energy industry

EXPLAINER: Why Russia drives European gas prices

EXPLAINER: Why Russia drives European gas prices

GAS. A worker climbs a cylinder at a gas compressor station at the Yamal-Europe pipeline near Nesvizh, southwest of Minsk, Belarus, December 29, 2006.

Vasily Fedosenko/Reuters

Europe relies on Russia for around 40% of its natural gas. There are knock-on effects even for countries that do not get supply directly from Russia.

LONDON, United Kingdom – European gas prices surged more than 30% on Thursday, February 24, after Russian forces launched an invasion of Ukraine.

Below outlines why Russia has so much impact on Europe’s gas markets, even in countries that Russia does not supply directly.

How much gas does Russia supply?

Europe relies on Russia for around 40% of its natural gas. The bulk comes through pipelines including Yamal, which crosses Belarus and Poland to Germany, Nord Stream 1, which runs directly to Germany, and pipelines through Ukraine.

A network of interconnecting pipelines links Europe’s internal gas markets.

Not all countries get supply directly from Russia, but if countries such as Germany, the biggest consumer of Russian gas, receive less from Russia, they must replace this from elsewhere, for instance, Norway, which has a knock-on effect on available gas for other countries.

As a result, news on Russian supplies triggers as much volatility in British gas prices as in those in continental Europe, even though Britain typically gets less than 5% of its gas from Russia. Lower overall Russian supply to Europe means less could be available from its largest supplier Norway.

European Commission President Ursula von der Leyen said the European Union would be able to cope with some disruption of gas imports from Russia.

A mild winter has also meant Europe’s gas stocks are healthier than many had expected toward the end of the winter heating season, although they remain near a five-year low.

Gas prices however are expected to remain high, and several European countries have pumped billions into measures to shield households from the impact of record high energy costs.

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What has happened to Russian supply?

Russian energy giant Gazprom on Thursday said gas exports via Ukraine are normal and in line with requests from consumers.

Analysts expect Russia will continue to supply gas to Europe and pointed to uninterrupted Russian supplies to Europe during the Crimea crisis in 2014-2015.

Flows through the Yamal Russia-Europe pipeline, which traditionally account for about 15% of Russia’s westbound supply of gas to Europe and Turkey, have been in reverse mode since December with flows going eastwards, contributing to the high gas prices.

Flows in 2021 through Russia’s three main pipelines to Europe totaled 37,409 gigawatt hours/day, Refinitiv Eikon data showed, down from 41,263 GWh/d in 2020 and 49,431 GWh/d in 2019.

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What about Nord Stream 2?

Russia has said Nord Stream 2, which could double Moscow’s annual gas export capacity in the Baltic, could provide relief to the European gas market.

German Chancellor Olaf Scholz on Wednesday, February 23, halted certification of the pipeline after Russia formally recognized two breakaway regions in eastern Ukraine as independent.

Washington on Wednesday also imposed sanctions on the company in charge of building the pipeline.

Nord Stream 2 AG is a registered Swiss firm whose parent company is the Russian state-owned gas giant Gazprom.

Since the pipeline was not operational, the moves by Germany and the United States have not had an immediate impact on supply.

However traders had expected it would be providing gas supplies by the end of the year and prices for future delivery have surged.

The Dutch Q4 2022 contract was up 35% on Thursday at 114 euros/MWh.

The British Winter 2022 contract was up 31% at 290 pounds/therm. –