Brussels without gas agreements, Moscow dictates its terms

Brussels without gas agreements, Moscow dictates its terms
Brussels without gas agreements, Moscow dictates its terms

The dispute between the European Union and Russia over gas is all about the duration of the contracts. While the price of the raw material that the EU is holding in apprehension shows no sign of falling, a hidden challenge continues between Brussels and Moscow on how to regulate supplies in the coming months. Or rather, years. On the one hand the Kremlin denies any involvement behind the shortage that is keeping the price above the warning levels, on the other hand the Commission continues to repeat that while Norway has given ample willingness to increase supplies, Russia is tracking more than due. One thing is certain: today the EU finds itself with an open side, stocks at historic lows, internal divisions and an even stronger ‘political’ dependence on Moscow than before, when winter is almost upon us.

During the past week the cost of gas had slightly decreased in the wake of the relaxing openings of President Vladimir Putin, who showed himself willing to increase supplies in the pipelines to the Old Continent. On Monday, however, prices started to rise again, reversing the course. The November gas price at the Dutch hub TTF rose by € 7.70 to € 91.50 per megawatt hour (MWh), while the December delivery contract rose by € 8.20 to € 92 / MWh. The arrival of a cooler than usual autumn is driving bullish forecasts. Furthermore, analysts at Engie EnergyScan explained that coal prices in Asia are more expensive, which could signal a greater purchase of coal and gas by energy producers, which could in turn put upward pressure on European gas. .

In an interview with the Spanish newspaper El Pais, the High Representative of the Union for Foreign Affairs and Security Policy Josep Borrell admitted that the EU still needs Russian gas and will likely need it more than it has bargained for. . Words, those of the commission member who went on a diplomatic tour to Russia in February that proved disastrous, which were promptly re-launched by the official Russian news agency Tass. The Commission, however, finds itself with dull weapons to try to stem the expensive gas that is causing the bills of European citizens to rise and jeopardizing the recovery of the entire industrial fabric due to skyrocketing electricity prices. Brussels “will encourage member states to lower taxes on energy,” said EU Commissioner for the internal market, Thierry Breton, anticipating some issues to a French radio that will be addressed in communications that the Commission will announce on Wednesday. “Each state will be given the opportunity to lower taxes on energy, such as VAT, to redistribute it in favor of the most disadvantaged”, explained Breton according to which, in the EU, there are 36 million that can be considered in the most penalized by the price crisis.

For now, the project launched by Brussels and supported by some (few) Member States of shared storage centers at Community level has therefore ended. Several countries, in particular the so-called “frugal” – the same ones who warn of the long-term risks deriving from inflation in the monetary field – believe that the causes behind the rise in gas prices are transitory and therefore worthwhile wait for a natural adjustment of the market. Probably on Wednesday the Commission will guarantee its commitment to consider common stocks, in the wake of the ways of procuring vaccines, starting from December but only on a voluntary basis between the states that have shown themselves available such as the Republic, France and Spain. But the times are expected to be long anyway, too long in view of this winter. Because even in the Commission there are those who believe that the market worked well and that there is no need for substantial corrections. Borrell, on the other hand, has a different opinion according to which “it would be reasonable to rethink the current model of the electricity price system, but a change of this type takes time, while the current situation requires faster decisions”.

The dispute, as mentioned, is all about the duration of the contracts. In Russia the system of pricing of natural gas is different from that adopted by Western European countries in recent years after the liberalization of the market. The price of gas on the Russian market in long-term contracts tends to be anchored to that of oil (slightly lower than the latter). “Those who have agreed to conclude long-term contracts with us in Europe can now be happy with it,” Putin gloated a few days ago.

On the European market for several years it has been decided to detach the price of gas from that of crude oil, making it determined by the meeting of supply and demand (price hub). Gazprom has not changed the layout of its system over time pricing but it has introduced “discounts” to make it competitive and less susceptible to oil fluctuations. Thanks to these alternative concessions, the discounts offered by Gazprom have often turned out to be still affordable, even if less than the hub prices.

