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Escalating tensions over Ukraine could intensify Europe’s energy crisis

With Europe still paying, literally, a high price for its energy supplies, the escalating tensions between the US and Russia risk bringing a harder time for Europe as an energy customer. Especially if US President Joe Biden, as already announced, will impose economic sanctions on Russia, if it decides to invade Ukraine.

“What we can see is this: we can see a massing of Russian forces on Ukraine’s borders – the south, the east, the north – that is larger than at any time since 2014,” said US Secretary of State, Antony Blinken, during an interview with Radio Free Europe/Radio Liberty.

“[…] We’re doing everything we can to make clear to Moscow that it has two paths before it: the path of diplomacy and dialogue to resolve differences peacefully, or the path of aggression if that’s what it chooses and the massive consequences that will flow from that,” Mr Blinken continued. “And for each path, we’re fully engaged and we’re fully preparing.” 

Fully prepared to do what? President Joe Biden, together with his European Allies (the European Union, Germany, Poland, France, Italy and the United Kingdom) are discussing different possibilities. There is the one about financial sanctions, maybe not against the opportunity to trade with foreign currencies but only affecting the banks. There is also the possibility to halt the Nord Stream 2 pipeline, already a controversial project and one that Russia cares deeply about.

“If Russia invades Ukraine, one way or another, Nord Stream 2 will not move forward,” said US Under Secretary of State for Political Affairs, Victoria Nuland.

Whatever the sanctions, Russia will reply somehow. As pointed out already several times by US diplomats, we cannot predict what Russian President Vladimir Putin is thinking or what he’ll do (despite the fact that Russia is denying planning an invasion).

“There won’t be a war as far as it depends on the Russian Federation, we don’t want a war,” Russia’s Foreign Minister Sergey Lavrov said in a live interview with Russian radio stations, as reported by AP. “But we won’t let our interests be rudely trampled on and ignored.”

However, many are fearing a reiteration on gas supplies.

Indeed, Russian pipeline supplies covered 41 per cent (13 billion cubic metres, bcm) of extra-EU net gas imports in the third quarter of 2021. The EU is in growing need of gas, as shown by the European Commission’s Quarterly report on European gas markets. Russia is meeting almost half of the EU needs. If this should be cut, what will remain? There is still Norway, which in the same period of time supplied 27 per cent of EU gas; the Netherlands produced 4.8 bcm of gas, whereas Romania produced 2.1 bcm. Overall, indigenous gas production in the EU amounted to 11.7 bcm, not enough to replace a possible lack of Russian gas.

Liquified Natural Gas (LNG) could help replace Russian sources, although its imports only accounted for 17 per cent in the third quarter of 2021. In this regard, the game is led by Qatar, the largest LNG source for the EU, ensuring 4.6 bcm of imports, followed by the United States (4.6 bcm) and Nigeria (2.8 bcm), pushing Russia back to fourth place (2.5 bcm).

Will this be enough? Over the third quarter of 2021, lower than expected gas inflows from Russia resulted in less opportunity to fill up storages, which was particularly true for storages controlled by the Russian gas giant, Gazprom. A significant drop (-15 per cent) was also observed in Russian gas imports through the Belarus transit route (practically the Yamal pipeline), while in September, Gazprom signed a new long-term contract with the Hungarian MVM, changing the traditional supply route through Ukraine to the Turk Stream.

All of the above, low gas storage levels, lower gas inflows, have increasingly impacted the wholesale gas market and prices, as spot contracts rose from 37 euros/megawatt-hours (MWh) to 85 euros/MWh, which highs were hardly ever seen before on the European hubs. Spot contracts rose to record highs, well above 100 euros/MWh, several times in the final months of 2021 and the wholesale gas market prices became very volatile. Forward contracts also rose significantly, signalling that the market does not anticipate a quick return to the price levels seen in the previous years.

Thus, any decisions in the upcoming days and weeks could escalate the current energy crisis, pushing prices even higher and decreasing gas imports to the EU, right in the middle of the winter season.

All the leaders involved in the discussion, from US President Joe Biden to European Commission President Ursula von der Leyen, European Council President Charles Michel, France President Emmanuel Macron and so on, have underscored their shared desire for a diplomatic resolution to the current tensions. On 7 February, President Biden will welcome German Chancellor Olaf Scholz to discuss their shared commitment to deter further Russian aggression against Ukraine. Once again, the energy bills of the average citizen will be determined by high-level political decisions.

Photo: Twitter/US Secretary of State.

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