EU natural gas price cap

As part of the sanctions imposed on the Russian Federation as a result of the Russo-Ukrainian War, on 3 December 2022, the European Union (EU) agreed to cap the price of natural gas in order to reduce the volatility created by Russia in the gas market.

In 2021 the EU imported 83% of its natural gas, but following the invasion of Ukraine gas imports from Russia have fallen, partly due to the increasing cost, partly because of reductions in supply from Russia, partly through reduction of consumption and partly because of a desire to move away from Russia's Gazprom as a supplier.[1] The main effect on Russia, would be the desire of the EU to move quickly away from buying any gas from Russia.

The price cap would become effective from 15 February 2023 at €180 per megawatt-hour.[2]

Discussions on price cap proposals

The EU originally proposed that a gas market correction mechanism would kick in when the price of month-ahead contracts on the Dutch Title Transfer Facility (TTF) exceeded €275 per megawatt hour and the gap between world prices was greater than €58.[3]

The Czech Republic, which holds the rotating presidency of the bloc, proposed a second compromise for a broader price cap — lowering the intervention threshold to €220.[4] 12 member states had demanded to decrease the previously proposed price ceiling of €275. Lithuania, Latvia, Poland, Romania, Italy, Greece, Croatia, Slovenia, Slovakia, Belgium, Bulgaria, and Malta came out in favour of lowering gas prices.[3]

The price in December 2021 topped €180 before declining to below €100. Another peak in early March 2022 hit €220, before again declining to below €120. Between late July and late September the price was mainly above €200, with the highest in late August at €340, before declining again to below €150.

There were concerns from some that an intervention could cause greater volatility in the market.[2]

Price cap price

The European Energy ministers agreed, on 19 December 2022, on a price cap for natural Gas at €180 per megawatt-hour,[3] with Austria and the Netherlands abstaining and Hungary voting against.[2] This equates to about $55/MMBtu.

Gazprom gas production and exports

Gazprom holds the monopoly rights for gas exports via pipelines, enshrined in Russian law. In 2020, natural gas exports accounted for more than 20% of Russia’s total exports by value.[5]

Gazprom has 63% of the 377bcm domestic market and is forced to sell at a low specified government tariff level whereas Novatek and Rosneft are free to chose their prices and can sell just in profitable areas.[6] [5]

Gazprom, in 2021 exported 16.5bcm to China and 16bcm to Turkey with 140bcm of gas going to Europe. The export to Europe fell to 5.9bcm in Q1 2023, roughly the same as the export to China in the same quarter.[9] [10]

Sanctions do not affect Liquefied natural gas (LNG). In 2021 the EU bought 16 bcm of LNG from Russia, in 2022 this rose to 22 bcm.[11]

Reactions

Azerbaijan

Azerbaijan announced that its supply of gas to Europe would be 30% higher in 2022 than in 2021 and that an agreement had been signed in July 2022 to increase gas supplies to Europe from around 8 to 20 billion m3 by 2027.[12] Azerbaijan supplied 11.4 bcm of gas to Europe in 2022, for €15.6 billion, with 80% going to Italy.[13]

Hungary

Hungary, which had recently signed a long-term contract with Russia, had objected to the principle of the price cap, according they were given freedom, without notification to, or consent from, the EU to keep or modify their current contract with Russia.[14] Hungary's contract is for 4.5 bcm per annum and there is a price cap of €150 per megawatt hour.

Russia

Russian deputy prime minister Alexander Novak said that the cap on the price of gas was "just another political decision, absolutely not an economic one."[15] Russia reported that it believed the sanction would lead to gas shortages which would destabilise Europe.[16]

Ukraine

The only operational gas pipeline from Russia to the west is the Urengoy–Pomary–Uzhhorod pipeline, originating from the Urengoy gas field, it enters Ukraine at the Sudzha gas metering station. The agreement between Russia and Ukraine limits the daily gas level to 42.5mcm. Ukraine has refused to allow gas to be sent from the Sokhranovka gas pumping station through the Soyuz pipeline.[17]

Operation of sanctions

EU energy ministers have reached an agreement to cap gas prices in the bloc when they exceed the price cap for three days. Operational from 15 February 2023 and applying to gas contracts traded on the TTF between one month and a year ahead. Prices must also be €35 per megawatt hour above an average of global liquefied natural gas prices in order to be triggered.[2]

The price must be above the cap price for three working days and be €35 per megawatt hour above an average of global liquefied natural gas prices. Then the cap will remain in place for 20 days, after that date it will cease if trade is then below the cap price for three working days. The EU can deactivate the cap in the event of an emergency such as a risk of loss of supplies. [18]

The cap will not apply to private gas trades, those arranged outside energy exchanges, although there is an option to review this later, once the price cap is in force.[19]

December 2022

Between December 15 and December 23 natural gas prices fell €49 to €85 due to a combination of high LNG imports, high levels of storage and lower demand in Europe.[20] At 28 December, the EU storage capacity was at 83.2% and the price of January delivery gas had fallen to €76.18pmh.[21]

