Sep 17, 2022
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“Many factories are already closing”: Europe ahead of a gas-free winter

Despite assurances from European authorities that the continent’s underground gas reserves have reached record levels, the continent’s consumers continue to worry about the threat of fuel failures in the midst of winter cold. Even in the case of serious energy savings, the last cubic meters of Europe run the risk of running out long before the onset of spring. With what resources will the EU countries be able to survive the coming winter and who will suffer first of all from the restriction of Russian exports?

These questions were answered by experts: Artem Deev, Head of the Analytical Department at AMarkets, Alexey Fedorov, TeleTrade Analyst, Artem Tuzov, Executive Director of the Capital Market Department at IVA Partners Investment Company.

Despite the complete shutdown of the Nord Stream 1 gas pipeline, which serves as the last significant channel for the supply of Russian “blue fuel” to the European Union, the injection of gas from our country into underground storage facilities (UGS) in the countries of the Old World continues: according to Gas Infrastructure Europe, the EU reserves are almost full by 85%. According to German Chancellor Olaf Scholz, more than 91 billion cubic meters of gas accumulated in storage facilities will allow the countries of the continent not to freeze next winter. Meanwhile, in “Gazprom” this conclusion was called into question. According to the Russian company, a reliable passage of the upcoming autumn-winter season to European countries is not guaranteed even by close to maximum gas reserves in underground storage facilities. Many international experts share this skepticism. According to the forecasts of the reputable analytical company ICIS, if Russia does not resume gas supplies, then about 160 gas storage facilities located in 18 EU countries will quickly become empty. And the stocks of many countries with which the EU has a common supply chain, such as the UK, Switzerland and the Balkan countries, will be used up until March 2023.

– European leaders, primarily German Chancellor Olaf Scholz, argue that the countries of the continent are able to get through the next heating season even without supplies from Russia. Independent European experts agree that the UGSFs in the EU are 83% full, but warn that this level is only enough to cover a fifth of the EU’s annual consumption. And already in February 2023, EU gas storage facilities may be empty. To what extent are such fears justified?

Tuzov: European underground storage facilities are designed for the efficient operation of the gas transmission system of the EU countries. During peak consumption, hydrocarbons are usually immediately used to generate energy, and only at night, when the need for electricity is reduced, imported volumes are sent to fill gas storage facilities. If the supply of Russian gas to the EU is completely cut off, then underground reserves alone will not be enough for the whole winter.

Fedorov: The statements of European politicians regarding the high readiness of the EU to overcome the energy crisis and successfully pass the 2022/2023 heating season should be treated with a great deal of skepticism. Due to the mistakes made by EU leaders in energy policy, assuring the electorate of the limitless possibilities of “green energy” and the declining role of traditional sources of heat and light, especially from Russia, their political careers now depend heavily on confirming the correctness of the chosen course. For European leaders, it now came down to a simple choice: admit mistakes, negotiate with Russia and save their own economy, or leave government posts.

Optimists say that the accumulated stocks of European UGS facilities will last for 3 months, realists say that the resources will run out in 2 months. The difference is small, given that the heating season starts on October 8, and without Russian gas, European consumers will still not be able to get through the winter. But the more clearly EU politicians realize such a prospect, the more desperately they are ready to act, protecting precisely their political future. A vivid example of this is an attempt to impose a price limit on gas imported to Europe, which can lead to catastrophic consequences for the Europeans themselves. However, a warm seat in the Cabinet of Ministers for one or another European politician can indeed guarantee such a move for several more years.

— According to representatives of Gazprom, none of the world’s producers will be able to increase the supply of hydrocarbons to Europe as quickly as Russia. Who will Brussels turn to first when EU countries run out of stored fuel? Will Qatar, Algeria, and other LNG and conventional pipeline natural gas suppliers be able to meet the needs of Europeans?

Deev: It will be really difficult for other suppliers, among which the United States is the largest exporter of liquefied gas, to quickly increase production in the EU. Washington has already stated that it will not be able to fulfill the wishes of Europe: the number of developed wells in the United States is not growing at the pace necessary to quickly fill European UGS facilities. Other commodity exporters, including Norway, Australia or Qatar, did not count on a sharp increase in European demand. They did not take into account that Gazprom, with a 40% share of the European market, could simply stop selling raw materials to Europe. It will not be possible to quickly compensate for such volumes – Russia supplied about 160-180 billion gas per year to the EU. It is unlikely that any alternative suppliers will be able to reimburse such a volume.

