Russian freeze prompts fresh crisis in gas supply

[HenryTo]

Natural gas crisis emerging in Europe as we speak. Since Christmas, the U.S. has been experiencing warmer-than-normal weather. Should temperatures get cold again, then domestic natural gas prices can easily spike back to above $10/MMBtu.
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Russian freeze prompts fresh crisis in gas supply
By Carl Mortished, International Business Editor

A SUDDEN drop in Russian gas deliveries to southeastern Europe yesterday provoked an energy crisis in Italy as Gazprom struggled to meet domestic demand in the face of intense frost in Russia.
The gas export squeeze, which reduced supplies by 25 per cent in Hungary and Bosnia and by 5 per cent in Austria, emerged after Gazprom had cut off Ukraine on New Year’s Day in a row over prices and will aggravate concern about Europe’s growing dependence on Russian gas.

British Gas gave warning of a “domino effect” yesterday as the wholesale price of gas for February delivery soared 16 per cent to 82p per therm.

Mark Clare, managing director of British Gas, said that there was no danger of supply shortages in Britain as little Russian gas reaches the UK, but he gave warning of price consequences. He said: “This is impacting other countries in Europe, and because the UK is reliant on gas imports from the Continent, there is an effect on the UK wholesale gas market, building an anxiety premium on prices, which were already at record highs.”

As temperatures in parts of Russia plunged to minus 50C yesterday, Gazprom raised its domestic deliveries by 40 per cent and its export volumes by 7 per cent. However, gas industry experts said that the pressure drop in Hungary, Italy and the Balkan states was a result of the removal of 40 million cubic metres of gas from export pipelines through Ukraine.

The unplanned removal of gas was not opposed by Gazprom, despite the showdown on January 1, when the Russian utility cut off supplies to the former Soviet republic in a dispute over Gazprom’s demand that Ukraine pay European prices for its gas.

In Italy, industrial gas consumers were cut off as ENI, the Italian energy company, experienced a 5.4 per cent drop in pressure at a time when gas demand is peaking because of cold weather. Claudio Scajola, the Italian Industry Minister, called an emergency meeting with leading energy firms to review Italy’s gas supply. “We are increasingly becoming aware of our excessive or total dependence on energy sources from other countries,” he said. Italy has a no-nuclear policy.

Patrick Heren, a gas industry expert and publisher of the Heren Report, said that Russian gas supplies often “wobbled” in winter at the Ukrainian border, the main Russian export route. He said: “This has more to do with the extreme size of the Russian gas network and the difficulty in maintaining pressure when it is very cold and demand is high. The gas is in Siberia, but most of the demand is in Western Russia and Europe.”

Ivan Plachkov, the Ukrainian Energy Minister, admitted yesterday that Ukraine was partly responsible for the drop in exports to Europe: “We have reached agreement with our partners at Gazprom. We have cut shipments to Europe by something like 40 million cubic metres per day.”

Ukraine’s tapping of the export pipeline exposes a dilemma for Gazprom, which wants to be a reliable supplier to Europe but cannot satisfy everyone when demand is acute without cutting off its neighbour.

For European gas consumers, the outlook is higher prices, Stephen O’Sullivan, an analyst at UFG, the Moscow brokerage, said. “If the clearing price is not Russian pipeline gas, it is liquefied natural gas from Qatar.”