Russia today cut off gas supplies to Poland and Bulgaria, delivering on earlier threats to halt sales to all companies refusing to use Russia’s mandated rouble payment mechanism. The stop came as large supply contracts expired and buyers from both countries refused to acquiesce to using the mechanism. Poland is one of only few European countries having spent the past decade and more preparing to cut its reliance on Russian gas. Stocks are comparatively high, LNG import and western reverse-flow capacities have been expanded and this autumn the Baltic Pipe from Norway will hook Poland straight into one of the main arteries supplying North Sea gas to North Western Europe. It is therefore not a Polish gas crisis which have given gas markets the jitters and caused a risk premium increase.
By delivering on its threats, the Kremlin is upping the ante ahead of the late-May expiry of several large German, Italian and other contracts from Western European buyers. If these companies are directed by their politicians, or the EU Commission, not to accept Russia’s new payment mechanism as contracts are renewed, then today’s Russian action is a strong restatement of the threat to cut them off. Such a situation would be hard for the market to handle, especially should it then be followed by a gradually increasing number of contracts lapsing over subsequent months.
As things stand now, the lowered Russian volumes sent out to Europe after Poland’s and Bulgaria’s purchases have stopped can still be met by the increase in US and other LNG being sent to Europe. If large Western and Central European contracts lapse, however, this would risk no longer being the case. Shortages would emerge during the coming winter season and an economically painful period of demand destruction would likely ensue.
Today Russia signalled it is ready to follow through with its threats, likely realising its reputation as a stable energy provider is shot for the long term in any case. #energy #gas #energymarkets
