Gas prices at 13-year high in Europe as Russia curbs supply

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Prices of natural gas in Europe has been driven to a 13-year high due to shortages that, according to analysts, have been exacerbated by the actions of Russia.

Pipeline gas exports from Russia's Gazprom to Europe have dropped by around 20% this year on pre-pandemic levels in spite of a surge in demand and dwindling stockpiles. The ensuing imbalance has sent prices in Europe to their highest since 2008, ultimately pushing up energy costs for homes and businesses.

The prices rises have come as tensions between Russia and the West are becoming increasingly volatile. Last week, Moscow said that Russian forces had fired warning shots at a British destroyer off the coast of Crimea, claims that London has denied. At the same time, France and Germany have proposed a new EU plan to help cool tensions with Russia.

Read more: Biden waives Nord Stream 2 sanctions in push to mend ties with Germany

According to reports in the FT, analysts are saying that while Russia is meeting its long-term contractual obligations, additional pressure is being put on the market because of its reluctance to boost supplies to Europe.

Some energy analysts have accused Gazprom of opportunism, attempting to maximise profits at a time when spot prices are high, storage is low and demand in Asia is strong.

In a statement, Gazprom said that it "supplies gas precisely in line with consumers’ requests".

"It is based on those very requests as well as the possibilities for portfolio capacity optimisation that the company books transportation capacity in particular directions," the statement added.

Some other industry observers have said that Gazprom's actions seem designed to support prices and the move may be aimed at putting pressure on EU leaders to give approval to the Nord Stream 2 pipeline.

Read more: Nord Stream 2 complete and ready to be filled with gas, says Putin

Tom Marzec-Manser, a lead European gas analyst at ICIS, told the FT that "Gazprom is effectively saying to the EU: ‘give us the green light for Nord Stream 2 and we will send you all the gas you need’.

"Don’t, and we won’t. We’re not going to send the extra gas via Ukraine and you’ve seen what that means for wholesale prices in a tight global market,’” he added.

Earlier this month, Russian President Vladimir Putin said that Nord Stream 2 was "complete and ready to be filled with gas".

The controversial pipeline, which runs across the Baltic Sea from Ust-Luga, Russia to Lubmin, Germany, also bypasses Ukraine, which relies heavily on gas transit fees from Russia to support its economy. Since 2014, when it annexed Crimea, Moscow has backed a proxy war in the country's eastern territories.

Germany has been one of Nord Stream 2's staunchest backers. It is set to give approval to the project this year following the waiving of further sanctions against the pipeline's operator by the Biden administration. The move by Washington is widely seen as a tacit admission that it was no able to prevent its completion. 

However, September's elections in Germany could complicate the issue further with the Green Party, which has opposed the pipeline, looking set to make large gains and potentially even take the Chancellorship.

Read more: Demise of King Coal could cause turmoil in Germany

Gazprom's move is not the only reason for rising gas prices, though analysts say that it has compounded the issue. A lengthy, cold winter in Europe drained supplies of natural gas in Europe to their lowest levels in nine years, while simultaneously the demand to burn gas instead of coal has been boosted by the rocketing costs of EU carbon allowances to over €50 per tonne.

Globally, supplies of gas are tight with more LNG cargoes being shipped to Asia than Europe. However, Russia is seen as the one country with enough spare production capacity to rein in the price rally.

Some energy sector analysts have said this limitation of sales by Gazprom is a quiet but significant deviation from past form, whereby the company provided as much gas as customers wanted. There are now concerns that Moscow's strategy may be evolving to mirror that of Opec, the cartel of oil producers with which Russia has cooperated since 2016 in order to manage oil supplies and support pricing.

Last month, Gazprom's Director-General of Exports, Elena Burmistrova, denied any change in strategy but did acknowledge that there had been additional requests for more volume.

She also said that "the launch of the Nord Stream 2 gas pipeline" would enable the company "to supply additional demand".

Also read: Making net-zero possible

Marzec-Manser at ICIS told the FT that Gazprom was "leveraging the global supply situation to try and get the result they really want".

"They could have already solved this problem but they’re choosing not to. It is hard to argue the additional cost of shipping through Ukraine is too high when prices are so high. It's making people in the industry realise there's something more strategic in play."

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