– If the crisis comes, who will be the first to be cut off from electricity by European officials: industrial consumers or households?

Tuzov: First of all, the industrial consumers of the continent will suffer. In fact, many European factories are already closing. The volumes of gas that the European Union needs are automatically reduced. At this pace, by winter, the EU countries will indeed be able to abandon Russian gas. True, a significant number of industrial enterprises will have to be closed.

Deev: In order to avoid social unrest, European states will first turn off industry, not the population. This is evidenced by the measures already taken by local politicians. To compensate for the population’s heating costs, tariffs are fixed, subsidies are paid … Some countries have even moved to the nationalization of companies in the energy sector in order to prevent the collapse of the economy – in Germany, for example, the energy holding Uniper is nationalized.

— Which European industries are at the greatest risk due to the critical situation in the energy sector and which of them is more likely to be on the verge of bankruptcy?

Tuzov: Answering this question, we can already talk not about the future, but about the present. In September, the Slovak concern Slovalco, the main European supplier of aluminum, announced the curtailment of production. The Dutch zinc plant Budel, the Romanian chemical giant Chimcomplex and the Polish fertilizer producer ANWIL announced the stoppage of conveyors, while the Yara chemical plant from Norway reduced capacity by up to 35%. In Germany, a large ammonia producer SKW Sticksoffwerke Piesteritz, which seems to have accumulated gas reserves necessary for the heating season, is forced to close regional branches and is ready to completely stop production due to a lack of money to pay the fuel surcharge. In such a situation, it is worth asking the question of which industry sector of the EU will not suffer from the crisis – it will be much more difficult to name such structures.

Deev: It is already clear which enterprises in Europe will reduce production or completely stop their conveyors. These are energy, metallurgical and chemical sectors. Next in line are mineral fertilizer producers who require nitrogen. By the way, the reduction in the production of nitrogen fertilizers by 30%, which may happen in the near future, according to the European officials themselves, threatens with a food shortage in Europe in 2023-2024.

— If stocks in underground gas storages run out, then European countries risk facing the worst energy crisis in history. How does this threaten the European economy?

Deev: Gas reserves in European UGS facilities cannot run out. There is a certain level below which it is technologically impossible to allow a reduction in stocks. True, one can imagine what this threatens: for example, in a large city, electricity is lost for a day or two or for a week. Imagine: traffic lights, ATMs, shops, public transport do not work; products are not brought in, products of the widest profile are not produced. People live in the dark if there are no batteries or chargers… Of course, the population can endure this for some time, but there are also full-cycle enterprises, the shutdown of which in such conditions risks leading to man-made accidents and problems with a new launch. For the European economy, such a blackout threatens with consequences comparable to the Second World War.

Tuzov: If necessary, Brussels will simply print more euros. There is no need to wait for the economic situation in the EU to change dramatically on the horizon in a year. It will take decades to resolve the issue of revolutionary changes, when the margin of safety formed by the colonial economies, the use of cheap labor in Asia and cheap resources from Russia, will end. Domestic entrepreneurs are accustomed to the changing external environment. Now EU businessmen will have to assimilate to the same “weather conditions”. A catastrophe will not happen, but you will have to spend money on “jackets” and “umbrellas”.

— Is there any threat to the Russian economy from a potential energy crisis in Europe?

Fedorov: The world is very integrated, because the economic problems of one large country, especially the whole region, cannot but affect the entire world economy. The deeper the economic recession in Europe (and taking into account the energy crisis, the fall in GDP in the EU can reach 4-6%), the more the Russian economy will fall. This needs to be realized. Given the mutual sanctions that have been introduced, negative correlations, of course, may be lower, but they will certainly reach us through the foreign exchange market. First of all, the problems will be expressed in the growth of the federal budget deficit and the weakening of the ruble, which will provoke a new inflationary surge in Russia, perhaps a little smaller in scale than the one that covered our country this spring.

Deev: For Russia, the decline in oil and gas revenues this year has already resulted in a budget deficit of 1.7 trillion rubles and the prospect of spending cuts. Not only will our prices for some goods rise, to which we are already accustomed, but the entire domestic economy will also rise. The energy crisis is a double-edged process that neither Europe nor we need.

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