Talks between Russia, Ukraine and the European Union are due to restart today (26 September) hoping to reach a deal over Ukraine’s unpaid gas bill that could lead to a resumption of Russian gas supplies to Ukraine. Gazprom stopped shipping gas there in June.
This comes as a number of Central European countries report gas flows from Russia 20%-25% below contracted levels in recent weeks. Slovakia, Poland and to a lesser extent Hungary have been redirecting Natural Gas to Ukraine.
In response to this Russian energy minister Alexander Novak has reportedly threatened further gas supply disruptions if the EU continues to re-export Russian gas to Ukraine. Day-ahead gas prices have risen by 20% over the past month to almost £0.50 per therm on fears of disruption.
According to Reuters the EU is going to propose a one off purchase of Russian gas to cover the peak-demand winter season to April 2015 and hopefully avert the EU’s gas supplies being cut off. Ukraine needs 5 billion to 20 billion cubic metres (bcm) of extra gas, depending on how cold the weather is, to get through winter without supply disruptions.
However whether a deal can be struck depends on Russia. Societe Generale has warned that in the event of a supply disruption subsequent spikes in gas prices may take longer to abate as the market distrusts there will be a lasting solution to the Ukraine crisis.
Europe appears relatively safe from disruption at the moment. According to Gas Infrastructure Europe gas storage facilities across Europe contain a record 75.7 billion cubic meters, making them more than 91 percent full.
So in the event of a disruption there would be time to find alternatives. However, some countries are more vulnerable than others particular Bulgaria, Finland and the Baltic countries. Meanwhile another cold winter will mean that stocks are used up more rapidly.
Norway, a big producer and the second largest gas supplier to Europe could pump a little bit more. Although costly a slowdown in China the reopening of some nuclear plants in Japan will mean more liquefied natural gas (LNG) is available on spot markets. Europe has the capacity to import more than 200 bcm of LNG a year, of which just 20% is in use.
Meanwhile contingency plans are reportedly being drawn up by the EU which might include cutting gas to industry to preserve supplies for heating homes and generating power.
Longer term Iran could be a potential alternative source of gas for the EU (it has the world’s second largest gas reserves after Russia) but at the very least this is several years away.
According to an EU report, “High potential for gas production, domestic energy sector reforms that are underway, and ongoing normalization of its relationship with the West make Iran a credible alternative to Russia.”
However there is considerable doubt as to whether a deal can be arranged over its nuclear capability that could then lead to the lifting of sanctions. The deadline for a deal is 24 November.