EU could step in to ensure gas supply if Russia flows cut off

Reuters/Brussels

European Union authorities could intervene to prevent gas shortages this winter in the event the Ukraine crisis causes disruption to flows from Russia, EU stress tests showed yesterday.

European Energy Commissioner Guenther Oettinger unveiled the results of tests conducted across the EU’s 28 member states and 10 neighbouring countries to assess how vulnerable Europe would be in the event of a six-month supply cut from Russia.

“If we work together, show solidarity and implement the recommendations of this report, no household in the EU has to be left out in the cold this winter,” Oettinger said.

Should market forces alone not be able to secure supplies, authorities could intervene, the tests concluded.

“A market-based approach should be the guiding principle, with non-market measures (i.e. the release of strategic stocks, forced fuels switching and demand curtailment) only kicking in when the market fails,” the European Commission said in a statement. “Responsibility (for a market intervention) should be shared between public authorities and industry through the implementation of the EU’s Security of Gas Regulation,” it said.

Russia is Europe’s biggest gas supplier, meeting around a third of the region’s demand, and the EU gets about half of the Russian gas it uses via Ukraine.

Analysts say that some form of disruption of Russian flows to the EU is likely this winter, either because Ukraine has to siphon off some gas meant for transit en route to Europe in order to meet its own demand, or because Russia reduces its exports to the EU if the crisis with Ukraine deteriorates further.

“As Ukrainian storage only reached a maximum level of 16.7bn cubic metres and withdrawing should start soon, this will make it difficult to meet local consumption this winter,” French bank Societe Generale said in a research note yesterday.

“Ukraine needs direct Russian gas this winter: the longer it waits, the stronger Russia’s position is likely to become. Our base-case scenario calls for a short interruption of gas transit this winter in Ukraine,” it said.

Russian President Vladimir Putin warned yesterday that Russia will cut gas supplies to Europe if Ukraine steals from the transit pipeline to cover its own needs, although he was hopeful it would not come to that.

The European Commission has been working on emergency plans since the beginning of the Ukraine crisis, including steps such as banning gas exports from the EU and limiting industrial use in order to protect households.

Germany is Europe’s biggest buyer of Russian gas, paying Russian gas exporter Gazprom around $15bn a year, while EU members such as Bulgaria and Slovakia are almost entirely reliant on Russian gas imported via Ukraine.

While high gas storage levels and easing prices have helped much of Europe prepare for winter, a disruption in Russian flows would still pose a risk to markets such as Bulgaria and Britain.

Britain and Bulgaria both have small gas storage capacities, of three weeks and two months respectively, while Germany has some of Europe’s biggest at almost half a year.

Russia cut off supply to Ukraine on June 16 over what Gazprom said were billions of euros in unpaid bills.

Without Russian flows, there is concern Ukraine might have to siphon off gas from flows transiting the country en route to Europe this winter.

The stand-off over pricing is the third in a decade between Moscow and Kiev, though this time tensions are higher in the wake of Russia’s annexation of Ukraine’s Crimea region and fighting in the east of Ukraine between government forces and pro-Russian separatists.