Europe's Gas Supply Crisis Intensifies After Russia Imposes Sanctions

Moscow imposed sanctions on European subsidiaries of state-owned Gazprom (MCX:GAZP) on Thursday, a day after Ukraine halted a major gas transit route, increasing the pressure on Europe to obtain alternative gas supplies.

Gas prices soared, with the major European benchmark increasing by 12 percent, as purchasers fretted over escalating threats to Europe's supply, given the continent's reliance on Russia.

Moscow has already cut off supplies to Bulgaria and Poland, and nations are scrambling to replenish their diminishing gas stockpiles before winter.

Russia imposed sanctions primarily on Gazprom's European businesses, notably Gazprom Germania, an energy trading, storage, and transmission company that Germany placed under trusteeship last month in an effort to safeguard supplies.

In addition, penalties were imposed on the owner of the Polish section of the Yamal-Europe pipeline, which transports Russian gas to Europe.

Dmitry Peskov, a spokesperson for the Kremlin, stated that there can be no relations with the impacted enterprises, nor can they participate in the supply of Russian gas.

The affected entities, listed on a Russian government website, are primarily situated in European Union nations that have imposed sanctions on Russia in reaction to its invasion of Ukraine.

Germany, Russia's largest customer in Europe, said that some companies of Gazprom Germania were not receiving gas due to sanctions.

Robert Habeck, the German economy minister, informed the Bundestag that Gazprom and its companies are affected. "This means that some subsidiaries are no longer receiving gas from Russia. However, the market provides alternatives."

Astora operates Germany's largest gas storage facility in Rehden in Lower Saxony, which has a capacity of 4 billion cubic metres, and Wingas, a trader that feeds industry and municipal utilities.

Wingas has stated that it will maintain operations despite the risk of shortages. Competitors Uniper, VNG, or RWE could be prospective market suppliers. The Nord Stream 1 pipeline continues to transport Russian gas to Germany via the Baltic Sea.

Henning Gloystein, director of Eurasia Group, stated that if sanctioned corporations are unable to function, other companies, such as gas utilities, could take over contracts, which would likely necessitate negotiating new terms with Gazprom, including for payment.

"This may be Gazprom's intention here, in addition to conveying a signal of retaliation (for EU sanctions)," he noted.

Gazprom announced that it will no longer be able to export gas through Poland via the Yamal-Europe pipeline as a result of sanctions on EuRoPol Gaz, the owner of the Polish section.

The pipeline connects Russian gas reserves in the Yamal Peninsula and Western Siberia to Poland and Germany, via Belarus, and has a 33 billion cubic metre (bcm) capacity, which accounts for approximately one-sixth of Russian gas exports to Europe.

However, gas has been flowing eastwards through the pipeline from Germany to Poland for several weeks, allowing Poland, which was cut off from Russian supplies last month along with Bulgaria for refusing to comply with a new payment structure, to build up inventories.

Thursday's exit flows into Poland at the Mallnow metering station on the German border decreased to 9,734,151 kilowatt hours per hour (kWh/h) from almost 10,400,000 kWh/h the day before, according to statistics from the operator of the Gascade pipeline.

Habeck of Germany opined that Russia's actions appeared to be aimed to push up prices, but that the anticipated 3 percent decline in Russian gas supply could be compensated for on the market, albeit at a higher price.

Dutch gas prices at the TTF hub, the European standard, increased by as much as 20% before settling 12% higher. In the past year, the standard has soared, increasing the burden on consumers and businesses.

Despite the fact that German gas storage is approximately 40 percent full, this is still below average for the time of year, and inventories must be increased in preparation for winter.

Moscow's sanctions came just one day after Ukraine blocked a gas transit route, citing interference by occupying Russian soldiers. This was the first time since the invasion that supplies via Ukraine were interrupted.

The Sukhanovka gas transit point will not reopen until Kyiv regains full control over its pipeline system, according to the head of operator GTSOU, who added that flows could be redirected to the alternative Sudzha transit point, despite the fact that Gazprom has stated that this is technically impossible.

Gazprom has reserved 65.67 million cubic metres of capacity via the Sudzha entry point for Friday, up from 53.45 million cubic metres on Thursday.

Although the European Commission has stated that the Ukrainian suspension does not pose an immediate threat to gas supply, the market is concerned about the next winter, when heating demand will increase and global supply limits would be felt.

"Storage levels are currently sufficient to survive through much of 2022, even if Russian flows were to stop abruptly, barring unforeseen weather occurrences," said Kaushal Ramesh, senior analyst at Rystad Energy. "However, the picture for winter 2022 supply is now much more dismal."

According to the newspaper Iltalehti, citing anonymous sources, Finland's leaders have been informed that Russia may cut off gas supplies to its neighbor on Friday. Approximately five percent of Finland's energy usage is derived from gas.

In addition, misunderstanding persists among EU gas companies on a payment method decreed by Moscow in March that, according to the European Commission, would violate EU sanctions.

As the end of the month approaches, RWE, the largest power producer in Germany, expects Berlin to soon clarify whether payments for Russian gas may be made under Moscow's proposed arrangement, its finance head said on Thursday.

The majority of European gas buyers have rejected Russia's demand for payment in roubles due to the complexity of the process, which requires opening accounts with Gazprombank. This has stoked fears about potential supply disruptions and their far-reaching consequences for Europe and Germany, which relies heavily on Russian gas.