A 'Toxic Cocktail' for the EU's Natural Gas Supply

Transatlantic circles again speculate on applying sanctions on the Nord Stream 2 pipeline. US LNG producers reduce their supplies to Europe.

BERLIN/WASHINGTON/MOSCOW (Own report) - Statements by US officials and a trip to Europe by a US special envoy renew speculations on possible sanctions on the Nord Stream 2 pipeline. Russia has been accused of deliberately driving up the gas price in Europe and of exploiting the current supply difficulties within the EU for political ends. Experts largely disagree: Whereas natural gas prices have skyrocketed, due to the rapidly rising demand in East Asia and the EU Commission's pricing policy, Moscow has fully honored all contractual supply obligations. Gazprom has even increased its exports to Germany by 33 percent, compared to the same period last year, while US supplies of liquefied natural gas (LNG) to Europe have decreased by 15 percent. US energy companies can get higher prices in Asia. According to the US ambassador to Ukraine, Russia might have "geopolitical considerations" for delaying the expansion of gas exports to Europe. In that case new sanctions are envisaged.

Surging Demand in Asia

The causes for the skyrocketing natural gas prices in Europe are widely known. The significant increase in natural gas demand in East Asia, particularly in China, plays a key role. After its slowdown in early 2020, due to the pandemic, China's economic recovery has picked up faster than expected and is boosting consumption. In addition, the switch from coal to other energy sources is rapidly progressing, not only in industry but in private households, as well. Specialists expect gas demand to increase by 13%, or 42 billion cubic meters (bcm) compared to 2020.[1] Some of this will be met by pipeline deliveries - on the one hand, via natural gas pipelines from Central Asia, on the other, via the Power of Siberia pipeline to China from the gas fields in eastern Siberia, which has been operating since late 2012, and whose supply volume is currently being increased. At the same time, the import of LNG has significantly increased. Experts assume that China's natural gas demand will grow over the next few years, due to its phasing out of coal. This could maintain prices at a high level, or drive them even higher.[2]

The EU's Pricing Policy

The fact that the rising demand has impacted so rapidly and massively on the price of natural gas is also due to the fact that "long-term gas supply contracts linked to the oil-price are on the decrease - ultimately due to pressure by the EU Commission," the former CDU politician Friedbert Pflüger explains.[3] Instead, the raw material is increasingly being traded on the "free global gas spot market." This is why "the gas price is subjected to considerable market fluctuations," according to Pflüger, who is also a Senior Fellow at the Atlantic Council's Global Energy Center. "A surge in demand leads to a surge in prices." The natural gas market "functions ... now exactly the way the EU Commission always wanted it to," Kirsten Westphal, energy policy expert at the German Institute for International and Security Affairs (SWP) is quoted saying. "There are no more long-term supply contracts, the oil-price linkage has long since been abandoned, gas price is set on short term and has become volatile." When "shortages arise" they are reflected in the price."[4] This has contributed to the emergence of a "toxic cocktail for the EU's natural gas supply."

No Price Decrease

The difficulties have also become worse, due to the extreme weather conditions that caused consumption of natural gas to skyrocket last year - initially, because of the cold winter, then because of extreme summer heat in some regions of the world, which also increased consumption of natural gas for running air conditioning. In Germany as well, gas consumption was still around 60 percent higher in April, than in the preceding year reported the Chair of the German Gas Storage System (INES), with which 90 percent of all natural gas storage companies in Germany are affiliated.[5] The supplementary consumption has been covered over a protracted period from storage tanks, to avoid the constant increase in price. Many had planned to refill their reserves only after the desired decrease in prices. However, that has not occurred. Thus, in mid-September, the storage tanks throughout the EU held only about 71 percent capacity, in Germany, even only 64 percent.[6] To be prepared for winter consumption, the tanks are usually filled to around 90 percent capacity. INES announces that it hopes to be able to reach this amount by the beginning of November. However, given the high demand globally, it is uncertain, if this will be possible.

