Russia's indefinite closure of Nord Stream 1 triggers another price spike

Natural gas prices surged on September 5 as markets opened following Gazprom’s announcement that it had suspended gas flows through Nord Stream 1 indefinitely before the weekend.

Gazprom announced it was closing Nord Stream 1 down after reporting a leaky oil value after the Dutch TTF gas spot market closed on Friday, September 2 for the weekend. Gas prices had tumbled in the previous days after Germany announced a €65bn relief package for consumers in the face of the mounting energy crisis in Europe.

But that relief was quickly wiped out following Gazprom’s decision. Benchmark futures jumped as much as 35% after the decision, which was widely seen as a political reaction to the G7 finance ministers' decision to go ahead with an oil price cap scheme announced on September 2 that is designed to cut the Kremlin off from sky-high oil export revenues.

With gas storage tanks already over 80% full, hitting the target set by the European Commission at the start of the Ukraine war a full month early, Europe will still need to import gas all winter, as gas storage tanks in Europe are not big enough to last a whole winter without some imports from Russia.

Gazprom’s decision takes Europe a step closer to increase the European energy crisis status to “emergency” level, the third in a three-step system, that gives governments emergency powers to take control of remaining energy resources and introduce measures such as rationing.

European energy ministers are set to discuss radical proposals to curb power prices when they hold a special meeting on September 9, including gas-price caps and a suspension of power derivatives trading, reports Bloomberg.

Dutch front-month gas, a benchmark for Europe, was 26% higher at the opening of trading on September 6 in Amsterdam at €270/MWh ($2,675 per thousand cubic metres).

Uncertain outlook

Russia will keep Nord Stream 1 closed indefinitely until technical problems at the pipeline’s compressor station can be resolved, Gazprom reported late on September 2, confirming the worst fears of European leaders and energy market players.

The announcement triggered another spike in gas prices that, coupled with an associated surge in power prices, will push Europe further into recession, which is now inevitable, according to Robin Brooks, the chief economist at Institute of International Finance (IIF). The UK is one of the worst affected economies in Western Europe, despite being one of the least reliant on Russian gas, and is believed to already be in recession.

Nord Stream 1 was supposed to return to operation on September 3 after a three-day joint maintenance inspection, conducted with Germany’s Siemens, the developer of the turbines and other equipment used at the compressor station. But Gazprom cancelled the restart, citing an oil leak at the last remaining turbine still in operation. The Russian company has blamed sanctions for preventing the repair of this equipment and said the pipeline would remain closed as long as it takes to carry out the necessary work.

“Siemens is taking part in repair work in accordance with the current contract, is detecting malfunctions … and is ready to fix the oil leaks,” Gazprom added in a second Telegram post on September 3. “Only there is nowhere to do the repair.” According to the German company, though, such an oil leak would not usually affect the operation of a turbine and could be fixed on site.

“Irrespective of this, we have already pointed out several times that there are enough additional turbines available in the Portovaya compressor station for Nord Stream 1 to operate,” a Siemens spokesperson told Reuters. The station reportedly has four spare turbines on site in case of problems, but none of these have reportedly been used to replace the faulty turbines.

The EU managed at the end of August 30 to successfully fill its gas storage facilities to 80% of capacity – two months ahead of its target. But the indefinite closure, and the risk of a further reduction in Russian supply, raises the risk that this still may not be enough to get Europe through winter, especially if it proves to be a harsh one.

Russian gas supply in Europe already plummeted to a record low in August of 3.4bn cubic metres, down 7% from the previous record low set in July. The remaining Russian gas will be extremely difficult to replace, with global LNG production already maxing out and limited other alternatives on the table. The result will be further demand destruction as energy-intensive industries curtail output.

The EU called for a voluntary 15% cut in gas consumption in July across all sectors between last month and the end of the coming winter, to ease the economic pain. But there are limits to how much Brussels can enforce such reductions in the event of an emergency. Originally the EU proposed a mandatory 15% cut, but Brussels backed off after several countries rebelled. After negotiations with the European Council, the final legislation approved in early August was extensively watered down. The decision to enforce reductions in gas use can only be made with the approval of member states. And many of those member states will be able to secure exemptions, including the Baltic States, Cyprus, Ireland, Malta, Portugal and Spain.

Perfect energy storm

Critically, there are constraints on how much Europe can rely on alternative sources to gas supply. France has been struggling with an unusually high number of outages at its nuclear power plants (NPPs), and Germany shut down 4.2 GW of its own atomic energy capacity at the end of last year. Fortunately, energy system stress tests carried out by the government last week concluded that the country should extend the lifespan of two of the three more plants it was due to close at the end of 2022 until at least next spring.

Meanwhile, the already-high cost of Europe’s third main source of baseload power supply, coal, has been inflated by the significant expense of carbon permits under the EU Emissions Trading System. However, coal supplies to Europe have been curtailed after the sixth package of sanctions banning Russian coal deliveries to Europe came into force on August 10.

Performance at wind and solar power plants over the last few months has also been weaker than usual for the time of year, and with Europe now entering the colder half of the year, solar output typically diminishes anyway. Meanwhile, hydroelectric power supply particularly in Norway has been hindered by low water levels caused by the summer drought. The combination of all these blows has been called a “perfect storm” for Europe’s energy system by some analysts.

Rising discontent

If the EU fails to curb consumption in a planned way, the result could be blackouts and further spikes in energy costs this winter. This could trigger further unrest among the public, already greatly disconcerted by soaring energy bills.

Protests against the energy crisis are sweeping Europe. On September 3, an estimated 70,000 people took to the streets of Prague to demand that the ruling coalition do more to control energy costs, and the protesters also voiced opposition to both Nato and EU, viewing the present situation as a consequence of Western sanctions against Russia. Germany is bracing itself for similar unrest. There were also protests in Cologne over the weekend when tens of thousands of pro-Russia demonstrators marched to complain about the rising cost of living and called for an end to Berlin’s support of Ukraine. Polls show most Germans are dissatisfied with Chancellor Olaf Scholz’s government.

This is of course the outcome that Russian President Vladimir Putin desired. A wave of outrage against Russia’s invasion and sympathy towards Ukraine swept Europe earlier this year. But by throttling energy supply to Europe, Moscow is pressing European leaders to make concessions in the Ukraine conflict, or risk being ousted in elections by an increasingly bitter public. Some governments have tried to quell the anger by introducing caps on energy prices to the public, but there is a limit to how much support can be maintained against the damage that the energy crisis is inflicting to economies and government budgets.

Europe has already spent an estimated $278bn in support and relief measures as a result of the war, but that cost is expected to more than double as the weather gets colder. Italy is one of the most exposed to Russian energy of all the European countries and the economic minister said at the weekend that Rome has already spent €54bn on relief but expects that sum to rise to €100bn by the end of the year, with more spending to come in the first half of next year.