Russia fired a warning shot across Europe when gas company Gazprom suspended supplies to Poland and Bulgaria in a row over how payments should be made. Wholesale gas prices spiked sharply higher late on Tuesday and early on Wednesday as a result. While prices had eased back by afternoon trading, the price of the benchmark Dutch gas futures market was not far off €110 per megawatt hour, some €18 higher than before the latest row broke out and more than six times their level one year ago.
The news has two implications for countries such as Ireland. First, it threatens to keep gas prices higher. And second, it again raises the issue of the security of gas supply; while the Republic is not directly reliant on Russian gas, any general supply squeeze will have implications here.
Poland and Bulgaria had refused to meet Russian demands that payments for gas supplies from “unfriendly countries” must in future be made in Russian roubles, saying that this was in breach of contract terms. Both are heavily reliant on Russia as a natural gas supplier and will now need to seek supplies elsewhere. While this may be possible as the peak demand winter season has passed, it raises the stakes in the economic war between Russia and Europe.
For now, flows through Poland and Bulgaria to other European countries are unaffected, though Moscow has warned that other countries could also be cut off if they refuse to pay in roubles.
A key issue to watch is how the European Commission interprets its own sanctions and whether a way can be found to pay for Russian gas that satisfies Moscow without breaking the letter of the law. On Wednesday, European Commission president Ursula von der Leyen warned that direct payment in roubles did breach sanctions.
Flow of cash
A way around this may be possible technically – but how it will play out politically is very uncertain as the war continues and gas payments provide a steady flow of cash to Moscow’s coffers. Germany’s biggest gas importer, Uniper, said on Wednesday that it believed a payment mechanism via Gazprombank – associated with the Gazprom energy company – would meet EU sanctions rules and allow gas to keep flowing.
Wholesale gas prices had settled back a bit from March’s highs in recent weeks, while remaining at multiples of their levels a year ago. However, the latest tensions will add to uncertainty about the months ahead.
Wider disruption to gas flows from Russia – which supplies about a third of Europe’s natural gas – would send prices higher, up to around €200 per megawatt hour in the case of a complete shut-off, according to predictions by Goldman Sachs. This would send gas prices for consumers and businesses higher again – in addition to the increases already seen – and knock on to electricity prices.
What about security of supply? Ireland has no significant gas storage and so is reliant on the Corrib field – which supplies around a third of gas – and on supplies from the UK. In turn, UK supply comes largely from the North Sea and Norway. Redirecting Norwegian supplies to supply countries hit directly by a shut-down of Russian gas – as would be suggested by co-operation agreements – would not be straightforward. A study by the Oxford Institute of Energy Studies suggests pipeline capacity and the complexity of transporting it as LNG would be significant constraints.
Scramble for supply
But even if Irish gas supply via the UK is somewhat protected, there would be a scramble for supply in the event of a shut-off of Russian gas and significantly higher prices – particularly if the crisis continued into next winter. In the recent Ibec quarterly commentary, its chief economist, Gerard Brady, said that this could lead to a form of "quasi-rationing where some energy-intensive business operations would become uneconomical at the persistently high prices necessary". He pointed out that each lost 24-hour equivalent of output in Irish industry would reduce annual economic output by 0.1 per cent – so the costs could accumulate quickly.
Other countries – such as Germany and Italy – that are directly reliant on Russian gas would take a heavy immediate hit, in turn depressing growth in Irish export markets. This is why there has been reluctance to turn off the gas taps, but as the war continues, political pressure to do so can surely only grow.
