Ukraine update | News
Gas prices rise to astronomic levels
The IEEFA (Institute for Energy Economics and Financial Analysis) reports that the invasion of Ukraine is powerfully affecting global gas demand, with LNG unable to deliver energy security for Europe or the world. In less than nine months, Europe will be heading into another cold winter, this time presumably without the gas supplies they’ve previously relied upon.
Around 44% of Europe’s gas comes from Russia. Germany is even more reliant – occasionally 75% of its gas is Russian-sourced. In the months leading into the conflict, Russia constrained gas supply delivering only contractual minimums to Europe and no
excess volumes beyond. Europe had grown accustomed to the luxury of summer spot purchases and when that gas did not materialise, there were no viable alternatives available. So Europe entered the winter with its gas storage capacity not filled.
The global LNG market is finely balanced. Shortfalls have sent prices rising
astronomically. The Dutch TTF, the benchmark hub for gas prices in Europe, went from under €5/MWh in mid-2020 to nearly €20/MWh in early 2021. On 7 March 2022 prices closed at €227.20/MWh. In less than two years, European spot gas prices have risen by over 4500 %.
250 200 150 100 50
2018 2019 2020 2021 2022 Natural gas prices EU Dutch TFF (€/MWh) 2017-2022 (Source:
tradingeconomics.com)
Germany’s chancellor suspends Nord Stream 2
The day after Russia’s president Vladimir Putin officially recognised the two breakaway regions of eastern Ukraine, Donetsk and Luhansk, and on 22 February ordered the deployment of Russian troops there to carry out ‘peacekeeping functions’, German chancellor Olaf Scholz ordered the country’s economy ministry to initiate steps that will effectively put the certification process for the contentious Nord Stream 2 pipeline on hold. The permit process cannot continue until Germany has reassessed its supply security, which ‘will certainly take some time’ said Herr Scholz. Economy and climate minister Robert Habeck said the ‘one-sidedness of dependence on one supplier, who has also proven to be unreliable, must be overcome’. He added that Germany was secure in terms of supply regarding its gas reserves for the winter. The pipeline Nord Stream 2 would connect Germany directly to the Russian gas supply, but it has split opinions in Europe and beyond for years. The link’s construction in the Baltic Sea is
completed, but the certification process is ongoing.
The project dampens efforts to rekindle good transatlantic relations, as the US is strongly opposed to the project and for a time imposed sanctions on the companies involved. As tensions at the Russian-Ukrainian border rose, Germany’s government considered the option of including Nord Stream 2 in a sanctions package in case of Russian aggression.
● Uniper has initiated three measures in response to the situation in Ukraine. It has taken the decision to record a full impairment loss on its loan to Nord Stream 2. The divestment process for its Russian subsidiary Unipro “will be resumed when possible”. And although existing long-term gas import contracts with Russia are expected to remain part of the European gas supply, Uniper will not enter into new long-term supply contracts for natural gas with Russia.
Strategy rethink in fossil– dependent Germany
The war in Ukraine is forcing Germany to radically rethink its energy policy, given that the country is heavily dependent on Russian fossil fuels. In a first response, Germany’s government put the contentious Nord Stream 2 pipeline project on hold, announced the creation of strategic coal and gas reserves, committed itself to building terminals for the import of LNG, and agreed to support the ejection of Russian banks from the SWIFT banking payments system. The government has also undertaken to speed up the shift to renewables in a bid to become more independent of energy imports. Dependence on Russian fuel must be quickly reduced in Germany, even though it is likely to cost the country a considerable ‘insurance premium’ on energy security, says the head of industry lobby group BDI, Siegfried Russwurm. However, Russwurm says energy supplies from Russia should not be cut entirely in the short-term in order to avoid ‘sanctioning ourselves more than the aggressor.’ Russwurm noted that coal imports could be replaced quickly, whereas the construction of new liquefied natural gas (LNG) terminals would take at least three years. He firmly rejected reopening the debate about Germany’s nuclear exit, arguing that ‘coal is the true elasticity factor’.
This view is backed by senior German politicians who reject a full suspension of energy trading with Russia owing to a lack of readily available substitutes for imported oil, gas and coal. Finance minister Christian Lindner of the Free Democrats argued that renouncing Russian energy imports would mean that ‘prices in western Europe and around the world [would] skyrocket due to the expected scarcity.’ He warned supply bottlenecks could be expected by next winter and that it would be necessary to discuss very drastic measures in response. Foreign minister Annalena Baerbock, a prominent Green, said that a boycott would need be very well prepared, as it would have to last at least several months; while Markus Söder, conservative CSU leader and state premier of economic powerhouse Bavaria, warned that an import ban would mean ‘it could become very cold and expensive’ in Germany. By contrast, Norbert Röttgen, security expert of the conservative CDU, advocated for cutting imports “as much as possible”, writing in the newspaper Tagesspiegel.
www.modernpowersystems.com | March 2022 | 5
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