Gas Prices Could Rocket in the Near Term

Gas Prices Could Rocket in the Near Term
Gas prices could rocket in the near term if Russia implements shutoffs to more countries.

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.

That’s according to Rystad Energy analyst Nikoline Bromander, who said 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. 

“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,” Bromander said in a statement sent to Rigzone late Monday.

“Russia will have to find a balance between reduced domestic production, domestic storage availability and diversity of pipeline exports,” Bromander added.

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, according to the Rystad analyst.

“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,” Bromander said.

“For instance, gas distributors in Germany and Austria are currently working on ways to accept Putin’s demand for payment in Rubles,” the analyst added.

“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,” Bromander continued.

Bromander outlined that Russian pipeline exports are stable after supplies to Poland and Bulgaria halted last week and added that the reversed flow from Germany to Poland is also stable.  

In a separate statement sent to Rigzone last week, Bromander and fellow Rystad analayst Kaushal Ramesh described the gas embargo on Poland and Bulgaria as Russia’s first shot back at the West.

Any Member State Could be Next

In her opening remarks at the press conference of the Extraordinary Energy Council on May 2, Kadri Simson, the European commissioner for energy, outlined that Gazprom’s decision to suspend gas supplies to Poland and Bulgaria marked “another turning point in the current crisis”.

“It is an unjustified breach of existing contracts and a warning that any Member State could be next,” Kadri warned.

“It is also an attempt to divide the EU, to which we must respond by reinforcing our unity and solidarity,” Kadri added.

“The Commission has provided guidance to the Member States on the issue of payment in Rubles. We made clear that this is a unilateral change to contracts, unjustified by commercial reasons, and it is perfectly legitimate under commercial law to reject it. We have explained that payments in Rubles lead to a clear breach of sanctions, as they provide assets for the operations of the Central Bank,” Kadri continued.

Nevertheless, many European energy companies are due to make their next payment to Gazprom in mid-May and are trying to understand better what they should do, Kadri highlighted in the remarks.

“We need to give them the clarity that paying in Rubles through the conversion mechanism managed by the Russian public authorities and a second dedicated account in Gazprombank is a violation of the sanctions and cannot be accepted,” Kadri said.

In a press statement by European Commission President Ursula von der Leyen on April 27, Leyen noted that Gazprom’s announcement that it is unilaterally stopping gas delivery to certain EU Member States is another provocation from the Kremlin.

“But it comes as no surprise that the Kremlin uses fossil fuels to try to blackmail us,” Leyen said in the statement.

“This is something the European Commission has been preparing for, in close coordination and solidarity with Member States and international partners. Our response will be immediate, united and coordinated,” Leyen added.

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