Mystery gas leaks detected on Tuesday at the undersea Nord Stream pipelines from Russia to Germany has led to lots of speculation. Only Russia has come out to discuss the damage, and their partners — Germany’s Wintershall and France’s Engie— have yet to speak on the subject.
Wintershall’s last press release is dated September 8. They were partners in both Nord Stream I and Nord Stream II.
Engie’s last press release is dated September 21, only it is on Europe’s favorite topic when it comes to energy: decarbonization.
E.On from the U.K., another Nord Stream owner, is also quiet so far. Nothing has been updated on their corporate website as of Wednesday.
Mostly all of the big European energy companies are moving ahead with Brussels’ plan to build a post-fossil fuels Europe.
Nord Stream II’s website was taken down, allegedly due to hacks. The company, which was roughly 53% owned by Gazprom at the time of its creation, is now defunct since Germany opted out of shipments earlier this year, citing Russia’s war with Ukraine.
Nord Stream AG, the Zug, Switzerland-based company partnering those three companies above with Gazprom, said on Sept. 26 and again on Sept. 27 that there was a problem with gas pressure coming through both lines.
The company said yesterday, “Nord Stream AG has started mobilizing all necessary resources for a survey campaign to assess the damages in cooperation exchange with relevant local authorities. Currently, it is not possible to estimate a timeframe for restoring the gas transport infrastructure. The causes of the incident will be clarified as a result of the investigation.”
The Nord Stream consortium members presumably agreed upon this statement.
The European Union has called the pipeline damage “sabotage” and is blaming the Russians for it. Russia’s government spokesman Dmitry Peskov called those allegations both “stupid” and “predictable.”
However, none of the European companies involved in Nord Stream has issued a separate statement about the problems at one of its most essential pipelines.
Nord Stream is (Probably) Dead. Now What?
Nord Stream is probably good as gone. Next up will be Russian gas transit through Ukraine, which is still ongoing but is likely the next shoe to drop. However that happens remains to be seen. Gas transit fees are around 8% of Ukraine’s GDP.
There is a risk that European leaders, and the U.S., will assume Russian sabotage and that will stop the trickle of natural gas still flowing into Western Europe, as Russia just retaliates by shutting down what little they are shipping now.
Ukraine, which also blamed the Kremlin for the incident, would be impacted as gas is still flowing through Naftogaz pipe, which is Ukraine’s state-owned energy conglomerate.
It is arguably the most important company in Ukraine. Naftogaz and Gazprom have been at each other’s throats for around 10 years, with high legal bills on both sides.
Their fight has been a key starting point in the Russia-Ukraine divorce. Europe has failed miserably at mediating that divorce. Now Russia and Europe are divorcing in what some will compare to a new Cold War between the West and Russia.
Will Europe come out okay? Their reliance on Russian fuel sources is legion.
In a note today, Raymond James and energy analyst Pavel Molchanov said that EU’s natural gas storage is looking better. It is currently at 88% of total capacity with a month to go before the heating season begins to fill up even more. The U.K., led by new Prime Minister Liz Truss, is back to fracking for hydrocarbons. A good market signal, but it won’t shift the supply equation in the near-term.
“There is no longer any reason for Europeans to worry about physical gas shortages this winter,” Molchanov said.
The record-high cost of imported gas – as distinct from physical access to supply – is still an economic challenge, Molchanov says, “but it is manageable as governments absorb much of the immediate burden on their sovereign balance sheets. The bottom line is that Europe has managed to successfully disentangle from Gazprom more rapidly than anyone could have imagined at the start of the war.”
If natural gas prices continue to fall to under $100 per megawatt hour, Europe’s “dark and cold winter” scenario may not unfold. But markets will unlikely react to this in any big up-move for the FTSE Europe.
That’s because Europe has been able to get some LNG supplies from the UAE
“Fears of a looming global recession may (pressure) energy prices in the near term (but) supply issues remain,” says Mark Haefele, CIO of UBS Global Wealth Management.
Haefele said on Wednesday that the price of Brent crude, the main crude oil priced for Europe, will return to plus-$110 per barrel this winter. Europe will be clamoring to buy U.S. strategic supply, now dwindling rapidly here, as the use of oil to generate electricity remains a high need in countries like Germany.
Moreover, the EU’s partial import ban on Russian oil imports will become a full ban, supposedly, later this year. This will keep the price floor rock solid for fuel sources needed to power a Europe in crisis.
Ukraine and the Naftogaz Risk
Oil prices have dropped to their lowest levels since January because markets believe economic growth is now in retreat. The rising dollar index, at its highest level in 20 years, is stoking fears of slower demand from oil-importing nations like India, who have to pay for that oil in dollars. Many countries will likely turn to Russia and pay for it in another currency, as China and Russia have set out to do. A stronger dollar is also a problem for some emerging and frontier markets with high dollar debt. Sovereign risk is elevated. It is unclear if Ukraine can use any of its recent funding from the U.S. to pay down its IMF and European Bank for Reconstruction and Development loans.
Other than recession risk globally, Europe’s energy crisis remains top of mind for investors.
The Nord Stream fiasco this week reminds businesses, investors, and policy makers that securing energy supply is paramount for most nations. Europe is heavily dependent on imports. Ukraine is a supplier. But for how long?
Geopolitical tensions mean unpredictable energy supply.
Europe’s natural gas benchmark has already gone up by around 17% since Monday on renewed worries of further supply interruptions to Europe via Ukraine. Turkish Stream is also a possibility.
“The reliability of gas supplies to Europe from Russia—which are already running at less than 20% of capacity was also called into question by indications from Gazprom that Moscow would impose sanctions on Naftogaz,” Haefele says. “That would prevent the Ukrainian company from paying transit fees, putting gas flows to Europe at risk.”
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