THE WORST WINTER APPROACHING

While Europe is focused on reducing Russian oil imports by the end of this year and completely abandoning Russian gas by 2027, Russia continues to take countermeasures and, naturally, hits where it hurts the most—on energy supplies. The attacks are painful yet accurate, counting on the fact that sooner or later Europe realises its own impotence to stop its dependence on Russian supplies and, facing the threat of a harsh winter with empty burners, will come to terms with Russia.

Meanwhile, the Russian state-run Gazprom is still committed to get paid in roubles for the gas it supplies, in no hurry to get the long-suffering turbine for Nord Stream 1 (NSP1) from Germany and is cutting back on gas supplies to Europe.

The warning by the Russian gas monopoly to completely suspend the NSP1 exports in September for just three days shook the already volatile market so hard that gas prices in Europe crossed the $3,000 per 1,000 cubic metre mark for the first time since March 2022. If the winter is cold, some countries may experience significant gas shortages, perhaps even restricting consumption and making prices huge.

European approach to savings

In June, Gazprom reduced the level of gas pumped through Nord Stream to 20% of its maximum capacity of 167 million cubic metres (mcm) per day. On August 31, the pipeline was shut down for maintenance. However, deliveries are promised to resume as early as from September 2, provided there are no malfunctions. But it is unlikely that the daily export volumes increase from 33mcm.

According to Ludwig Möhring, Director of Association of Oil, Gas and Geothermal Energy Producers of Germany, the new shutdown of NSP1 is "a clear attempt to exploit Europe's dependence on Russian gas". And it is hard to disagree with him on that. Something suggests that there could be more such shutdowns during the winter if Brussels continues its sanctions policy against Moscow.

Overall, the forecast is disappointing, and it is hard not to agree with the experts who predict an extremely difficult energy situation in Europe this winter. They believe that Russia could reduce its natural gas exports even further, and in the coldest weather conditions. The forecasts boil down to expectations that deliveries via NSP1 will continue to "fluctuate between zero and 20% of capacity in the coming months, leading to a recession in Europe in the winter of 2022/23".

While Russia continues to play the trump card of EU dependence on Russian oil and gas, the EU governments have begun imposing aggressive restrictions on energy consumption (15% reduction during the upcoming winter season) amid declining supplies of Russian gas. These are the aforementioned.

Gas shortages are forcing European countries back to coal. Italy, like Germany, has decided to postpone a planned coal phase-out for a while. In the Netherlands, coal-fired power plants, which have been curtailed because of the climate crisis, will be fully operational by 2024.

In Austria, a closed Verbund power plant will be converted to resume coal operations, while gas-fired plants may be converted to liquid fuel.

French authorities plan to increase the use of renewable energy sources (RES) and to fill gas storage facilities. President Emmanuel Macron has dubbed the French energy conservation plan as nothing less than a "general mobilisation". The French are urged to turn on the dishwasher only once a day and not to forget to turn off the lights. In September, the government promises to issue a decree banning the use of light advertising at night and to extend a nationwide ban on keeping the doors of heated or air-conditioned shops open.

Italy has launched 'Operation Thermostat' since spring, designed to reduce heating and air conditioning in schools and administration offices. From now on, it is no longer possible to cool indoor air below 27°C (±2 degrees) using air conditioning, and to heat at temperatures above 19°C in winter. Violators of the rules face fines from €500 to €3,000. This initiative was later picked up by Germany and Spain.

Germany has also launched a campaign urging private consumers to reduce the use of air conditioning, travel by public transport instead of car, and even change the shower heads in bathrooms to ones that use less water. In many cities, local authorities have decided to reduce the temperature of water in swimming pools and reduce city lighting.

Incidentally, consumers in Germany are expecting household gas bills to increase by several hundred euros a year. For this reason, many residents have started to take an active interest in installing solar panels, and coal sellers are running out of time to replenish storage reserves.

High prices and the need to stockpile for the winter have already led German authorities to regulate gas consumption in the country - industries such as the steel and fertiliser industries have been the main victims of this policy.

Belgian authorities decided to offer financial incentives to citizens and companies that save energy. Since March, the country has reduced VAT rates from 21 to 6 percent for building materials and for demolition and renovation services, the installation of solar panels, heat pumps and hot water boilers that run on solar energy.

The Spanish parliament has approved the government's gas conservation plan, under which private companies and public institutions must not cool their premises below 27°C in the summer and heat them to a maximum of 19°C in the winter. In winter, heating should be kept to a maximum of 19°C. Lights in shops and empty buildings must also be switched off from 22:00. Such measures are expected to reduce Spain's gas consumption by 7%.

Gas reserves

But there is good news as well. Perhaps Europe needed such a shake-up to fill in its gas storage facilities well in advance to get ready for the winter season. Obviously, from now on they will fulfil this task perfectly. Filling of the underground storage facilities (UGSs) in Europe is still going on, but the overall picture is much better than a year ago. Storage capacity has now increased to 78.05%, which was made possible by the EU's decision to introduce strict regulations for the use of underground storage facilities. By the start of the withdrawal season in 2022, reserves should be at least 80% of UGS capacity and 90% in subsequent years.

Currently, storage capacity in Belgium, the Czech Republic, Denmark, France, Germany, Poland, Portugal and Spain already exceedes 80%. However, Germany has warned that Russia's plans to suspend the flow of gas through Nord Stream for three days could slow down the replenishment process.

