The Business Times

EU races to help industry as Russian gas halt rattles markets

Published Mon, Sep 5, 2022 · 10:00 PM

EUROPE’S gas prices surged, its share prices slid, and the euro sank on Monday (Sep 5) after Russia stopped pumping gas via a major supply route, sending another economic shock wave through the European Union (EU) as it struggles to recover from the pandemic.

EU governments are pushing through packages worth billions of dollars to prevent utilities being crushed by a liquidity crunch and to protect households from soaring energy bills, after Russia’s state-controlled Gazprom said it would stop pumping gas via the Nord Stream 1 pipeline due to a fault.

Europe has accused Russia of weaponising energy supplies in retaliation for Western sanctions imposed on Moscow over its invasion of Ukraine. Russia blamed sanctions by “the collective West” for causing the gas supply problems.

A host of European power distributors have already collapsed, and some major generators could be at risk, hit by caps that limit the prices rises they can pass to consumers or caught out by hedging bets, with gas prices now 400 per cent more than a year ago.

“This has had the ingredients for a kind of Lehman Brothers of energy industry,” Finnish Economic Affairs Minister Mika Lintila said on Sunday, referring to the US bank that collapsed in 2008 and heralded the global financial crash.

Finland aims to offer €10 billion (S$14.4 billion) and Sweden 250 billion Swedish crowns (S$32.3 billion) in liquidity guarantees to their power companies.

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“The government’s programme is a last-resort financing option for companies that would otherwise be threatened with insolvency,” Finland’s Prime Minister Sanna Marin said.

Utilities often sell power in advance to secure a certain price, but must maintain a “minimum margin” deposit in case of default before they supply the power. The margin deposit required has raced higher with surging power prices, leaving companies struggling to find cash to cover the new demands.

Germany, more reliant than most EU states on Russian gas, has offered a multibillion-euro bailout to power utility Uniper. Berlin said it would spend at least €65 billion to shield customers and businesses from soaring inflation, stoked by surging energy prices.

The benchmark gas price rose as much as 35 per cent on Monday and was up more than 400 per cent on the year, after Russia said on Friday a leak in Nord Stream 1 equipment meant it would stay shut beyond last week’s 3-day maintenance halt.

European financial markets were reeling from the news. The euro sank to a 20-year low and European shares tumbled.

Nord Stream 1, which runs under the Baltic Sea to Germany, historically supplied about a third of the gas Russia exported to Europe, although it was already running at just 20 per cent of capacity before last week’s maintenance outage.

“Problems with gas supply arose because of the sanctions imposed on our country by Western states, including Germany and Britain,” Kremlin spokesman Dmitry Peskov said on Monday. “There are no other reasons that lead to problems with supplies.”

Adding to the standoff over energy, he also said Russia would retaliate if G7 states imposed a price cap on Russian oil. “There can only be retaliatory measures,” he said.

Russia also sends gas to Europe via pipeline across Ukraine, another major route. But those supplies have also been reduced during the crisis, leaving the EU racing to find alternative supplies to refill gas storage facilities for winter.

Some energy-intensive industries in Europe, such as fertiliser makers and aluminium producers, have already scaled back production. Other industries, already grappling with chip shortages and logistics logjams, face rocketing fuel bills.

Several EU states have triggered emergency plans that could lead to energy rationing and fuelling recession fears, with inflation soaring and interest rates on the rise.

“We cannot rule out that Germany might look at rationing gas,” Uniper chief executive Klaus-Dieter Maubach told Reuters on the sidelines of the Gastech conference in Milan.

Germany, which is installing liquefied natural gas (LNG) terminals so it can ship in fuel and expand its range of global suppliers, is at Phase 2 of a 3-stage emergency gas plan. Phase 3 would entail some industry rationing.

The global market for LNG was already tight as the world economy sucked up supplies in the recovery from the pandemic. The Ukraine crisis has added further demand.

Norway, a major European producer, has been pumping more gas into European markets but cannot fill the gap left by Russia.

EU countries’ energy ministers are due to meet on Sep 9 to discuss options to rein in soaring energy prices, including gas price caps and emergency credit lines for energy market participants, a document seen by Reuters showed.

Klaus Mueller, president of Germany’s Federal Network Agency energy regulator, said in August that even if Germany’s gas stores were 100 per cent full, they would be empty in under 3 months if Russian gas flows were halted completely.

Germany’s storage facilities are now about 85 per cent full, while facilities across Europe hit an 80 per cent target last week. REUTERS

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