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Gas capitulation: how the EU helped putin

12/20/2022 12:01:12 pm
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By setting the upper limit for stock exchange quotes of gas prices in the EU at $2,974/1,000 m3, the Europeans will fully compensate russia for its losses from the decrease in physical volumes of gas exports by the Gazprom state-owned corporation.

Thus, the restriction of putin's ability to finance the criminal war against Ukraine, promised by official Brussels, did not actually happen. The kremlin's gas blackmail essentially achieved its goal.

Brussels’ nod to Gazprom

OstroV had already noted that the kremlin hoped to make European leaders to force Ukraine to conclude peace on moscow's terms due to the ultra-high gas prices.

It was also pointed out that stock quotes were an instrument of financial speculation, and not a "mirror" of the gas market. Nevertheless, quotes still influence the relationship between the real sellers and buyers of gas.

Therefore, at the end of November, the European Commission introduced an upper limit of $2,974/1,000 m3 for futures contracts (with gas delivery in a month) on the TTF Dutch gas virtual trading point.

If the price of futures exceeds the upper limit for more than 2 weeks, the so-called "mechanism of an emergency market correction" will kick in. It consists in the prohibition of transactions with prices above the upper limit.

At the same time, one more condition must be met: within 10 days, quotes of European gas futures must be at least $627/1000m3 higher than on other regional markets (Asian and American ones).

By setting such a high upper limit for exchange transactions with gas (at the moment of the directive’s issuing, the TTF quotes were at $1,298/1,000m3), European officials played into the hands of Gazprom, one of the key players in the European market.

Since high quotes allow the managers of the russian state corporation to raise contract prices for their European consumers. And, accordingly, to increase export earnings. Part of which goes to finance the war against Ukraine.

Moreover, the European Commission made an important reservation. Its statement says that the "emergency correction mechanism" will be stopped if there are risks of non-fulfillment of long-term contracts and (respectively) there is a threat of insufficient supply.

In other words, if there is not enough gas, the Europeans will be ready to buy it even for more than $2,974/1,000 m3.

Commenting on the decision, the European media agree that in this way, the official Brussels is trying to hedge and not to lose Gazprom as one of its main suppliers.

It is interesting that the November report of the russian state monopolist points out a drop in the EU gas consumption by 50 billion m3 following the results of 11 months of this year compared to the same period in 2021.

The ICIS analytical company has calculated that the November demand in the EU was 25% less than the average value over the past 5 years. In Germany and Italy, the two largest gas consuming countries, the demand fell by 23% and 21% respectively. In France and Spain, it fell by 20%, in the Netherlands - by 34%. Therefore, there is no growth of demand on the European market.

At the same time, Gazprom's exports fell by 76.3 billion m3 in January-November. That is, the reduction in all supplies to foreign buyers is 1.5 times greater than the decline in European demand.

And this is taking into account the increase in export to China (data from the buyer, the CNPC Chinese state-owned company, are not available, so we have to take Gazprom's word for it) via the Power of Siberia gas pipeline. Why did it happen?

Firstly, after the February invasion of the russians into Ukraine, the supply through the Yamal-Europe gas pipeline passing through Belarus was stopped. European sanctions were imposed on its operating companies.

Secondly, russian gas has ceased to flow to the EU through the Nord Stream 1 gas pipeline. At first, due to sanctions that stalled the repair of pumping equipment in Canada. Then, as a result of the September sabotage, both branches of the gas pipeline were blown up. No one claimed responsibility for the incident, and the Danish police failed to identify the perpetrators.

Nevertheless, Gazprom had and still has the opportunity to increase gas transit to the EU through Ukraine. However, it does not do this on principle.

Therefore, the situation is as follows. Against the backdrop of a decrease in russian supplies to the EU, both stock gas quotes and contract prices soared. This allowed Gazprom to cover with a vengeance the losses from the decline in exports in physical terms.

So, according to the results of the first half of the year, the corporation reported a record profit of 2.5 trillion rubles. This is 2.6 times more than in the same period in 2021, despite the drop in foreign supplies (by 44.5% in January-November).

You can't be too careful...

There is a very important nuance in the story of the capitulation of the EU to putin. As you know, usually one of the parties surrenders due to the complete absence of opportunities to continue the war. Then it is forced to agree to all the conditions of the other party, i.e. the winner.

The nuance is that the Europeans did not lose the gas war to the kremlin. As noted above, due to the transition to resource-efficient technologies and renewable energy sources, they reduced gas consumption by 50 billion m3 this year.

In addition, a "major turn" has been made in the European energy strategy from pipeline gas to tanker gas. In January-October, imports of liquefied natural gas (LNG, transported by sea in special tanker ships) to the EU increased by 70%, to 111 billion m3.

The entire Gazprom export in January-October (including not only to the EU, but also to China and Turkey) was 91.2 billion m3. That is, since the beginning of the year and by the start of the next heating season, LNG supplies to the EU have exceeded pipeline imports.

Russian corporation Novatek also exports LNG to the EU. But the "trick" is that in this segment the russians are much more modestly present on the European gas market than in the pipeline segment.

The main LNG segment players are American companies. And there is no shortage of their resources. On the contrary, Deputy Minister of Energy of Ukraine Yaroslav Demchenkov noted an excess of supply offers at the end of October.

According to him, the LNG tankers lined up in queues near the European ports because they simply had nowhere to unload gas. Since the European underground storage facilities were almost 100% full at that time.

So, the Europeans stocked up on gas in advance and in full before the onset of winter. They actually are no longer dependent on the russian gas due to an increase in LNG imports, mainly from the USA and the Middle East.

When on September 3, European Commissioner for Economy Paolo Gentiloni announced that the EU was ready for a complete cessation of gas supplies from russia, he was not bluffing or pretending.

In that case, why did the European Commission make a nod to russia by setting the upper limit for gas stock exchange quotes at such a high (and comfortable for Gazprom) level at the end of November?

To answer this question, you just need to understand the European mentality. The EU citizens most of all dislike all sorts of surprises. Calm measured lifestyle is the main value there, for which they are willing to pay any price.

It is in this context that the decision of the official Brussels should be considered. They played it safe just in case, because "you can't be too careful".

With high European gas prices, the chances of the putin regime to continue its existence certainly increase. However, one should not be too pessimistic.

At the beginning of December, the price cap for russian oil ($60 per barrel), introduced at the initiative of the United States, began to work on the world market. The G7 countries, Australia and the European Union joined the agreement.

The governments of the countries participating in the coalition have banned their insurance companies and banks from providing tanker transportation of russian oil if buyers pay $60 per barrel or more for it.

If this mechanism proves to be effective, in 2023 one can hope for expansion to russian pipeline oil and russian gas (LNG and/or pipeline).

Vitaliy Krymov, OstroV