Gas crisis/Russia: punished for past failings, EU and UK need transition plan

Russia is often represented as a bear. The surge in natural gas prices suggests a bull might be a better emblem. Gas is a key Russian export and the EU has been running short of it. Soaring prices reflect low European inventory and high Asian demand. This gives Russia political leverage it is keen to exploit.

The EU has only itself to blame. The bloc has increased its gas dependency on Russia over the past decade despite US warnings against doing so. At the same time, limited US export capacity for liquefied natural gas means it cannot plug the supply gap.

The EU depends on Russia for 41 per cent of its imported gas. The UK has little direct reliance but is as sensitive to price squeezes as any nation. Both have ignored the role natural gas should play as a transitional fuel for decarbonisation, advocated by pundits including Lex. One result in the UK has been a rundown in gas storage by two-thirds in the past decade, down towards four-five days of winter demand.

Normally, US LNG would cushion against price shocks. Last year, US gas accounted for 12 per cent of UK imports. This year, US LNG terminals are already running at 95 per cent of capacity, says Rystad Energy, thanks to brisk Asian demand. That is despite US natural gas prices close to $6 per 1,000 cubic feet, perhaps a fifth of the UK level.

Russia, for all its talk, is constrained by the need to fill domestic storage before serving foreign customers. State-owned gas producer Gazprom is at near full effective capacity, says Ron Smith at brokers BCS, producing at 1.4bn cubic metres daily.

Next week Russia will announce its November gas shipments. Then we will see how badly it yearns to sell more gas to Europe, as Citi points out.

That could take some heat out of UK near-term prices. These have hit £2.96 a therm, equivalent to $232 a barrel of oil. The UK sources nearly half of its gas from the very mature UK Continental Shelf, according to government data.

The gas price spike is dealing apt punishment to EU and UK politicians for their short-sightedness. They can atone by writing energy transition plans featuring natural gas as a transitional and reserve fuel, supplied by the US eagle as well as the Russian bear. That should make the latter pull in those bullish horns it has grown.

The Lex team is interested in hearing more from readers. Please tell us what you think of Russia and the gas crisis in the comments section below.

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