EU member states agree on gas cuts

Governments and companies in Europe remain vulnerable to a reduction in energy supply from Russia as the continent scrambles to fill up its gas storage facilities for the upcoming winter. As of July 27, gas flows to Europe through the Nord Stream 1 pipeline have been reduced to around 33 million cubic meters of gas per day, just 20% of the pipeline’s full capacity. Nord Stream 1 had initially resumed operations at around 40% flow capacity on July 21 following a 10-day annual maintenance shutdown. However, according to a recent statement by Gazprom, gas flows through the pipeline have been reduced on the orders of a Russian industry watchdog due to an alleged issue with a Siemens turbine, an explanation that has been disputed by the manufacturer as well as authorities in Europe, including the German government.

These developments came on the heels of a key agreement reached by EU member states on July 26 to voluntarily reduce gas usage from August 1, 2022, to March 31, 2023 by 15%, with the option to make the reduction target mandatory in the event of a supply emergency. However, the plan includes several opt-out clauses allowing countries to request exemptions if they surpass gas storage filling targets, if their domestic gas usage increased by at least 8% in the past year in comparison to the average of the previous five years, or if so-called critical industries in a respective country depend heavily on gas usage.

Figure 1: Snapshot of TTF Neutral Gas Price Index (source: European Energy Exchange).

According to an initial draft by the European Commission, industries such as health, food making, oil and gas, defence or sectors that keep cross-border supply chains within the bloc running may be considered as critical under the new emergency plan. Manufacturers that would not be able to resume operations without notable delays, repairs, regulatory approval, or high financial costs could also see themselves exempt from mandatory cuts.

The plan also carves out exemptions for countries not connected to the gas network of other member states, such as Ireland, Malta, and Cyprus, as well as countries not connected to the continent’s electricity grid that rely heavily on gas for electricity production, such as the Baltic states of Estonia, Latvia, and Lithuania.

Figure 2: Flow status of major pipelines between Russia and Europe (source: Everstream Analytics).

Beyond these regional measures, authorities in Germany recently agreed to a EUR 15 billion (USD 17,76 billion) bailout for Uniper SE, a large electricity producer and major importer of Russian gas, which was forced to file a bailout request in July after it had only been receiving around 40% of the expected gas volumes from Russia. Similar financial bailouts for other electricity providers reportedly remain possible but have yet to be confirmed.

Energy shortages increase the risk of operational disruptions in energy intensive industries

Companies in energy intensive industries continue to warn of widespread production impacts due to insufficient gas supplies and rising energy costs. In Germany, several of the country’s major chemical producers, including BASF SE, SKW Stickstoffwerke Piesteritz GmbH, and INEOS Group, have warned that they may be forced to reduce ammonia production if energy prices continue to rise. In the steel sector, ThyssenKrupp AG, Germany’s largest steel manufacturer, stated that it could face widespread production halts as well as technical damage to its facilities due to its dependence on gas that cannot easily be substituted with other energy sources such as oil or coal.

Figure 3: Number of energy-related factory shutdowns in Europe by month (source: Everstream Analytics).

Gas storage levels continue to increase at slow pace in most parts of Europe

Gas storage levels continue to increase throughout the continent, with Sweden seeing the largest overall increase in gas storage levels at 51.63% over the entire month of July. Meanwhile, storage levels in many countries heavily dependent on Russian imports have risen significantly slower in the last two weeks, including in Germany and Austria, where storage levels rose by less than 3%, while storage levels in eastern European countries like Slovakia, Hungary or the Czech Republic rose by less than 5% during the same period. Despite the slow increase, Germany still managed to reach its interim storage target of at least 65% of full capacity by August 1 that had previously been set by the government.

Outlook and recommendations

Despite the growing number of countermeasures announced across the continent to mitigate the intensifying crisis, private citizens and industrial customers alike already face an unprecedented spike in energy prices in many European countries. As a result, many warn that energy-intensive industries including chemicals, textile, paper, or aluminium manufacturing will remain at high risk of further operational disruptions throughout the second half of 2022 if Russia cuts off energy supply permanently and a colder-than-usual winter hits the continent later in the year.

Everstream clients are receiving detailed information about this disruption.

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