The global market’s reaction to further restrictions on Russian exports to Europe could be emphatic and swift, with additional limitations likely to lead to surging prices in all regions, according to Rystad Energy.
“If Russia implements gas shutoffs to more countries unwilling to pay in rubles – in addition to Poland and Bulgaria – prices could rocket in the near term,” said Nikoline Bromander, Rystad senior analyst.
Many European energy ministers are actively exploring and discussing how to effectively phase out Russian oil and gas while keeping the lights on and avoiding a full-blown domestic energy crisis, said Bromander.
Regarding Gazprom, as these countries look for alternative sources of energy, any decrease in sales will negatively impact Gazprom’s income and could lead to operational issues. Russia will have to find a balance between reduced domestic production, domestic storage availability, and diversity of pipeline exports.
To accept Putin’s terms, European buyers may make dollars or euro payments into an account at Russia’s Gazprombank, which is later converted into rubles and transferred into a second account for the payment to be finalized, Rystad noted.
“After Gazprom shut off gas to Bulgaria and Poland, many European countries could accept Putin`s payment terms in fear of suffering the same fate. For instance, gas distributors in Germany and Austria are currently working on ways to accept Putin’s demand for payment in rubles,” said Bromander.
“Not all countries have readily available alternatives to Russian gas, and as new and upgraded infrastructure requires considerable time and financial investment, many countries could struggle to replace a sudden drop in supply,” he continued.
More severe consequences are likely for large countries, such as Germany and Italy, which rely heavily on Russian imports. Germany has updated its plans to build Floating Storage and Regasification Units (FSRU), an essential component of the LNG supply chain, and will now build four units instead of the originally planned three. The move helps Germany move away from Russian gas and advances its goal of zero Russian imports by 2024.
Russian pipeline exports are stable after supplies to Poland and Bulgaria halted last week, and the reversed flow from Germany to Poland is also stable. More gas is estimated to flow from the UK to Belgium in the coming months with capacity at the IUK pipeline (Interconnector UK) almost fully booked through June.
Prices in European hubs have diverged in recent weeks, as the spread between the TTF and UK NBP indexes widens, and UK gas prices plunged to a discount over TTF of more than $15/MMbtu. A major factor for this spread represents higher LNG imports into the UK, currently exceeding the UK`s demand, said Bromander.