quite possible that Moscow will again be accused of “energy blackmail” and the use of “energy weapons.”

How gas prices have changed in Europe (per 1000 cubic meters, $):

January 2021 230

May 2021 320

July 2021 465

August 2021 580

September 2021 700

October 2021 1900

November 2021 800

January 2022 1000

March 2022 1200

April 2022 1500

June 2022 1850

August 2022 2225

According to European stock exchanges.