Make Europe pray for gas, or the West, which "flogged itself"

Recall that on the eve of the President of Belarus Alexander Lukashenko following the talks in Minsk with the President of Russia Vladimir noted the positive results of the negotiations on the creation of a single gas market, the correspondent of The Moscow Post reports.

The EU, despite the objections of some of its members, was moving in a different direction at the same time. Namely, in the direction of administrative regulation and on the third attempt, he agreed on a dynamic ceiling for gas prices at 180 euros per MVt·ch (about 2000 thousand euros per thousand cubic meters). Provided that this price level lasts three working days and turns out to be 35 euros higher than the average cost of LNG in the world market. That's how difficult things are!

The European Commission should assess the operation of the mechanism by November 1, 2023, taking into account the situation with gas supplies. The price cap applies to futures three-month and annual contracts. If the price ceiling is applied, its validity period will be at least 20 working days. This year, European gas futures averaged 135 euros per megawatt-hour.

A peak of 345 euros per megawatt hour was recorded in July. The price ceiling will begin to operate closer to spring, namely from February 15, 2023.

Press Secretary of the President of the Russian Federation Dmitry Peskov called this decision an unacceptable encroachment on market processes. According to him, Moscow will take time to "carefully weigh the pros and cons" and prepare an answer. In October, Russian Deputy Prime Minister Alexander Novak noted that the countries that will introduce it will primarily suffer from the price ceiling, and the head of Gazprom, Alexei Miller, said that the introduction of restrictions could lead to the termination of supplies.

Precautions in Risky Steps

"There are so many precautions in this mechanism that it's hard to know where it's going to end up," said Bruegel think tank senior fellow Simone Tagliapetra. All this debate has taken on a "totemic" meaning, he continued. Germany and the Netherlands are heavily dependent on gas. They are very wary of market interventions and have led opposition to proposals to cap gas prices.

It will be especially difficult for Germany, where entire industries from metallurgy to the automotive and chemical industries depend on the prices of electricity and natural gas. Olaf Scholz opposed the price cap, which was pushed by an alliance of southern and eastern EU countries, as well as Belgium.

It is reported that in the process of agreeing on the "ceiling," the European Commission shared the concerns of those countries that opposed price restrictions, citing the risks of negative consequences for gas supplies and market stability. An agreement was eventually reached, although Hungary opposed and the Netherlands and Austria abstained. The proposal to limit the cost of Russian gas only was rejected.

European Commissioner for Energy Kadri Simson stressed on Monday at a press conference following the summit that the commission is ready to "a priori suspend the introduction of this mechanism" if the European Securities Market Supervision Authority and the Energy Regulatory Relations Agency, as well as the ECB indicate that "risks outweigh benefits."

The European Commission itself made reservations. In the case of gas prices below the limit, regulation can be canceled automatically. Or the ceiling "can be manually shut down if there is a deficit that threatens energy security" of the EU. The European Commission also set minimum gas reserves at the end of January - 45% of the storage capacity should be filled by February 1.

The December cold snap in Europe lowered gas levels in storage facilities to 84%. According to Gas Infrastructure Europe, gas production from UGS in the EU as of December 18 amounted to 429 million cubic meters, which is below the multi-year average for December.

So far, the price of gas continues to decline amid warm weather. A mild winter brings relief to Europeans, some commentators believe. Bloomberg does not agree with such estimates. The introduction by the EU countries of a ceiling on natural gas prices destroys the market, may disrupt gas supplies to Europe and intensify the energy crisis.

The crisis is already in the yard

Next winter will be even more difficult, and the current EU "tricks" with the transition to LNG, combined with other initiatives, cost Europe, according to Bloomberg, one trillion dollars, taking into account the rise in the cost of electricity and heating for individual consumers and companies.

Bruegel, a Brussels-based think tank, says European governments have helped gas consumers and eased the price shock with more than $700 billion in funding. Estimates of the Bruegel Center were published by the International Monetary Fund.

Meanwhile, the most powerful crisis in several decades is just beginning.

