Page 5 - FSUOGM Week 17 2022

FSUOGM COMMENTARY FSUOGM

OIES expert warns against gradual

phase-out of Russian gas

The EU faces two options: cut Russian gas ties now or make it clear it will honour
contracts, according to an OIES expert. A gradual phaseout is not an optiion

EUROPE EU efforts to gradually reduce Russian gas that won’t reduce revenues to Russia,” he argues.
imports over time will only bolster Moscow’s The first option, he says, would be impos-
WHAT: revenues by driving prices upwards, Mike Ful- ing sanctions on Russian gas and stopping flow
The EU is aiming for a wood, a senior fellow at the Oxford Institute for completely.
gradual phase-out of Energy Studies, warned in a paper published ear- “The resulting issues surrounding breach of
Russian gas imports, but lier this month. Instead, the bloc faces a binary contract or possible force majeure would keep
OIES senior fellow Mike choice of either ending Russian gas imports lawyers employed for years,” he says. “Never-
Fulwood argues that this immediately, albeit at great cost to its economy, theless, this action would immediately stop
is not the strategy to or making it clear that supplies under long-term Russian revenues, albeit at a likely heavy cost to
pursue. contracts will continue, and, where possible, European economies and potentially very large
buyers should take as much gas as possible, further increases in gas and electricity prices to
WHY: bringing prices down. consumers.”
The EU faces two The European gas market tightened sig- “There would also be severe knock-on
choices: either cut nificantly towards the end of last year, causing effects to gas prices to all the world’s import-
supply immediately wholesale prices at trading hubs to spike. But ers, raising their energy costs – particularly
and bear the significant while prices have increased during this year, the damaging to developing countries,” he con-
economic cost, or commit global gas market has in fact loosened this year, tinues. “In addition, this could well last for
to honouring long-term with European demand down 7% year on year, a long time and impact global energy costs
contracts and take a LNG demand outside Europe down 9%, and until the end of the decade or beyond. Even
course of pragmatism. global LNG supply up 3.5%. As such, Fulwood the surge in LNG supply from the mid-2020s
argues that recent price spikes do not reflect the onwards plus more FIDs taken in the next
WHAT NEXT: market reality but the risks associated with Rus- couple of years may still not be enough to
This strategy does not sian supply. replace the lost supply from Russia.”
factor in potential actions “The conclusion must therefore be that high The second option, he says, would be for the
from Moscow. prices in the last few months have been catalysed EU or national governments “to be absolutely
not by market reality but by the uncertainty over clear that they will continue to take all the gas
the possible invasion and then the actual inva- from Russia under the long-term contracts and,
sion of Ukraine, with the possibility of disrup- to the extent possible, encourage the buyers to
tion to the flows of gas from Russia,” the expert nominate the maximum possible under the
writes. “Statements from Russian ministers contracts. With more supply on the market and,
that gas supplies to Europe could be curtailed hopefully, more certainty, that could bring prices
in response to sanctions, the EU’s REPowerEU down substantially and do more to reduce reve-
plan to drastically reduce imports of gas from nues to Russia and have a much greater impact
Russia this year and the decree from president than many sanctions already imposed.”
Putin that all payments for gas from ‘unfriendly’ The situation of uncertainty today is the
countries should now be in rubles have all served “worst of all worlds, and is keeping prices high
to spike prices briefly before some easing on the and, as a consequence, keeping Russian revenues
news that flows from Russia are being main- from gas at record levels,” he says.
tained at much higher levels than before the Continuing to abide by Russian contracts
invasion.” would not “remove the uncertainty that Rus-
As Fulwood notes, Russian gas flow to the sia may choose to curtail flows, but it would at
EU ramped up dramatically almost as soon as least provide certainty to the market from the
Moscow’s invasion began, as day-ahead prices perspective of the EU and European buyers,” he
on the spot market became more expensive than says. “Additionally, if Russia cuts off European
month-ahead prices under long-term contracts, buyers, then any negative consequences can be
incentivising buyers to increase supplies under laid firmly on president Putin, whereas if the EU
the latter. stops the flows, with significant consequences
“The EU has a binary choice now and neither for global gas prices, much of the world would
option includes continuing with the current be severely impacted, and the blame directed
fudge of reducing Russian imports gradually as towards the EU." ™

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