In recent years, Europe has decided to release gas from indexation to oil to make the price more flexible, as well as negotiating with Gazprom and other companies that charge prices oil-linked ever shorter contracts. According to Putin, this was the capital mistake of European countries. For the Russian president, the shortage “is a sum of various factors, including hasty actions, that have led to an imbalance of the European energy markets”. “Russia – he underlined a few days ago – is a reliable gas supplier for Asia and Europe and fully respects its commitments”. “Gazprom – he added – has never refused to increase gas supplies to Europe, if requested”. If anything, it would be “the policy of short-term contracts” to have turned out to be “wrong”. However, this is a mutual dependence, since Russia is also dependent on European purchases. A few days ago, Foreign Minister Lavrov recognized Europe’s dependence on Russian supplies “but we too depend to a large extent on who buys this gas”.

It is understood that in the global context of severe shortage of all raw materials, Russia, through its state and monopoly company Gazprom, has every interest in entering into longer-lasting supply contracts with its customers. And above all with those customers who have decided to accelerate the green turn, gradually but decisively freeing themselves from fossil energy sources. First of all, oil and coal, but also from gas which is in some ways considered a “bridge” commodity, because it is less polluting than the others, to reach the green turning point. A colder winter than usual last year, and a less windy summer than usual this year, with obvious consequences for wind farms in Northern Europe, however, exacerbated the shortage generated by the explosion in global demand following the pandemic. Tass, for its part, has reported satisfaction – or something that appears to be so – in the forecasts drawn up by Gazprom for a “cold and snowy” winter 2021-2022.

Gazprom Export has announced that it will sell more gas to Europe on its electronic trading platform (ETP) during this week with delivery in the third quarter of 2022. And it will do so on the basis of medium and long-term contracts. In an interview with the Financial Times, Vladimir Chizhov, Russia’s permanent representative to the EU, said he expects Gazprom, the state-controlled company that supplies 35% of Europe’s gas needs, to respond quickly to the president’s instructions. Vladimir Putin, to adjust production. Putin “has given some advice to Gazprom, to be more flexible. And something makes me think that Gazprom will listen, ”said Chizhov, convinced that the action will take place quickly. While rejecting MEPs’ claims that Russia played a role in Europe’s gas crisis, Chizhov reiterated that Europe’s choice to treat Moscow as a geopolitical “opponent” did not help.

However, suspicions of Moscow’s role have not been entirely dispelled. On the other hand, it is the Russian exponent himself who says that “people will start looking around, looking again at gas and coal, something that some are already doing”. As if to mean that Europe will have to go back to its steps and stock up on those fossil fuels that it would so much like to set aside in the coming years.

Today the European gas stock is traveling at levels below the average of recent years. At the end of September 2021, compared to last year, EU storage plants lack a total of about 20.5 billion cubic meters, according to reports from Gazprom.

It is clear that the political clashes currently underway between the EU and Russia also play a role in the gas game. The European Union’s intention to ask Russia to increase gas supplies appears “cynical” in light of the simultaneous imposition of sanctions and the series of threats, said today Alexei Pushkov, chairman of the Federation Council commission (chamber Parliament) on information policy and interaction with the media. Furthermore, Pushkov stressed that the Americans also buy gas and oil from Russia and that Europe finds itself in the current situation due to its wrong energy policy, in particular due to the bet on renewables. Brussels is obviously aware of this party game: according to Borrell, Moscow “wants the opening of Nord Stream 2”, the gas pipeline of discord, strongly opposed by the United States, which connects Russia to Germany without passing through Ukraine, with which Moscow is in conflict. In recent days, Gazprom has started pumping gas into pipes but the entry into operation is bound to the overcoming of some legal issues in Germany that Moscow would like to overcome as soon as possible in order to diversify its supplies and increase its centrality in European supply chains. It is clear, added Borrell, that Moscow “takes advantage of this situation to bring water to its mill, it is an attitude that is part of the game of political pressure”.

Those who are directly angry with the Russian moves are neighboring Poland which, due to gas, is also fearing for the stability of food prices. The increase also affects that of fertilizers, which grew by 79% compared to last year, and the responsibility “is to be found in the decisions of the Gazprom company, which blocked the sale of this resource”. The allegation is contained in an information note that the delegation of Poland presented today to the Agriculture and Fisheries Council in Luxembourg. Already during the Environment Council last week, Warsaw had pointed the finger at speculation and Russia. Today he stressed that the increases in gas prices that impact on fertilizers “jeopardize the achievement of the key prerequisites of the European Union deriving from the European Green Deal”. “The impact of the fertilizer crisis will extend to the entire economy – the note reads – which, in turn, will cause social tensions”. Poland asks for compensation for farmers to “stabilize food prices”.

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