ECONOMY

Quick approval of Nord Stream 2 would balance gas prices in Europe, says Russia

Nord Stream 2 AG updates

The Kremlin has said quick approval of the Nord Stream 2 pipeline would alleviate a feared natural gas shortage in Europe this winter, in comments that increase suspicions that Russia is using supplies as leverage to get the contentious project up and running.

Dmitry Peskov, Russian president Vladimir Putin’s spokesman, said on Wednesday that Nord Stream 2 would “significantly balance price parameters for natural gas in Europe, including on the spot market”, provided Germany quickly approves the pipeline. Gas prices have more than quadrupled since the start of the year to the highest on record.

The comments were seen as stoking the argument that Russia, the biggest supplier of natural gas to Europe, has held back supplies and contributed to a surge in prices that has meant higher energy bills for industry and households across the continent.

Nord Stream 2 runs across the Baltic Sea to Germany and would be an alternative to the pipeline that brings Russian gas to Europe via Ukraine.

Russia last week said the 1,230km pipeline was complete, despite years of opposition from the US and many eastern European countries. German regulators need to approve the pipeline’s operation, which could take several months.

Ukraine has accused Russia of attempting to “blackmail” Europe to approve the Nord Stream 2 line by holding back sales of natural gas in the spot market. US officials warned last week that “lives are at stake” should Europe be hit by a cold winter, given relatively low levels of storage across the continent.

Gazprom, Russia’s state-backed monopoly pipeline gas exporter, has fulfilled all of its long-term contracts to buyers in Europe but has not made additional spot market sales through Ukraine, repeatedly declining to auction additional volumes.

“Gazprom is purposely limiting supply of gas, including through Ukraine,” Yuriy Vitrenko, chief of Ukraine’s state gas company Naftogaz, said on Wednesday.

He said Gazprom has this year booked 40bn cubic metres of gas transit through Ukraine, sharply down from 65 bcm last year.

Gas storage in Europe is running well below normal seasonal levels with most of the shortfall at Gazprom-controlled storage facilities, according to analysts and industry data.

There has been fierce debate in the industry over whether Gazprom has enough production volumes to sell more, at a time when the global gas market has tightened.

Natural gas prices have also been boosted by strong demand in Asia and Latin America for LNG cargoes, while Europe’s production has fallen amid maintenance delayed from last year by the coronavirus pandemic.

A gas pipeline valve
Ukraine has accused Russia of attempting to blackmail Europe to approve the Nord Stream 2 line by holding back sales of natural gas © Gleb Garanich/Reuters

Putin said last week that high gas prices were partly a consequence of “smart alecs” in the European Commission who had pushed for “market-based” pricing, following EU efforts to increase competition in gas markets where Russia dominates supplies.

“There will still be questions over whether Gazprom actually has additional supplies at this time, as the comments from the Kremlin do not fit with the company’s own recent comments that Nord Stream 2 will be rerouted gas rather than additional volumes,” said Tom Marzec-Manser at energy consultancy ICIS.

“But the comments from the Kremlin today will fan the flames of the belief that supplies have been held back, and may be related to an overall strategy to speed the start-up of the pipeline.”

Nord Stream 2 will be able to send 55 bcm of gas to Europe every year, doubling Russia’s export capacity, but the company has indicated volumes flowing to continental Europe will remain roughly the same.

Ira Joseph, head of global generating fuels pricing at S&P Global Platts, said that while Gazprom has long followed a strategy of supplying gas primarily under long-term contracts, it appeared to have “chosen to prioritise its domestic storage in Russia this year rather than making use of its storage in Europe”.

“Gazprom is not necessarily doing anything different to what it has done in past years, but the market expectation — because of the broader issues in the global market and the clear price incentive — is that it should send more gas,” Joseph said.

Additional reporting by Roman Olearchyk in Kyiv and Nastassia Astrasheuskaya in Dushanbe

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