Europe prepares for worst-case scenario for gas war

What is happening?

European Commission President Ursula von der Leyen warned on July 6 that all countries and industries in Europe must be prepared for a scenario where Russia completely cuts off gas supplies. There are growing concerns that the Nord Stream 1 natural gas pipeline from Russia to Germany across the Baltic Sea will not be restarted after maintenance scheduled for late July.

Gas prices in Europe continue to set new records. (Source: Getty Images)

Russia has cut off gas supplies to dozens of European Union countries, including Germany, the bloc’s largest economy, which relies heavily on Russian fuel to power its industries. Some politicians and business leaders accuse Russia of punishing Europe for supporting Ukraine against its military campaign.

Russia's Gazprom has cut its supplies to Europe via the Nord Stream 1 pipeline by up to 60 percent. Meanwhile, gas supplies to Italy have also been cut in half. Russia accounts for about 35 percent of Germany's gas imports and 40 percent of Italy's.

European options

Europe is trying to fill its underground gas reserves before winter. Gas companies hope to buy more gas at a cheaper price in the summer and then draw from the reserves to meet rising heating demand in the winter. But supply cuts are making refueling more difficult and expensive, raising concerns that Europe may not have enough fuel to last through the winter.

Some energy-intensive industries are facing higher costs and are having to cycle their energy consumption, slowing the European economy. Currently, Europe’s gas storage tanks are only 60% full, while the latest proposal from the European Commission requires countries to fill 80% of their storage by November 1.

If Russia does not resume deliveries via Nord Stream 1 after July 24, the EU could “run out of gas by the end of winter. To ensure energy security, Europe may have to consider gas rationing,” said Holger Schmieding and Salomon Fiedler, economists at Berenberg bank.

How does the EU handle this?

The EU imported about 40% of its natural gas needs from Russia before the Ukraine conflict broke out, but the bloc has outlined plans to cut imports by two-thirds by the end of this year and eliminate Russian gas entirely by 2027. The EU said it would ban imports of Russian coal from August and most Russian oil in the next six months. The aim is to deprive Russia of $850 million a day in oil and gas sales to Europe to stop the fighting in Ukraine.

To compensate for the drop in Russian supplies, many European governments and companies have been buying expensive liquefied natural gas (LNG) from the United States, shipped by ship. The high energy prices have pushed inflation to record levels in Europe.

Europe is now working to install more pipelines to receive gas from Norway and Azerbaijan, accelerating the exploitation of renewable energy. Germany, a country without an LNG import terminal, is planning to exploit four import terminals, two of which will be operational this year.

Many European countries have to return to using coal-fired electricity. Photo: Sputnik

Despite the focus on renewable energy, the energy crisis is pushing many countries back to fossil fuels. Germany is rushing to pass legislation to restart coal-fired power plants as a temporary measure, despite plans to phase out coal entirely by 2030. Authorities are also urging citizens to conserve energy in anticipation of a winter disaster. The Dutch government has also announced that it will allow coal-fired power plants to operate at full capacity again to conserve the country's natural gas reserves.

Despite these measures, ensuring energy security in Europe remains a challenge. LNG export terminals in energy-producing countries such as the United States and Qatar are operating at full capacity, meaning Europe must compete with Asia for the limited supply.

Russia's "card"

Gazprom said it was forced to cut off gas flows to Europe via the Nord Stream 1 pipeline because of repairs to compressor turbines in Canada and delays in deliveries due to sanctions against Russia. But many European governments disagreed, saying the decision was politically motivated.

Gazprom’s move has caused natural gas prices to surge, boosting Russia’s revenues at a time when its economy is under pressure from Western sanctions and putting further pressure on the EU to cut back on its political and military support for Ukraine. It can also be seen as a counter-sanctions move and a strong message to major European customers that they, and smaller ones, will not be exempt from supply cuts if they do not meet Russia’s conditions.

Germany and Italy saw their supplies cut around the time their leaders, along with French President Emmanuel Macron, traveled to Kiev to meet President Zelensky and support granting Ukraine EU candidate status.

Will Europe "freeze" in winter?

“The Nord Stream 1 supply cut could be an attempt by Russia to prevent Europe from filling its gas storage tanks in the summer and signal an energy war in Europe next winter,” said Timothy Ash, senior emerging markets strategist at Bluebay Asset Management.

So is Europe at risk of blackouts or freezing over in the winter? Many analysts say this is unlikely because EU law requires that in an emergency, governments in member states must impose gas rationing, which means cutting off gas to industry to ensure supplies to homes, hospitals and schools. Gas-starved countries can also ask for help from other countries with larger reserves, but this depends on the pipeline system.

The downside of rationing is that it can easily lead to cuts or shutdowns in industrial activity, which can cause job losses, reduced growth, further inflation and eventually economic recession.