Kremlin\u2019s grip on supplying heat and electricity to Europe is all too apparent as prices rise again<\/p>\n
First published on Thu 24 Feb 2022 10.01 EST<\/p>\n
With Vladimir Putin\u2019s invasion of Ukraine under way, the Kremlin\u2019s grip on the gas taps and pipelines that supply heat and electricity to millions of homes and businesses in Europe is all too apparent.<\/p>\n
Gas is already in tight supply globally and has reached record market price highs in recent months.<\/p>\n<\/p>\n
In the UK, this has triggered a full-blown energy crisis, including the collapse of multiple electricity suppliers and a rise in household gas and electricity bills that has contributed to a growing cost-of-living squeeze.<\/p>\n
As Russia began its assault on Ukraine, prices surged again. The UK benchmark was up 32% to 281p per therm on Thursday, while the closely watched Dutch future gained 31% on contracts for March delivery. So, could Europe\u2019s energy crisis become a catastrophe?<\/p>\n
\u201cWe must collectively cease the dependence on Russian oil and gas that for too long has given Putin his grip on western politics,\u201d Boris Johnson said on Thursday.<\/p>\n
The good news, for the UK\u2019s security of supply at least, is that less than 5% of our gas comes from Russian imports. About half comes from vast, though rapidly dwindling, North Sea reserves. Another third is sourced from Norway, while the rest comes in via pipelines connecting the UK to Europe, or in the form of liquefied natural gas (LNG), which is transported by tankers typically from Qatar or the US. All of this means, according to a report by the Oxford Institute of Energy Studies, that Britain is \u201cunlikely to face a physical shortage of supplies\u201d.<\/p>\n
The bad news is that Russia typically supplies 30-40% of Europe\u2019s gas, meaning it still wields huge influence over prices, which are already eye-wateringly high. The UK\u2019s market is closely connected to markets in Europe, so a price rise in Germany or the Netherlands means British suppliers must pay more to get hold of it. In January, the US bank Goldman Sachs said it expected gas prices to be twice as high as normal until 2025 and that was before Russia launched its attack on Ukraine.<\/p>\n
Nor can the UK turn to stored reserves of gas for relief from market prices. Storage capacity is very low by international standards since British Gas\u2019s owner, Centrica, shut down the Rough facility off the coast of Yorkshire.<\/p>\n
Very. Russian gas flows into Europe via a complex network of pipelines that run through Ukraine, Belarus and Poland to Germany, including Yamal and Nord Stream 1. From Germany, pipelines carry gas to the rest of western Europe and through to the UK.<\/p>\n
If war in Ukraine were to damage or choke off those supply lines, it could cause severe market volatility and a shutdown of European factories to help conserve gas.<\/p>\n
\u201cIt\u2019s possible to use other routes, particularly the Yamal pipeline through Poland and Germany,\u201d said Michael Bradshaw, professor of global energy at Warwick Business School.<\/p>\n
\u201cBut that depends on Russia being willing to do that.\u201d<\/p>\n
So far, the government has stuck to the line that \u201cthanks to our diverse mix of nuclear, natural gas and renewable technologies, the UK has one of the most reliable energy systems in the world\u201d.<\/p>\n
But while security of supply does not appear to be at risk, price pressure could have huge ramifications. The efforts of the chancellor, Rishi Sunak, to help households cope with rising costs involves giving them \u00a3200 off their energy bills, with this \u201cloan\u201d paid back at a rate of \u00a340 a year over five years from 2023. The idea is that part of the cost is postponed until markets return to normal. If the Ukraine conflict is prolonged, prices could remain higher for longer, meaning bills will still be high when households have to start repaying the government.<\/p>\n
When it comes to securing alternative supplies, LNG from the US and Qatar is one option. Officials were reportedly in talks late last year with Qatar over a deal that could result in the gas-rich nation supplying extra cargoes of gas in the event of an energy emergency, according to the Financial Times. But the government denied requesting that Qatar act as a \u201csupplier of last resort\u201d.<\/p>\n
Bradshaw warns that if LNG become a fallback option for Europe and the UK, particularly amid increasing demand for it in Asia, the maths might not add up.<\/p>\n
\u201cThe problem might then be that there isn\u2019t enough LNG to make up for shortage of pipeline gas,\u201d he said. \u201cWe\u2019re in uncharted territory.\u201d<\/p>\n
At 280p per therm, UK short-term gas prices are already more than seven times higher than this time last year and Tom Marzec-Manser, a senior gas expert at ICIS, thinks they could return to the record levels above 450p, reached in December last year.<\/p>\n
\u201cI don\u2019t think it\u2019s unreasonable to believe that gas markets could return to the highs we saw late last year if things were to escalate to the point that gas supplies were affected,\u201d Marzec-Manser said.<\/p>\n
For now, a few lucky breaks have helped to keep soaring gas markets in check, he added. Gas demand in Asia is lower, which allowed Europe to receive a record number of LNG deliveries from January.<\/p>\n
However, a major gas supply disruption could be enough to cause gas prices to soar back to record levels and the weather is always a factor.<\/p>\n
\u201cWe\u2019ve got to hope we don\u2019t have another cold spell,\u201d said Bradshaw.<\/p>\n