In a surprise, Russia says the gas pipeline to Germany will remain closed

In a surprise, Russia says the gas pipeline to Germany will remain closed

Gazprom said Friday that it would postpone restarting the flow of natural gas through a closely watched pipeline that connects Russia to Germany, an unexpected delay that appeared to be part of a larger struggle between Moscow and the West over energy and the war in Ukraine.

The Russian-owned energy giant had been expected to resume the flow of gas through the Nord Stream 1 pipeline on Saturday after three days of maintenance. But hours before the pipeline was set to reopen, Gazprom said that problems had been found during inspections and that the pipeline would be closed until they were eliminated. It did not give a timeline for restarting.

The announcement had the hallmarks of a tit-for-tat move. Earlier Friday, finance ministers for the Group of 7 countries said they had agreed to impose a price cap mechanism on Russian oil in a bid to choke off some of the energy revenue Moscow is still collecting from Europe.

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European officials said Russia was cutting back its gas deliveries to punish Europe for its opposition to the war in Ukraine. Many have accused Russian President Vladimir Putin of seeking to rattle energy markets with threats of ever-diminishing gas supplies.

russia gas pipeline Nord Stream 1, the pipeline operated by state-owned Gazprom, won’t reopen on Saturday as expected, heightening fears Russia will step up its use of energy to pressure Europe. (The New York Times)

Eric Mamer, a spokesperson for the European Commission, said the “fallacious pretenses” for the latest delay were “proof of Russia’s cynicism.”

Russia has, during Putin’s long tenure, used energy for geopolitical ends, often with the goal of gaining leverage over European policies toward Ukraine. Putin has taken a keen interest in the oil and natural gas industries, often negotiating deals personally with energy giants in ways that barely hide the political subtext. The Nord Stream pipelines, designed to bypass Ukraine by sending gas directly to Germany under the Baltic Sea, have been central to the Kremlin’s political use of energy.

In its statement Friday, Gazprom said it found oil leaks around a turbine used to pressurise the pipeline, forcing it to call off the restart. The German company Siemens Energy, maker of the turbine, cast doubt on that account. “As the manufacturer of the turbines, we can only state that such a finding is not a technical reason for stopping operation,” the company said late Friday. Siemens also said there were additional turbines available that could be used to keep the pipeline operating.

Whatever prompted Gazprom’s latest action, there is little doubt that energy has become a proxy fight in the Ukraine war. Simmering under the surface is resentment by oil producers such as Russia over Western plans to phase out oil and gas, their key export earners, because of climate change concerns.

Europe, meanwhile, is squeezing Russia with sanctions and intends to stop buying Russian oil by December. Russia is taking advantage of Europe’s vulnerability on natural gas, driving up the price of the fuel to extremely high levels across Europe and creating fears of widespread hardship this winter.

Some analysts foresee a prolonged battle over energy, with oil another arena along with gas.

Analysts at Goldman Sachs said Friday that there was a risk that Russia could retaliate for the oil price caps by repeating what it has done with gas, cutting “buyers off and shutting in production, thereby elevating global prices and its own revenues.”

At a time when Europe and the United States are trying to bring down energy prices, the OPEC Plus group of oil producing countries, headed by Saudi Arabia and Russia, have been hinting that they might pivot away from their gradual post-pandemic production increases and cut output to bolster falling prices. The group is expected to meet Monday to set oil production levels.

“Putin will endeavour to demonstrate that he has not played his last card and that there are many open windows in his energy war with the West,” Helima Croft, head of commodities at RBC Capital Markets, wrote in a note to clients Friday.

The latest action by Gazprom will raise fears of a permanent shutdown of the pipeline, which had been the key conduit for gas to Germany, a country heavily dependent on Russian natural gas. Like other European Union nations, Germany has been rushing to fill storage facilities before winter as insurance against Russian cutoffs.

Gazprom halted flows on the Nord Stream 1 pipeline Wednesday. In July, the pipeline was shut down for 10 days, also for maintenance.

But there are signs that Europe, by scrambling to find alternate sources of energy, has reduced some of Putin’s leverage. If the flows had resumed Saturday, they were expected to reach only about 20% of the pipeline’s overall capacity — the same reduced level it has provided since late July. Well after Russia invaded Ukraine in late February, the pipeline was typically transporting about five times that level.

Before the latest Gazprom announcement, European benchmark natural gas futures prices had fallen about 13% on Friday. Prices have dropped by more than one-third in recent days as overall levels in European gas storage facilities have reached 80%. Still, futures prices are about seven times higher than a year ago, creating hardship for households and putting pressure on businesses.

On Aug 26, Britain’s energy regulator said fuel bills for 24 million households would rise by 80% beginning in October, putting pressure on the next prime minister, expected to be Liz Truss, to turn immediate attention to coming up with a massive aid package to head off a catastrophic winter.

Britain’s government is not the only one working to mitigate the energy crisis in Europe. Facing dire circumstances, lawmakers and regulators across the continent are increasingly intervening in the energy markets to protect consumers.

At the same time, the European natural gas market has changed substantially over the past year as Russia crimped supplies and Europe turned to other sources. Flows from Russia to Europe have declined sharply.

Those deficits have been largely made up by imports of liquefied natural gas shipped by sea from the United States and elsewhere, and increased pipeline flows from producers including Norway and Azerbaijan. The problem is that the shifts have forced gas prices higher, as Europe vies with Asia for limited supplies of liquefied gas.

Until Friday’s announcement, there was increasing optimism about the prospect for navigating the winter with less Russian gas, leading to the fall in natural gas prices in recent days. Wood Mackenzie, an energy research firm, has projected that Russian pipeline gas imports will steadily decline from supplying more than one-third of European demand in recent years to about 9% in 2023.

Even the importance of Nord Stream has diminished. Analysts say that Gazprom has so constrained Nord Stream volumes this summer that the pipeline’s performance is no longer crucial to the overall fundamentals of the market. But news about the conduit still has a psychological impact, and some analysts expect gas prices to jump when markets open Monday.

“A complete shutdown will obviously have implications on market sentiment given how tight the market is,” said Massimo Di Odoardo, vice president for global gas at Wood Mackenzie. Such an event, he added, would “increase the risk of further cuts via other pipelines bringing Russian gas to the EU via Ukraine and Turkey.”



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