Russian gas exports to countries outside of the Commonwealth of Independent States (CIS) totaled 100.9bcm in 2022 compared to 185.1b in 2021 a fall of 45.5%.[22] Gazprom overall production in 2022 was 413bcm, down from 515bcm in 2021 which will affect the profitability of Gazprom, who is restricted in the price it can sell gas for to the domestic market. 2022 exports to China of 15bcm generated under USD4b at a price around USD25pmh.[23]

January to March 2023

The warm weather in Europe continued into the new year with 4 January prices dropping to €64.20pmh.[24] January gas supplied by Russia to Europe was 1.7b m3 compared with 13b m3 average per month for the 2021 year.[25]

The price of natural gas in Europe fell to an 18 month low in mid February of €49pmh with gas storage across the European Union at 65% capacity, well above the average of 45% at this time of year.[26] By 31 March the price had fallen further, to €43pmh.[27]

Gazprom’s pipeline gas exports to Europe are taxed at 30%, but have fallen 75% from pre-war levels in January on the remaining routes through Ukraine and Turkey.[28]

April to June 2023

The EU used 18% less gas than the 10 year average in the period October 2022 to January 2023.[29]

In April the price of gas remains in the €40-45pmh band for future deliveries.[30] Gasprom expects exports of gas in 2023 to be half of 2022.[5] Russian gas production in 2023 is expected to fall from 673bcm to 630bcm with Gazprom production falling from 412.6bcm to 390bcm.[8] 2023 Exports to Europe total 8.14bcm in first 4 months.[31]

See also

References
  1. "Infographic - Where does the EU's gas come from?". Retrieved 19 December 2022.
  2. "EU ministers agree deal on gas price cap". Retrieved 19 December 2022.
  3. "Reuters: EU countries agree on Russian gas price cap". 4 June 2016. Retrieved 19 December 2022.
  4. "Spain's Sanchez, Southern European Leaders Demand Changes to Gas-Cap Plan". 9 December 2022. Retrieved 19 December 2022.
  5. "Export revenue projected to fall by 50% in 2023: Gazprom has serious problems?". 21 April 2023.
  6. "Exports collapse and Gazprom wants to increase the price of gas in Russia". 21 April 2023.
  7. "Gazprom in 2022: production and exports down, profits up". 12 January 2023.
  8. "Russian Gas Production Down 10% in 2023". 3 May 2023.
  9. "Russia is losing the energy war as Putin's winter gas attack backfires". 15 April 2023.
  10. "Gazprom's exports to Europe up 4% in March from Feb – Reuters calculations". 1 April 2023.
  11. "Analysis – LNG imports test EU's resolve to abandon Russian fossil fuels". 12 April 2023.
  12. "Azerbaijan Says Will Increase Gas Exports To Europe This Year By 30 Percent". Radiofreeeurope/Radioliberty. Retrieved 26 December 2022.
  13. "EU countries spend 15.6 billion euros on gas purchases from Azerbaijan in 2022". 22 March 2023.
  14. "Hungary can modify gas deal with Russia without consulting Commission -Szijjarto". Reuters. 19 December 2022. Retrieved 19 December 2022.
  15. "Russia's Novak: EU gas price cap 'just another political decision'". Retrieved 20 December 2022.
  16. "EU sanctions to inevitably lead to gas shortages in Europe — Russian deputy PM". Retrieved 26 December 2022.
  17. "Gazprom supplies gas for Europe through Ukraine equaling 42.5 mln cubic meters via Sudzha". Retrieved 28 December 2022.
  18. "Europe Implements Trading Cap to Curb LNG Price Wars". Retrieved 21 December 2022.
  19. "At last: EU ministers finally agree Russian gas price cap". 19 December 2022. Retrieved 19 December 2022.
  20. "Significant drop in natural gas prices after EU cap deal". 26 December 2022. Retrieved 26 December 2022.
  21. "Gas price in Europe hit 10-month low owing to milder weather". Retrieved 1 January 2023.
  22. "Russian Gas Exports Outside Ex-Soviet States Fell 46 Percent In 2022, Gazprom Figures Show". Radiofreeeurope/Radioliberty. 2 January 2023.
  23. "Gazprom in limbo after loss of European market". 3 January 2023. Retrieved 10 January 2023.
  24. "Gas and oil prices sink on back of warm weather and economic worries". Financial Times. 4 January 2023. Retrieved 5 January 2023.
  25. "ANOTHER RECORD LOW FOR RUSSIAN GAS FLOW TO EUROPE IN JAN". Retrieved 14 February 2023.
  26. "Europe's natural gas prices fall to 18-month low". Retrieved 18 February 2023.
  27. "Lower Natural Gas Price Is Not All Good News For Europe". 2 April 2023.
  28. "Russian tax overhaul seeks to offset drop in revenue from oil companies". 24 February 2023.
  29. "EUROPE'S GAS OUTLOOK TRANSFORMED AFTER MILD WINTER: KEMP". 13 April 2023.
  30. "Europe Gas Heads for Weekly Decline With Start of Storage Refill". 14 April 2023.
  31. "Russia's April gas exports to Europe up 7.5% from March, calculations show". 2 May 2023.
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