Europe braces for gas crisis as Russia halts supplies

Russia has started shutting off natural gas supplies to Europe, making good on its threat to stop deliveries to “hostile” countries that refuse to make payments in rubles.

On Wednesday, state energy giant Gazprom said it had suspended supplies of natural gas to Bulgaria and Poland after they rejected President Vladimir Putin’s ultimatum to pay in rubles instead of euros – part of a broader effort to prop up Russia’s currency as its economy weakens under the weight of Western sanctions.

The move marks a significant escalation in the economic conflict between Russia and the West, and Moscow’s most serious response to several rounds of European sanctions announced since Putin ordered the invasion of Ukraine in February.

European Commission President Ursula von der Leyen said the suspension amounted to “blackmail”. She said EU member states met for emergency talks on Wednesday and that some had already started shipping gas to Poland and Bulgaria.

“The era of Russian fossil fuels in Europe will come to an end. Europe is making progress on energy issues,” she said in a statement.

Poland and Bulgaria may be able to cope, but if Russia cuts off supplies to other EU countries, and in particular Germany and Italy, Europe’s preparations will be sorely tested. Both G7 economies have said they intend to continue paying for gas in euros or dollars.

Can Europe take it?

According to the European Commission, the bloc depends on Russia for around 45% of its natural gas imports. EU gas storage facilities are around 32% full, according to Gas Infrastructure Europe. This is well short of the 80% target the bloc has set for its member states to reach by November.

Berenberg analysts predict Europe will reach the end of autumn before it starts to run out of gas if Russia abruptly cuts off its supplies. But the bloc moved quickly to find alternative supplies and cut demand.

In March, EU leaders committed to reducing Russian gas consumption by 66% before the end of this year and ending the bloc’s dependence on Russian oil and gas by 2027. The bloc also agreed with the United States. to import more of its liquefied natural gas (LNG) this year.

Germany is accelerating construction of LNG terminals, and Italy signed deals with Egypt and Algeria this month. “This latest aggressive move by Russia is another reminder that we need to work with trusted partners and build our energy independence,” von der Leyen said Wednesday.

Poland is also preparing for a moment like this. While Russia’s gas accounted for around 55% of its total imports in 2020, the country has diversified its energy sources in recent years. It has built an LNG terminal and is preparing to open a gas pipeline to Norway later this year.

PGNiG, the Polish state gas company, said on Tuesday that its underground gas storage was nearly 80% full. And gas flows along the Yamal pipeline – the delivery route Russia cut off – were already slowing.

“[O gás via Yamal] accounted for less than 2% of Russian pipeline deliveries to Europe since the beginning of the year,” wrote Carsten Fritsch, energy, agriculture and precious metals analyst at Commerzbank Research, in a note on Wednesday.

Poland’s preparedness helps explain the market’s modest reaction, Fritsch added.

European gas futures prices rose 24% on Wednesday morning but have since resumed trading slightly above the April monthly average of €100 ($106) per megawatt hour, data from the Independent Commodity Intelligence show. Services.

“Poland’s strategy to move away from Russia was justified,” Rystad Energy analysts Kaushal Ramesh and Nikoline Bromander wrote in a note.

Bulgaria is most exposed, relying on Russia for nearly 75% of its gas imports, according to EU data. But his government said on Tuesday it had taken steps to find alternative supplies. And it’s building a pipeline to Greece.

“Currently, no restrictive measures have been imposed on gas consumption in Bulgaria,” the Energy Ministry said in a statement.

And Germany?

But the damage that a sudden gas cut could cause in Germany is of greater concern. Europe’s biggest economy typically imports about 55% of its gas from Russia, according to its economy ministry.

While it has managed to reduce Russia’s share of imports to 40% in recent weeks, a sudden stop would be disastrous for Germany’s heavy industry, which is already grappling with rising energy prices and a shortage of raw materials.

A sudden disruption to its main energy source could lead to a cut in production and exports and threaten the survival of many of the country’s small and medium-sized manufacturers.

Germany’s central bank said last week that an abrupt halt would push the economy into a deep recession. Some 550,000 jobs and 6.5% of annual economic output could be lost this year and next, according to an analysis by five of the country’s top economic institutes.

“If we lose Nord Stream 1 across the Baltic Sea to Germany, that will be a big crisis,” Ole Hvalbye, a natural gas analyst at Swedish bank SEB, told CNN Business.

Last month, the German government began the first of a three-step emergency plan that could lead to gas rationing, with homes and hospitals taking priority over many manufacturers.

Henning Gloystein, director of energy, climate and resources at the Eurasia Group, told CNN Business that under a major Russian supply cut, Germany and Italy – which depend on Russia for about 41% of their gas needs – will be able to avoid the rationing next winter if they act quickly.

“[Alemanha e Itália] need to try to structurally reduce gas consumption by replacing household boilers with alternative systems such as water heat pumps and asking households to use less gas for heating or cooling,” he said.

“European utilities will need to enter the LNG market and order as many tankers as possible in the coming weeks and months,” he added.

— Sugam Pokharel, Clare Sebastian, Svitlana Budzhak-Jones, and Hannah Ritchie contributed to this story.