Higher Profits in Asia

All the more so, since the obvious hope of being able to cover this supplementary demand by importing flexible liquified gas, has yet to be achieved. As Pflüger reports, this year’s LNG deliveries to the EU and Great Britain have "fallen by 17 percent during the first eight months, in comparison to the same period last year."[7] In relation to last year, LNG supplies to Europe from the United States had dropped by 15.9% in absolute terms in the first six months of this year.[8] Natural gas is traditionally sold in Asia at a higher price than in Europe, because Asia, still today, is only rudimentarily reliant on pipelines. Therefore, "LNG from the USA ... is, above all, shipped to Asia and Latin America," Pflüger reports. This is being reinforced by the Phase One Agreement in the US' trade war against China, which was concluded in January 2020. It stipulates that, to lower the US trade deficit by the end of this year, the People's Republic of China must buy an additional US $50 billion worth of energy raw materials from the United States. This means considerably less gas available for the European market. In addition, to stabilize prices on the US domestic market, the US industry has begun calling for a reduction in natural gas exports.[9]

More Natural Gas to Germany

In this situation, transatlantic circles are again raising the subject of sanctions on the Nord Stream 2 pipeline. At a time when gas deliveries from the United States have been reduced, the importers and the industrial associations have unanimously confirmed that Russia has upheld its export commitments. In the first 9 months of this year, Russia's gas exports were altogether 17.3 per cent - and to Germany 33.2 per cent - more.[10] Russia has its own difficulties. First of all, as the Atlantic Council expert Pflüger notes, it must fill its own storage tanks, significantly emptied by the high level of consumption, as well as having suffered losses due to damage to a large compressor station. In addition, the Nord Stream 2 gas pipeline has been completed and is ready for operation, however, it has not yet received authorization from Germany's Federal Network Agency, whose decision must then be submitted to the EU Commission for approval. It was reported that the licensing process could last "until May."[11] There is a possibility of refusal. The perspective that bureaucracy could render the pipeline unusable - even after its completion - is no source of impetus for increasing gas delivery.

Sanctions in Discussion

Now the US Ambassador to Ukraine, Steven Pifer has been quoted with the statement, "the question is, whether geopolitical considerations are in play in the Kremlin."[12] If this were the case, Berlin must adopt new sanctions against Moscow. That is stipulated in an agreement with the Biden administration.[13] If the German government does not impose sanctions, Washington could impose sanctions on Germany. US Special Envoy for Energy Security Amos Hochstein recently traveled to Brussels following his visit to Berlin. The object of his interest was the EU Commission's soon awaited official position, on Germany's Federal Network Agency Nord Stream 2 decision.[14] The Biden administration, like that of its predecessor, is very interested in the failure of Nord Stream 2.


[1] Miaoru Huang: The Future Of China's Gas Demand. forbes.com 22.09.2021.

[2] Kathrin Witsch, Katharina Kort, Mathias Peer: Gaspreiskrise: Der LNG-Boom in Asien steht erst am Anfang. handelsblatt.com 01.10.2021.

[3] Friedbert Pflüger: Der Gasmarkt ist "schuld", nicht Putin. background.tagesspiegel.de 01.10.2021.

[4] Klaus Stratmann: Dreht Russland am Gashahn, um Nord Stream 2 zu erzwingen? handelsblatt.com 21.09.2021.

[5] Kathrin Witsch: Europa steckt in einer Gaspreiskrise. Das sind die Folgen für die Versorgung in Deutschland. handelsblatt.com 23.09.2021.

[6] Thomas Kohlmann: Was steckt hinter den Rekordpreisen für Gas? dw.com 21.09.2021.

[7] Friedbert Pflüger: Der Gasmarkt ist "schuld", nicht Putin. background.tagesspiegel.de 01.10.2021.

[8] US supplies of LNG to Europe have not been stable for two years, says Gazprom Export. tass.com 24.09.2021.

[9] Katharina Kort: US-Unternehmen fordern Drosselung der Gasexporte. handelsblatt.com 22.09.2021.

[10] Gazprom ramping up gas production. gazprom.com 01.10.2021.

[11] Ewa Krukowska, Dina Khrennikova, Elena Mazneva: Nord Stream 2: Diese Hürden stehen einer Inbetriebnahme noch im Weg. capital.de 09.10.2021.

[12] Moritz Koch: Neues Machtspiel um Nord Stream 2: Wie Russland die Energiekrise ausnutzt. handelsblatt.com 07.10.2021.

[13] See also Raw Material Supplier for the EU's Energy Transition.