Page 4 - FSUOGM Week 38 2021

FSUOGM COMMENTARY FSUOGM

European policy exacerbates

energy crisis

The record high gas prices seen today would not be possible had Europe
not shifted away from oil-indexed long-term supply contracts and towards

shorter-term, more market-driven pricing

EUROPE THE widely circulated narrative in the media is York Times on September 8, the company said
that Russia is to blame for record-high gas and that its “mission is to fulfil contractual obliga-
WHAT: power prices in Europe. But in reality, the cur- tions to our clients, not to ‘reduce the concerns’
Russia has been blamed rent situation has been caused in large part by of an abstract market.”
for the record high gas serious shortcomings in European energy policy. The company itself seems to have been caught
and power prices in Gas price futures for October at the Dutch off-guard by the surge in demand this year. Its
Europe. TTF hub hit $950 per 1,000 cubic metres on supply capacity is constrained following a fire at
September 15 – an all-time high at a time of year a major gas processing plant in Siberia in August,
WHY: when markets are typically subdued. Demand is leaving one of its trains offline. Recently the com-
This can be seen as a recovering and supply remains restricted, while pany discussed bringing more wells online and
reflection. In fact, the gas storage levels in Europe remain low. This fast-tracking new supply projects in response to
EU's focus on shorter- spike, while unsustainable in the long term, is high demand.
term, market-driven weighing down on Europe’s post-coronavirus
pricing, restrictions (COVID-19) recovery, while also making gas European shortcomings
on indigenous supply less competitive next to dirtier coal in power Rather than with Gazprom, the blame for
and increased use of generation, undermining EU efforts to reduce Europe’s current energy crisis lies at least in part
renewables have led to emissions. There is also the risk of serious supply with European leadership. For years, the Euro-
the current conditions. shortages looking ahead, especially in the event pean Commission has been pushing to expand
of a cold winter. the use of gas-on-gas, market-based pricing in
WHAT NEXT: Gazprom, as Europe’s biggest gas supplier, contracts between buyers and suppliers, replac-
Current gas prices are has faced accusations of intentionally withhold- ing longer-term oil-indexed pricing.
not sustainable, although ing some supply to drive up gas prices and put As BCS Global Markets (BCS GM) analyst
there is a serious risk of pressure on Brussels to allow Nord Stream 2 to Ronald Smith noted in a research note on Sep-
shortages further down start up. Nord Stream 2 was declared as complete tember 14, whereas Gazprom shipped almost
the line if the coming on September 8, but the pipeline operating com- 100% of its gas to Europe under oil-linked con-
winter proves to be a pany will need certification as an independent tracts in 2008, today that share has fallen to 20%.
harsh one. transmission operator to operate at full capacity, Oil-linked prices are currently three times lower
and the process will take time. Germany’s energy than spot and future prices.
regulator said on September 13 it had four The EC and other EU authorities have played
months to decide whether to issue the certifica- a critical role in causing this shift. Gazprom faced
tion, and after that the decision will be reviewed an antitrust suit which was settled in 2018, and
by the European Commission. as part of that settlement, the company promised
Gazprom denies this charge, and in fact it Europe competitive gas pricing.
exported some 138.6bn cubic metres of gas to “If the old pricing mechanisms were still in
countries beyond the Former Soviet Union in play, Europe might well still be short of gas and
the year up to mid-August, which is close to the facing problems in securing that marginal unit
company’s all-time record for the period. Some of gas, but for the vast bulk of its gas purchases
analysts have also blamed Ukraine’s offer of it would be paying far lower prices than today,”
inadequate transit terms for exacerbating sup- Smith said.
ply scarcity. Russian President Vladimir Putin noted the
Gazprom has largely avoided responding to same in a briefing late on September 9.
these accusations. But in a comment to the New “Smart alecks in the previous European

P4 www. NEWSBASE .com Week 38 22•September•2021