For the winter of 2022-23, the European Union has set itself the goal of filling its underground gas storage to 80% of its capacity by October. It may be possible, but only at a huge political – and moral – cost: the EU will have to keep buying as much Russian gas as it does now, paying Vladimir Putin around $200m a day , or approximately $36 billion over the next six years. month.
It would cement the hypocrisy at the center of current European energy policy and diplomacy. While EU politicians pledge to punish the Kremlin for Russian war crimes in Ukraine, they refuse to impose a gas embargo that would hurt Putin financially.
For the first time, Josep Borrell, the EU’s top diplomat, spoke candidly about the problem of buying Russian coal, oil and gas. “Every day, approximately, we pay 1 billion euros to import Russian energy, and this is, obviously, a source of income which is used to finance the war,” he said on Tuesday.
For weeks, European diplomats have privately pushed back against the accuracy of that figure and the role of the billion-euro energy bill in the war. The taboo is now broken. Brussels implements a coal embargo – the first time it has targeted Russian energy. Whether that will follow with oil and gas remains to be seen. The European Commission said it was considering what to do about oil, but in a telling silence it said nothing about gas. For now, Europe is still buying Russian gas – shipments via Ukraine hitting their highest level in four months on Tuesday.
These flows have limited prices: European gas reached a record high of 345 euros ($380) per megawatt-hour in early March, but has since fallen back to 110 euros per MWh.
Europe’s greatest ally in the current energy crisis has been the weather. Between the beginning of October and the end of March, average temperatures in northwestern Europe were about 1.3 degrees Celsius above their 30-year average, which reduced the demand for heating. February was about 3 degrees Celsius warmer than normal. According to Gas Infrastructure Europe, an industry association, regional gas stocks hit a seasonal low of 25.51% on March 19, much better than the worst-case scenarios that many in the energy industry feared before Christmas would see the reserves drop below 20%, and possibly to as low as 15%.
Last year, the EU was able to secure enough gas in the spring and summer to replenish its stocks to 77.3% of capacity in October from April’s low of 29.1%, even after the Russian Gazprom PJSC stopped selling additional gas on the spot market from the end of the summer. from there, only supplying what utilities have purchased under long-term contracts. Applying a similar swing for this year would leave EU gas storage close to 74% by October; not as high as Brussels would like, but not dangerously low. Add to that supplies of liquefied natural gas from the United States, Qatar and a handful of other friendly countries, and Europe could easily meet its gas storage target.
But to assume that the EU will normally buy Russian gas for another six months – or that Putin will not close the valves – is a stretch. The European nations brandish, except in name, the gas weapon against Russia, just in slow motion. Rather than immediately reducing gas imports, they plan to reduce them over the next two years. By 2024, however, Russia will suffer the same result. Putin knows an embargo is coming, so rather than wait, he may want to seize the initiative and cut off flows now, before Europe can field replacements. It’s a classic “I’m dumping you before you can dump me” move.
Surprisingly, the gas market seems relaxed, betting that Russian flows will continue. Putin is nevertheless trying to create a pretext to cut shipments by threatening to force European countries to pay in rubles – in violation of both contract terms and sanctions. The reality is that the Kremlin has probably abandoned its gas activities with Europe. Putin knows that if he wants to inflict maximum economic damage, the time to cut supplies is now rather than in a few months, when storage tanks are fuller and Europe has had time to find alternative supplies. .
Europe’s current energy policy is unsustainable. This is hypocritical and leaves the region at the mercy of Moscow. The alternative is not pretty, but Europe must prepare for it. I hope I am wrong, but the continent is likely to experience a gas supply disruption in the weeks and months to come. The first potential cuts could come as early as April 21, when some small European utilities will have to pay for gas supplied in March, and the Kremlin is likely to insist on payment in rubles.
The solution will be to adopt a war-style economy over the summer, limiting gas supplies to certain industries to protect critical sectors such as food and chemicals. Without Russian gas, this is the only way to replenish European gas storage before next winter. The cost will be a recession and even more inflation, as gasoline prices revisit March highs. Few in the commodity market or in diplomatic circles talk about it openly, but the continent is rapidly heading towards a gas balance.
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He was previously the Commodities Editor at the Financial Times and is the co-author of “The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources.”
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