Putin’s gas showdown with Europe risks an epic winter fuel crisis
Relying on fossil fuels from unfriendly regimes is an economic and security risk. The sooner Britain regains energy independence the better.
ABROSE EVANS-PRITCHARD21 July 2021 •
Vladimir Putin is playing geopolitical hardball. He is quietly orchestrating a European gas supply crisis by restricting pipeline flows.
The Kremlin-controlled group Gazprom has curtailed the summer supplies needed each year to rebuild depleted strategic inventories.
Mr Putin’s aim is to force Europe’s authorities to rubber stamp the Nord Stream 2 pipeline on his own monopolistic terms, even though this would violate EU energy law, betray the East Europeans, and breach the ‘solidarity’ principle of Article 194 in the Lisbon Treaty.
Britain will be caught in the cross-fire. As of this week, UK stocks of natural gas were critically low at 29pc of capacity, compared to 89pc at this point last year, or 52pc in the more normal year of 2019.
“I hope somebody is paying attention,” said Professor Alan Riley, an expert on European energy at the Atlantic Council. “We hardly need a gas supply disaster on top of a delta disaster. One crisis at a time please, Prime Minister.”
The whole of Europe’s interlinked system is abnormally short of gas. It is the result of cold weather earlier in the spring; rocketing demand for liquefied natural gas (LNG) in Asia; and a surge in EU carbon prices to €52 a tonne, driving a coal-to-gas switch in power plants.
Putin has seized his moment. Gazprom is working to rule, supplying minimal contractual volumes. It has stopped bidding for extra capacity through the Ukraine pipeline (bar a trivial amount), and pointedly failed to bid for any extra flows through the Polish pipeline for the rest of the year. In short, it has cut off the supplementary flows necessary for seasonal rebuilding.
The Russian business daily Kommersant cites government and industry sources openly stating that the supply rationing is “an attempt to pressure Europe to speed up the commissioning of Nord Stream 2” and to ensure that Gazprom controls the total flow.
European gas prices have spiralled to a 13-year high of $10 per million BTU (British thermal units). They could go much higher if there is a panic scramble for supplies when the first frost arrives.
Wholesale gas prices in the UK reached a record 93.22 pence per therm in early July. The public is for now shielded from this price shock. Wait until November.
The Nord Stream 2 pipeline – or the Molotov-Ribbentrop pipeline, as it was called by a Polish defence minister – does not provide Europe with additional gas, contrary to claims by the Kremlin and accomplices in Berlin and Brussels.
It diverts flows from Ukrainian and Polish pipelines to the Baltic route that goes directly to Germany, landing in Angela Merkel’s old constituency of Mecklenburg-Vorpommern, where jobs are scarce and the terminal is a pork barrel boon. Its elemental purpose is to deprive the former Warsaw Pact vassel states of self-defence leverage. It is an instrument of Russian foreign policy.
The mystery is why Germany is willing to sacrifice so much diplomatic capital on a venture of scant commercial value, to the point of poisoning relations with Poland and offering Ukraine on a platter to Vladimir Putin. It goes against the thrust of the EU’s green deal. It has led to chronic friction with Washington.
Two of the three Christian Democrat (CDU) candidates for Chancellor said it was not worth the candle. Yet the juggernaut goes on, pushed by the Social Democrats, who hark back to the Ostpolitik romanticism of Willy Brandt and have a strange affinity for Putin’s police state. Their former leader, Gerhard Schroder, is bought and paid for as a chairman of Nord Stream AG.
The White House has dropped its vehement opposition, and engineers are already preparing to complete the final leg of the pipeline in German waters. Joe Biden could have rendered the project stillborn by activating financial sanctions against the pipeline’s nexus of companies. He has concluded that however much he deplores Nord Stream 2, the greater imperative is to keep Germany on side and avoid pushing Putin into a full strategic alliance with China. He is playing Kissinger in reverse.
It is not an unhappy spectacle. Washington and Berlin have together decided Ukraine’s grim fate between them – with nobody from Kiev at the table – pretending that the stitch-up is not a latterday Yalta.
They have done so even after Mr Putin stated last month in almost mocking tones that Ukraine must show “goodwill” in exchange for gas flows (once the Nord Stream 2 alternative means he no longer needs them). Ukrainians can expect to freeze to death this winter unless they do his bidding.
The State Department says the accord will “ensure that Russia cannot weaponise energy flows”. There are fierce words about (unspecified) consequences if Gazprom cuts off gas supply to Ukraine. Nobody believes a word of it.
This US-German betrayal is not the end of the story. The US Congress is on the warpath and has mandated sanctions on Nord Stream 2, which Mr Biden cannot entirely ignore. Republican congressman Steve Womack described the deal as “one of the greatest foreign policy blunders in recent history.”
Mr Putin must still reckon with the possibility that Capitol Hill could slap crippling penalties on the pipeline’s operators, halting gas flows even after the project is up and running.
For now his objective is to create maximum political leverage in order to bring Europe’s regulators to heel. He wants the German regulator to back down from earlier demands for ‘unbundling’ (separating ownership from operation), which reduces Gazprom’s share to 50pc of flows.
Secondly, he wants the Commission to rush through certification in break-neck time. In the past this would have been a safe assumption. Brussels has been craven at every stage of this squalid story, exposed in leaked documents to be violating its own legal regime in favour of Gazprom.
But the Commission can no longer behave with the same breathtaking cynicism. Poland has just won a pivotal case in the European Court (C-848/19P Germany v. Poland) relating to Nord Stream 1 and the Opal pipeline. The judges ruled that the principle of energy solidarity under Article 194 is legally-binding. The Commission must now take account of the energy supply risk for all member states. It changes the picture fundamentally.
Russia is taking on the EU’s legal order in its largest sense. He is withholding gas in the hope of forcing Europe to overrule its own supreme court. This is a high stakes gamble. “The Kremlin is inadvertently in the process of triggering an existential threat to the European Union,” said Prof Riley.
The EU institutions and states cannot let this pass lightly. Either Mr Putin backs down, or the gas war will escalate to the point of crisis this winter.
In extremis, Britain and Europe can buy LNG on the global market. But the Asian spot price is already $14 per BTU due to record demand in China. it would soar in a bidding war with Europe. Ships are scarce and on the wrong side of the world. The freight rates on LNG tankers have exploded to $150,000 a day for September to November bookings.
The Government insists that the combination of North Sea pipelines, LNG terminals, and EU interconnectors will see Britain through anything. This is true in principle, at a cost. But can we rely on the interconnectors when push comes to shove.
The Commission threatened to curb flows through the interconnectors last winter as a pressure tool during Brexit talks. Emmanuel Macron issued that threat again over fishing rights in Jersey. It seems to be the first resort whenever there is tension with the UK. We saw how quickly the Commission turned feral over AstraZeneca vaccines once panic set in.
Can we be sure that Brussels would allow gas flows to leave the EU at a time of critical shortage, when it could either invoke emergency provisions to curtail exports, or allege some infringement of the Brexit accord justifying diagonal sanctions?
The proper conclusion to draw from this episode is that volatile fossil fuels supplied by unfriendly regimes are an economic and security risk. The sooner Britain regains energy independence, the better.