In light of the increasing Russian aggression towards Ukraine and Russia’s recognition of Ukraine’s two easternmost regions as sovereign, the US, EU and UK yesterday launched a raft of economic sanctions on Russia. Germany also halted the certification process of the Nord Stream 2 (NS2) gas subsea pipeline, which was completed last autumn. While not yet operational, the NS2 decision will not impact European gas supplies in the short term.
European gas markets are already tight, but that has mainly to do with Russia sending through as little gas as possible through its two main onshore gas lines to the EU, over Belarus and Poland, as well as over Ukraine. Russia has since the autumn prioritised gas deliveries through NS1 and its southern routes, bypassing Ukraine and Central Europe and managed to do so by honouring its remaining long-term gas contracts and restricting more general supply to EU gas hubs, causing a significant tightening of markets.
With hostilities looking likely to spread into Ukrainian government-controlled territory, a significant physical gas outage does not need to develop at the onset if Russia wants to avoid it. Ukraine will, however, have to purchase reverse flows from the EU for as much as it can, tightening European markets. The political signal from Russia to Europe will be clear and looks likely to persist over the coming summer inventory build-up season, causing continued tightness as Europe enters the next winter heating period in late-2022, unless EU finds ways to encourage industry to build significant stocks at elevated prices.
For Germany the pause of the NS2 line raises stark fears over the near-term competitiveness of its industry, in the light of long-term worries over German ability to meet climate and electrification targets. Despite significantly increasing incentives, the German onshore wind power boom has stalled completely in the last few years. Offshore wind sees very promising growth, but cannot on its own carry the German transition, while the country’s two last nuclear reactors are phased out this year. Without increased gas flow capacity the phase out of Germany’s large coal power fleet is threatened and even though LNG imports could increase, the different price picture for liquified gas would significantly eat into German industry’s competitiveness.
Over a decade of betting the house on Russian gas supplies alone, in order to exit nuclear, despite concerted protests from much of the rest of Europe, is now starting to look as irresponsible as many of its neighbours said it was. The lack of flexibility, alternative gas supply routes and diversified power supply strategy could cause Germany to gradually have to put its transition targets similarly on pause should the Russo-Ukraine crisis prove prolonged and sanctions on Russia remain.
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