Ukraine blocks Russian gas flow to Europe. Here’s what that means

Europe is feeling a new energy panic after the shutdown of a pipeline carrying gas from eastern Ukraine.

Gas prices rose and then dropped. The cutoff is in sharp focus because it’s the first time that the war has disrupted the Russian natural gas that flows through Ukraine to get to Europe, where it powers factories and generates electricity.

Here are some key facts to know:

Operator of the gas pipeline system, Gas TSO of Ukraine saidIt was unable to transport gas through a compressor station located in Luhansk in eastern Ukraine, close to the Russian border. It had to be shut down. said it had no operational control over the station in Russian-held territory, with occupying forces interfering in the station’s operation and diverting gas in a way that endangered the stability of the pipeline system.

The company saidIt repeatedly warned Gazprom, a Russian state-owned gas exporter, about possible interference. However, Gazprom ignored its appeals.

Around one third of Russian gas going to Europe is handled by the pipeline. Ukrainian operator saidAnother pipeline could make up the gas flows, which crosses from Russia into Ukraine close to Sudzha.

Gazprom saidIt was impossible to do so, however, Sudzha gas flows rose overnight by around 8 million cubic metres per day.

While Russia has cut off natural gas to Poland and Bulgaria over a dispute about payments in rubles, Wednesday’s cutoff is the first disruption in gas supplies flowing through Ukraine due to the war.

Prices have risen due to any suggestion that energy supplies may be at risk. Spot gas prices rose by 4% to 103 Euros per megawatt at Wednesday’s open. They dropped to 95 euros per megawatt-hour, just below Tuesday’s levels.

European governments aren’t happy about sending hundreds of millions of dollars a day to Russia for energy but haven’t been able to agree on a natural gas boycott because of heavy dependence of major economies like Germany and Italy. The European Union’s executive commission has proposed a phaseout of Russian oil but has run up against resistance from reliant countries like Hungary.

Economists predict that Europe will be plunged into recession if oil and natural gas are cut completely. Industries such as metals and fertilizer would be hit hard by a drop in gas. This could also impact ceramics, glass, and other industries that have had to cut back on production because of high gas prices. Consumers would also face higher heating and electric bills than they currently do.

To avoid these outcomes, the EU proposes to cut Russian gas imports in half by the end the year. This will be done through increased supplies of Russian pipeline gas from Norway, Azerbaijan and more purchases of liquefied petroleum gas that arrives by ship. It also recommends faster rollout of solar and wind energy and conservation. We will see if that is possible.

The share of Russian gas flowing to Europe via Ukraine was around 18% before the war. About a third of that goes through the section of the pipeline that was shut down. It can be as high as 32.6 million cubic meters per day. However, in recent times it has been at 23 million cubic meters per day.

Many, but not all, of that gas could be rerouted via the pipeline to Ukraine near Sudzha. said Zongqiang Luo, a gas analyst at Rystad Energy.

Even with added capacity through that town, some 10 million cubic meters per day of gas would still be in search of a pipeline route to get to Europe, and “where exactly is not clear as capacity in seemingly full, ” Luo said.

The daily flow would be approximately 3.6 million cubic meters of gas over the course of one year. This is in addition to the roughly 150 billion cubicmeters that Europe imports each year from Russia. It isn’t a huge amount by comparison, but gas supplies are scarce, prices are high and gas importers and governments are scrambling to find all non-Russian gas supplies they can.

The Energy Ministry reports that Germany is now receiving 25% less gas from Ukraine. said Wednesday. The shortfall is partially compensated by increased supplies from Norway, the Netherlands and other countries. said Annika Einhorn, a ministry spokeswoman.

She also noted that Russian gas reaches Germany primarily via the Nord Stream 1 pipe, and not via Ukraine.

Europe is now in a better position on gas, thanks to milder weather. Europe had barely enough reserves last winter and was struggling to keep up with demand. While reserves are filling faster this year than they did last, that is still not enough to meet the demand this winter.

The interruption would make it harder for European countries to meet their goals for storage levels next winter and would “hasten Europe’s plans to move away from imports of Russian gas,” Luo said.

“As the European gas grid is well integrated, no one country is likely to suffer any immediate impact, but this will put further strain on the system and place a floor on downside price movement,” Luo added.

Gazprom and Gaz TSO of Ukraine both sought to highlight their reliability in gas supply despite the conflict. Analysts are still trying to understand the game. Barbara Lambrecht at Commerzbank said, “It remains to be seen whether the disruption to supply turns out to be anything more than just a flexing of muscles.”

Tim Ash is a senior emerging market sovereign strategist at BlueBay Asset Management. said it could be about forcing Europe’s hand.

“I think frustrations are building in Ukraine that Europe is proving too slow in rolling out an energy embargo on Russia,” he said. “If Europe is not prepared to shut off the energy money printing machine for Moscow, why would Ukraine not take matters into their own hands?