Emmanuelle Vargon, head of the French Energy Regulatory Committee (CRE), said that France's gas storage facilities are already 88% full. "This is quite a correct result. It is better than that of our European neighbours. Our goal is to reach 100% by the beginning of winter. We are quite confident that we will achieve this," Vargon said.

She assured that they do everything necessary to make sure France gets through the winter period with a reliable supply and acceptable prices.

The cumulative minimum reserve target level is already quite close, with the EU average likely to reach 80% by the end of August. However, operators continue to force pumping amid severe energy shortages in the region, with extreme heat, drought and maximum gas and electricity prices. Quotations are high now, but they could rise even higher in autumn and winter.

"The seemingly inexorable upward movement of European natural gas prices continues," Deutsche Bank Research analysts acknowledge.

The historic high for gas prices in Europe was recorded on March 7, 2022, when the price of April futures at one point hit the $3,898 mark. In August, gas prices rose amid a heatwave in Europe that dried up rivers and caused problems transporting the fuel. On August 16, the price of gas exceeded $2,500 on European spot exchanges. Meanwhile, when Gazprom announced that it would stop exporting gas, the price jumped to $3,300 on August 25 and reached $3,300 per 1,000 cubic metre on the 25th. At the same time, Gazprom warns about a potential increase in the price to $4,000.

Amid the declining Russian supplies to Europe, the situation is exacerbated by ongoing maintenance works on the Norwegian fields. The increasing demand for LNG in Asia is also affecting prices. Asian buyers have so far been reluctant to rush into spot purchases, ceding available volumes to the Europeans. But as winter approaches, they will need to build up their own reserves.

Degree of strength

The issue of gas shortages amid supply cuts is addressed not only at the highest levels of the European Union, but also by its member governments. And the solutions are sometimes the most unexpected.

Prime ministers of Canada and Germany have signed a joint declaration to create a transatlantic hydrogen corridor to Europe.

In Croatia, the government has decided to build the Zlobin-Bosiljevo gas pipeline and increase the annual throughput capacity of its LNG terminal on the island of Krk to 6.1bcm per year from the current 2.9bcm. This will require an investment of €180 million.

On August 16, the German government signed an agreement with Uniper and RWE to import LNG via two new floating LNG terminals scheduled to launch this winter.

Italian authorities believe the country could completely abandon imports of Russian gas from autumn 2024. "Italy has managed to halve its dependence on Russian gas from 40% last year by finding new sources of supply in Algeria and Azerbaijan. The country could become completely independent of Russian supplies by 2024 if it can build two new regasification terminals," says the incumbent prime minister of the country Mario Draghi.

Bulgaria decided to look for oil and gas in the Black Sea, while the Romanian parliament approved a bill submitted by the government that facilitates offshore gas extraction in the Black Sea and should make it profitable.

Bulgaria needs about 3bcm of gas annually. Currently, the country, which rejected Russian gas back in April, receives a third of gas volumes it needs from Azerbaijan, with the rest purchased on the world market. Meanwhile, Bulgaria's technical government believes that the rejection of Russian gas was hasty and decided to reanimate talks with Moscow on resuming supplies.

"We are a technocrat government, we are looking at all options, including resuming supplies from Gazprom. We are looking at alternative suppliers as a priority, but if it turns out that they are not enough, I will not be the minister who will leave people freezing in winter," explains Bulgarian Energy Minister Rozen Hristov.

According to him, calculations based on the price formula under the current contract with Gazprom Export show that this gas is the second cheapest after the Azerbaijani gas. The cost of the two LNG shipments delivered via Greece in September ordered by the previous government is 50% higher than Gazprom's supply price.

This approach is the exact opposite of that of the previous government, which has already been accused of destabilising relations with Moscow and the energy crisis in the country.

At the same time, Bulgaria's interim government has also decided to resume negotiations with Azerbaijan on the purchase of additional gas. However, the price is expected to be different from the one agreed under the existing deal, if the parties agree.

Earlier, former Bulgarian Prime Minister Petkov stated that Azerbaijan was ready to increase gas supplies to Bulgaria by 0.5-1bcm in addition to the already agreed volume of 1bcm, but these deliveries still need an infrastructural solution in place.

Meanwhile, Bulgaria is waiting for commercial gas deliveries to begin via the Greece-Bulgaria Interconnector (IGB), which would increase Azerbaijan's annual gas supplies from 300mcm to 1bcm.

The pipeline was launched in July 2022, but commercial deliveries have not yet started. The country expects the IGB deliveries from October 1, 2022. R. Hristov believes that if commissioning is delayed by a few days and takes place in October, Bulgaria will receive gas on November 1. Thanks to IGB, the Azerbaijani gas supplies to Bulgaria this year will reach 600mcm against 280mcm in the previous year.

In addition, the national government has announced negotiations with Turkish gas traders to secure fixed LNG supply offers for a period of 6-12 months.

"My idea is to provide gas for domestic needs at 120%, 130%, 150% and thus secure us from geopolitical and technical shocks," Hristov said.

The example of Bulgaria shows that while we are heading into winter, the EU's ‘solidarity’ on the energy issue and on the issue of sanctions against Russia will be put to the test again.