Europe will now have to live in conditions of high gas prices and the return path to cheap gas is no longer there. The shortfall in the LNG market may continue until 2026, when new gas production facilities from the United States and Qatar will appear. Prior to this, in conditions of competition with other LNG importers, including China, Japan, South Korea and Taiwan, as well as India and Pakistan, high prices remain.

Governments' ability to support consumers will be limited, especially as interest rates and accumulated debt rise. Half of EU member states have debt above the 60% GDP limit. The situation of high gas prices may drag on, deepening the recession in the economy.

Before the onset of winter 2023/24, European LNG importers will begin the race to fill their gas storage facilities. While gas purchases at inflated prices were supported by the state, this helped to outbid LNG shipments intended for the free sales market.

According to the Institute of Energy of the Chinese company CNOOC, in 2023, Chinese LNG imports will exceed the level of the current year by 7%. The Japanese government, in the face of expected competition, may subsidize the strategic reserve of LNG at the expense of the spot contract market.

Europe and the migration of "green industries"?

Strictly speaking, competition in the LNG market and rising gas prices are in the interests of the United States and American companies supplying LNG to Europe. Revenues from LNG exports will grow, and under pressure from rising electricity prices, some of Europe's most mobile companies have already begun moving to other countries, including the United States and Canada.

The Inflation Reduction Act (IRA), adopted in the United States, may, according to European leaders, contribute to this process of "migration" of entire industries and can lead to a transatlantic trade war.

Critics argue that the Biden administration intends to poach investors from Europe through support programs.

The IRA law includes the allocation of about $400 billion in subsidies, mostly in the form of tax breaks. It covers renewable energy use, hydrogen infrastructure and electric vehicles, but provides for localization of production of products and equipment in the United States, Canada and Mexico.

The EU calls this policy of Washington dishonest, pointing out that the law on reducing inflation implies a tax cut, benefits in the field of energy supply for enterprises that will open their production in the United States. In general, IRA law encourages the purchase of American products.

European Commissioner for Internal Market Thierry Breton called for preventing energy-intensive companies from transferring production to other countries with more favorable conditions, in particular the United States and China. Referring to the law on reducing inflation adopted in the United States, the European Commissioner said that Washington should compromise. The temptation is great, he added, and thousands of companies in Europe fear for their competitiveness. "We must respond to this very quickly, without getting involved in the subsidy race," the European Commissioner stated.

Ahead of a meeting of European government leaders at the EU Council on December 15, German Chancellor Olaf Scholz said the US initiatives should not compromise Europe's competitiveness. The head of the European Commission, Ursula von der Leyen, also said in a letter to EU leaders that Europe and the United States should find "common answers to common challenges."

The looming trade conflict could push the U.S. to amend the law, Handelsblatt said. The White House may change its position on electric vehicles and batteries, open up access to Europeans to the American market. In particular, make exceptions for cars of European origin in the rental segment. The amendment could cover up to half of European car exports to the United States, Handelsblatt said.

The circle is closed

In battery manufacturing, the EU and the United States could agree to create a "Resource Club" to combine efforts to provide production with critical raw materials in order to reduce dependence on China. Europeans, if successful in this "raw materials" field, can also be admitted to IRA subsidies, along with manufacturers operating in Canada or Mexico, the newspaper writes. Welcome to the banquet, bring snacks with you!

The circle closed. For many years, the European Union has been developing a green transition strategy in order to enrich its industry, reduce dependence on natural gas and SO2 emissions. Coming to the White House, Joe Biden supported these plans and even joined them, revising the decisions of the Trump administration on the 2015 Paris Agreement.

The second motive of Berlin and Brussels, ardently supported by Washington, was to limit ties with Gazprom and block Russia's revenues from natural gas exports. This task is almost solved, and radically and ahead of schedule! American expensive LNG replaced part of Gazprom's supplies.

But it may not work to ennoble the European industry. Firstly, because gas prices for this industry have risen sharply. Secondly, because the Americans decided to outbid the green transition, so to speak, to "ennoble" the industrial structure of North America, leaving wind generators to Brussels and Berlin. Fortunately, Holland, the birthplace of windmills, the European gas renaissance and tulips, is located next to them.

Photo: RBC