Sep 6, 2022
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The gas gap between Europe and Russia took place

A complete shutdown of Nord Stream 1 occurred due to a technical malfunction of the last operating turbine. Europe and the markets reacted to this, at first glance, weakly. Although there is cause for concern. From that moment on, there was a real risk that Nord Stream 1 might never work again. What price will you have to pay for it?

On Friday, September 2, Nord Stream 1 did not work after three days of preventive work. Gazprom said that gas supplies through the pipeline have been completely stopped until the comments on the equipment are completely eliminated.

Gazprom explained that further operation of the Trent 60 gas compressor unit at the Portovaya compressor station without eliminating the identified defects creates a risk of fire or explosion, that is, it affects the industrial safety of the entire station. An oil leak was found in the turbine engines. Moreover, “such a leak was previously recorded, in particular, at GPU No. 14 (engine No. 120), progressed and had a more extensive character. The presence of this defect on several units indicates its systemic nature,” Gazprom added.

It is important that the elimination of defects is possible only in the conditions of a specialized repair facility, which, as you know, is located in Canada. And with the repair there are big problems.

A deadlock has developed, in the context of which this stop may be fatal for Nord Stream 1. The gas pipeline may never work again. “When earlier traders tested 3.5 thousand dollars per thousand cubic meters, they showed an approximate bar for prices, which is possible if Nord Stream 1 is turned off. In fact, it happened on September 2nd. There are no positive signals that this problem will be resolved in the coming months,” says Aleksey Gromov, Director for Energy at the Institute of Energy and Finance.

“According to my feelings, now the realization is coming that the gas divorce between Russia and Europe has taken place. And only those deliveries that still go through the Ukrainian route and the Turkish Stream will be preserved, because our friendly countries are there, and we meet their needs,” says Oleksiy Gromov.

Now he does not rule out a scenario that he considered unlikely back in the spring – this is the announcement by Europe of an embargo on Russian gas or a price ceiling, which is akin to an embargo.

It is paradoxical that in Europe the news about the shutdown of the last working turbine on the gas pipeline was perceived, albeit negatively, but quite calmly. Thus, gas prices on the European stock exchange soared by 35% after a record weekly fall. But they reached 2900 dollars, and these are not record values. The euro fell, but it has been trading below parity with the dollar for several days now. Economists have again started talking about a recession in the EU, but they have been scaring it for a long time too.

Why doesn’t Europe look shocked and upset that Nord Stream 1 may no longer work?

“Firstly, at the political level, Europe has long said that Russia will stop Nord Stream 1. Both sides have outlined their position and do not intend to retreat from it. They realized that gas would not flow through this channel. And this paradoxically calmed the markets. This is such a psychological factor when both sides understood the inevitability of the situation and calmed down,” says the industry expert.

Russia’s position is that Canada, the EU and the UK should remove sanctions from any repair work on the gas pipeline on a permanent basis, and not on a temporary basis, as was proposed for the repaired turbine stuck in Germany. The position of Germany and Europe is also indicated – they will not do anything.

In addition, Nord Stream 1 was already operating at only 20% of its capacity, and not at full capacity, which reduced the degree of tension from the closure.

“The second point is economic. In the EU countries, there was a natural reduction in gas consumption, which averaged 20% of the 450 billion cubic meters of gas that the EU consumes per year. It happened in the first half of this year. The main reason is that industry, the economy and people began to save gas consumption due to high gas prices that have been prevailing since the fall of 2021. Therefore, Europe will not need as much gas this winter as it consumed in the heating season last year,” says the energy director of the Institute of Energy and Finance. Expensive gas kills demand, this is an economic pattern. At other prices, gas consumption would not have fallen. It turns out that gas consumption in Europe on average decreased by 90 billion cubic meters of gas. This is more than the Nord Stream 1 capacity of 55 billion cubic meters.

“The third factor is the news that Europe’s gas underground storage facilities are already almost 80% full and only a little to 90% is left. The minimum level has already been reached, and the desired level will soon be reached,” says Gromov.

In fact, gas prices jumped faster this summer than now, precisely because the Europeans tried to pump gas into their underground storage facilities faster. This created a demand for blue fuel in the calm summer period. Now the UGS problem is almost solved, and the real heating season in Europe starts only from mid-October-November. Plus, Asian countries are not yet ready to fight for LNG and pay more than $2,000 per thousand cubic meters for it (Europe pays more than $2,900).

But there will definitely be price hikes in Europe for gas. During the heating season, the demand for gas will grow naturally. Plus, Asian countries will already start fighting for LNG, which means that its volumes for Europe may decrease. Also, price jumps will occur during frosts. Therefore, $4,000 is a very basic forecast.

“Factors for rising prices this winter. This is a potential shutdown of gas supplies through Ukraine. The second factor is the weather. However, in general, the accumulated gas reserves, coupled with a sharp decrease in consumption, in principle, allow Europe to get through this winter. Another thing is what price Europe will pay for this,” Alexey Gromov believes.

It should be understood that gas consumption during the heating season will decrease even more due to the further closure of industrial enterprises, the process has already begun and will gain new momentum in winter. First of all, energy-intensive plants for the production of fertilizers, cement, metal products, etc. will suffer.

In addition, the EU plans this week to adopt a whole range of measures to forcefully reduce gas consumption. In particular, about lowering the temperature in residential buildings by one degree to 19 degrees, which will certainly reduce the comfort of ordinary Europeans. In other words, as Gromov says, they will not freeze this winter, but it will be cool in the apartments. At the same time, energy costs will increase for everyone – for states, for industry, and for the population.

Why Europe and Russia have reached a gas impasse? “Everyone understands that Europe will give up Russian gas, it’s a matter of time. At first, Europe wanted to cut its own gas purchases by about two-thirds, but only by 2030. After the NWO in Ukraine, Europe decided to speed up and reduce gas purchases until 2025-2027. But Russia decided to do it itself. Of course, there are technical problems, but when the parties have an interest, then problems with repairs are solved. Russia does not want to be the outlier. Russia is forcing Europe itself to get out. I am sure that for Russia now is the best moment for such a gas gap. From a financial point of view, it will not be difficult for us to do this this year, but it will be difficult for Europe,” says Alexey Gromov.

The expert does not believe in the possible launch of Nord Stream 2 even in severe frosts, because in this case Germany will need to show political will and run counter to the actions of the EU and the USA, and there are simply no such strong political leaders in the country now.

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