EU Referendum

Energy: Russian roulette


Unwelcome news yesterday brought us closer than we ever want to running out of gas this winter. It was occasioned by an announcement by the German Federal Network Agency (Bundesnetzagentur) that it had suspended the certification procedure for the Nord Stream 2 gas pipeline.

The suspension applies to Nord Stream 2 AG syndicate, based in Zug, Switzerland. It was looking to be certified as an independent transmission operator for the section of the pipeline in German territory. But, following a thorough examination of the documentation, the Bundesnetzagentur has concluded that it would only be possible to certify an operator of the Nord Stream 2 pipeline if that operator was organised in a legal form under German law.

Nord Stream 2 AG, however, has decided not to transform its existing legal form but instead to found a subsidiary under German law solely to govern the German part of the pipeline. This subsidiary is to become the owner and operator of the German part of the pipeline.

The subsidiary must then fulfil the requirements of an independent transmission operator as set out in the German Energy Industry Act (sections 4a, 4b, 10 to 10e EnWG), which implements the EU's Gas Directive, as amended by Directive (EU) 2019/692.

Apparently, compliance is not yet complete, so the regulator is waiting until the main assets and human resources have been transferred to the subsidiary. It will then check whether the documentation resubmitted by the subsidiary, as the new applicant, is complete.

When thee requirements have been fulfilled, the Bundesnetzagentur says it will be able to resume its examination in the remainder of the four-month period set out in law, produce a draft decision and deliver it to the European Commission for an opinion, as provided for in the EU legislation on the internal market. It will then be up to the Commission to give the go-ahead.

The news was detailed briefly by the likes of the Financial Times and Reuters, with the Telegraph stressing that the suspension appeared to be a technical rather than a political decision.

None of the reports, however, convey the full flavour of the background, where the Nord Stream 2 pipeline initially stood outside EU legislation and was only brought within its remit by a hastily contrived amendment. This. the Russians regarded as an act of bad faith, as the law was applied only after plans for the pipeline were underway – effectively making it a retrospective law.

As I reported earlier, Russia had been unhappy with this development and, having tired and failed to overturn the law in a German court, was now being forced to comply – which it is evidently not doing to the satisfaction of the Bundesnetzagentur.

It has been this dispute which has been behind much of the Russian manoeuvring on gas supplies this year but, from the look of it, the problem is far from being resolved – at least in the view of Ukraine's Yuriy Vitrenko, CEO of the country's gas operator.

This highly partisan source asserts that Gazprom's grudging attempts to create a new operator of the German section of the pipeline is a "mockery of European rules" as it does not, in his view, comply with the legislation on gas pipeline certification. Therefore, he argues, the United States should impose sanctions on the operator of Nord Stream 2, which Gazprom intends to create.

Vitrenko adds that these new sanctions should last "at least until Russia stops using gas as a weapon and starts acting in accordance with European rules" – a call which is not exactly calculated to smooth over an already tense situation. But then, since the whole point of Nord Stream 2 is to by-pass Ukraine, this is not at all surprising.

With these undercurrents, therefore, there can be no certainty that this suspension is merely a technical glitch, especially given the current Russian sabre-rattling close to the Ukraine border. And nor is it certain that the existing certification timetable can be maintained, with the pipeline in operation by January.

Predictably, therefore, markets have reacted adversely, with European gas prices, already four times higher than last year's average, surging once again, and yet to peak.

Price, though, is only one of the concerns. With Nord Stream 2 not in service, the Russians are in fact increasing contracted supplies to Europe through the existing pipeline network. But, for the third month running, it has not taken up the option of booking extra transit capacity, a facility which serves the extensive spot market.

It is also reported that Europe's underground gas storage facilities were filled only to 74 percent of their capacity as of 13 November. Working gas inventories are thus lagging behind last year's by 19.5 billion cubic metres. And as much as 6.6 percent of the amount of gas injected during the summer period has already been withdrawn from the facilities.

Notably, five daily records for withdrawal of gas from Europe's UGS facilities were broken between 1 and 5 November, marking all-time highs for these dates in many years of observation. The biggest record was set on 3 November at 345.2 million cubic metres.

With green energy nowhere near ready to take the reins from so-called "legacy", the system is particularly sensitive to cold snaps in the coming months, especially as Norwegian gas flows have been reduced because of heavy maintenance.

And, although UK supplies are not directly affected, due to the integrated nature of both gas and electricity industries, there will be considerable knock-on effects.

Already, The Times is reporting that power prices have surge after low wind speeds have caused a shortfall in electricity generation. The grid has been force to switch to gas-fired power plants and draw on coal generation. Prices for the hour between 5pm and 6pm rose to £2,000.01 per megawatt-hour, with wind-power generation falling to the lowest level for 56 days.

To add to our woes, a strike in France is further limiting supplies. The French strike has cut output from Électricité de France's generation fleet by about two gigawatts, reducing the supply that from two key interconnectors.

All this is dangerously eroding the UK's own minimal gas capacity, which has one of the world's largest commodity traders warning of that which we have already worked out for ourselves, that a prolonged cold snap could result in electricity shortages due to insufficient gas storage, leading to rolling blackouts.

This is Jeremy Weir, chief executive of Trafigura, and his comments are said to be "likely to spark alarm in Britain following months of soaring energy prices" – although anyone who has even been vaguely following the UK's energy situation must know this already.

And the "cold snap" may happen sooner rather than later. Temperatures are set to slide starting next week, with parts of Italy forecast to experience weather as much as 2ºC below normal. Southern France, Spain and Germany are also forecast to be colder-than-usual, and the UK's top energy supplier, has warned its nine million customers to prepare for an icy blast that could last as long as six weeks.

But, while the uncertainty over Nord Stream 2 cannot be helping, the catastrophic fossil fuel policies and scramble to promote green energy at all costs must be put firmly in the frame. When or if the lights do go out, we should be very clear as to the real reasons.

Meanwhile, if you haven't already done so, you need to sign the petition.

Also published on Turbulent Times.