Gas prices will rise further as Russia reduces supply further

Gas prices will rise further as Russia reduces supply further

Russia’s gas supply to Europe via the Nord Stream 1 pipeline was further reduced today and Moscow said more delays in repairs could lead to a halt to all flows, slowing Europe’s race to replenish its gas reserves.

The shaky flows came when the leaders of Germany, Italy and France visited Ukraine, which is pushing for faster arms deliveries to fight invading Russian forces and wants support for Kiev’s attempt to join the European Union.

Russia’s state-controlled Gazprom said it was reducing gas supplies for the second time in as many days via Nord Stream 1, which runs under the Baltic Sea to Germany. The latest move reduces supply to only 40% of the pipeline’s capacity.

Kremlin spokesman Dmitry Peskov said supply reductions were not deliberate and related to maintenance problems, citing earlier comments that Russia could not secure the return of equipment sent to Canada for repair.

Germany said Russia’s apology was technically “unfounded” and instead aimed to drive up gas prices. Italy said Moscow could use the issue to exert political pressure.

Dutch wholesale gas prices, the European benchmark, rose by about 30% on Thursday afternoon.

Russia’s ambassador to the European Union told the state news agency RIA Novosti that flows through the pipeline could be completely interrupted due to problems repairing turbines in Canada.

Alexey Miller, CEO of Gazprom, the state-owned company with a monopoly on Russian gas exports via pipeline, said Western sanctions made it impossible to secure the return of equipment from Canada to the Portovaya pipeline compressor station.

Europe is competing to replenish stocks

Nord Stream 1 has the capacity to pump approximately 55 billion cubic meters (bcm) per year to the EU, which last year imported approximately 140 billion cubic meters of gas from Russia via pipelines.

Germany, like other European countries, competes to replenish its gas reserves so that they are 80% full in October and 90% in November before winter arrives. The stores are 52% full now.

Cutting flows through Nord Stream 1 would make that job more difficult, said the head of the German energy regulator.

“We might be able to get through the summer when the heating season is over. But it is imperative that we fill the storage spaces to cope with the winter,” Klaus Mueller told Thursday’s edition of the Rheinische Post.

Uniper, Germany’s largest importer of Russian gas, said deliveries fell by a quarter compared to agreed volumes, but that they could fill missing volumes from other sources. Power producer RWE said it had seen restrictions over the past two days.

Slovakia’s state-owned gas importer SPP said it expected Thursday’s Russian gas supplies to fall by about 30%, while Czech power company CEZ said it had seen a similar decline but filled the gap from other sources.

The European Union is striving to ensure that gas storage facilities in the 27-nation bloc are 80% full by November.

The latest reduction in supply may mean that Northwest European storage is only 88% full at the end of October – 1 billion cm less than planned – instead of 90%, said analysts at Goldman Sachs.

Germany is not alone in facing declining supply.

Austrian OMV said that Gazprom informed it about reduced deliveries, French Engie said that flows had decreased but customers were not affected, while Italian Eni said that they would receive 65% of the volumes they had requested from Gazprom.

The Italian government said that all possible measures were in place to deal with the situation if the gas supply from Russia continues in the coming days. Other European countries have also drawn up contingency plans.

In addition to the challenge, Nord Stream 1 will be completely closed during the pipeline’s annual maintenance on 11-21 July.

Norway, Europe’s second largest exporter behind Russia, has boosted production to help the EU reach its goal of ending dependence on Russian fossil fuels by 2027.

British Centrica signed an agreement with Norwegian Equinor for extra gas deliveries to the UK for the next three winters. The UK is not dependent on Russian gas and can also export to Europe via pipelines.

European states have also increased imports of liquefied natural gas (LNG), but Europe has limited LNG import capacity and the already tight LNG market has faced further challenges with disruptions in US LNG production.

A fire last week at a U.S. LNG export facility in Texas, operated by Freeport LNG, means the facility will be offline until September and will be operational only partially from then until the end of 2022.

The plant, which accounts for about 20% of US LNG exports, has been a major supplier to European buyers.

“There is a risk of further delays, in our view,” said analysts at investment bank Jefferies, adding that regulators must approve the restart while two investigations are underway into the cause of the LNG leak at the facility.

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