It would be the easiest solution to the high gas prices in Europe: stepping up gas supplies by Russia. But it remains the question of whether Russia can and will. At least it does not look like the country will supply more gas in the short term. According to experts, Europe owes it to itself.
About 40% of EU gas imports come from Russia. “Russian gas was always the cheapest. They can play with the gas prize,” says René Peters of TNO research institute. By this he means that Russia made gas cheaper than alternatives such as liquefied gas, also known as LNG.
Moreover, the gas price has been relatively low since 2014. European countries worked out well; it pushed the energy bills. Peters: “It was a buyer market. Gas could be cheap anywhere, and short-term contracts were the cheapest.”
Long vs Short Term
Those short-term contracts are Russia a thorn in the eye. More than a third of Russian state revenue comes from oil and gas. With long-term contracts, Russia had a more solid source of income, but with the liberalisation of the European gas market, long term contracts were renounced.
However, such contracts offer security of supply for buyer and seller, says Coby van der Linde, director of the Clingendael International Energy Programme. “Producers like Russia know where they stand and what kind of investment they can make. Those investments are giga, so you need to know if they are in demand. Not just for this winter, but for the next twenty winters.”
When the corona pandemic broke out last year and economies ceased, it also had effects on gas demand and price. It halved in half. That hurt the Russian treasury. Van der Linde: “We didn‘t ask the Russians last year if it works. Or what the low prices of the time would mean for this year’s production.”
Now the situation is reversed. The global economy is rapidly attracted and energy demand has skyrocketed. A cold spring also prevented supplies from being replenished. Van der Linde: “Last year, demand fell by 5 percent and now it is rising by 5 percent. The energy system is not so flexible that a lot more can be delivered.” This led to prices going through the roof, now that about four to five times higher than was usual in recent years.
President Putin now rubs Europe that it relied on the free market rather than long-term contracts. He said last week: “The situation in the European gas market does not look balanced and predictable. By relying on the so-called invisible hand of the market, prices have increased even more in demand.”
Do or not deliver more?
Russia has fulfilled all its contractual obligations. Peters: “Putin has always delivered to Europe. It doesn‘t shut the gas tap. If he did that, it would damage his own position. Countries would look for alternatives.” The Russians also like to emphasize that they delivered even at the height of the Cold War.
The question now is whether Russia could deliver more to lower prices but does not. Different signals come out about that. According to a Kremlin spokesman, state gas group Gazprom is unable to deliver more. Pipeline capacity contracts auctions showed this week that Russia will not provide additional gas to Europe next month either.
Van der Linde assumes that Russia is not able to deliver much more at the moment. “Russia also had a long spring, leaving its own supplies empty. They need to complement them. And last year they had to reduce production. Then it is difficult for older gas fields to regain production quickly. None of that helps, if it’s tight.”
And then there‘s Nord Stream 2
Putin said yesterday that more can be delivered quickly when the Nord Stream 2 pipeline opens. This gas pipeline under the Baltic Sea has been controversial for years, as it would lead to greater European dependence on Russia. According to US analysts, he’s blackmailing the EU.
Van der Linde: “We are so busy with the energy transition, but in the meantime, the store has to stay open. And for the time being, it‘s running on oil and gas.”
That is why Van der Linde advises to manage the relationship with Russia properly. “There are many things happening in Russia that you might want differently as an EU, but that doesn’t mean you have business relationships. The question is whether it has been wise to stop investing in the relationship with a country you are so dependent on and rely on the supply of large amounts of ‘uncontracted’ gas, as in recent years.”