Jul 27, 2022

‘Biggest fear’ has come true as Russia cuts gas supplies to Europe Transcript

'Biggest fear' has come true as Russia cuts gas supplies to Europe Transcript
RevBlogTranscriptsGazprom‘Biggest fear’ has come true as Russia cuts gas supplies to Europe Transcript

Russia’s state-owned gas company Gazprom said it would cut flows through the Nord Stream 1 pipeline to Germany in half, to just 20% of its capacity. Read the transcript here.

Becky: (00:00)
Europe is already bracing for what could be a long, cold winter because of Russia’s war on Ukraine. EU member states today agreeing to voluntarily reduce natural gas demand by 15% this winter, while facing down possible supply disruptions. Now that action, coming a day after Russia announced it’s cutting the flow of gas from the Nord Stream 1 pipeline to 1/5 capacity and what the EU’s energy minister calls, or commissioner calls, a politically motivated move.

Becky: (00:31)
Well, let’s talk about that big agreement out of the EU today to cut gas demand. CNNs Clare Sebastian is with me. The Europeans are saying this comes off the back of the restriction in gas supplies, of course, by the Russians, suggesting this is Russia weaponizing gas. The Russians have got a reason, they say, for cutting or further reducing this gas supply. Just explain what’s going on here.

Clare Sebastian: (00:54)
Yeah. So I mean, I think, we all knew from the beginning of the war in Ukraine, that you were never going to be able to replace all of Russian gas with other gas. So there was always going to be demand reduction. But here we have a very urgent situation, because until the recent cuts to the supply coming through Nord Stream 1, it was the biggest single artery supplying Russian gas to Europe. So it’s critically important, it was at 40% capacity. Now Russia says that another turbine needs repair. One is already on its way back from Canada. Russia says it hasn’t arrived yet. And another one now needs repair, and they say that means a cut of another 20%.

Clare Sebastian: (01:26)
The EU of course says that’s just a pretext, that this is a political issue. And meanwhile, that has stepped up the urgency for the EU to agree on this new deal, to cut energy demand, gas demand in particular, by 15% this winter. It’s a voluntary measure, the 15%, but if there’s an emergency and a trigger, what’s called a union alert, then it becomes mandatory.

Clare Sebastian: (01:48)
And here’s where we get the compromises. Because in order to get this over the line, they had to agree to exemptions. Exemptions for countries like Ireland and Malta who are not connected to the pipeline system. Exemptions for the Baltics who are not connected to the electricity grid, and a few other sort of deregations they’re called, where people can reduce the target from 15% down to something lower. Critics are saying it’s watered down, but it got over the line, Becky, in five days.

Becky: (02:12)
It got over the line in five days, but we know that there are 12 of 21 member states who really didn’t like the idea of a sort of Europe-wide mandate on gas rationing, effectively, is what we’re talking about here.

Clare Sebastian: (02:25)
Yeah. And look, cracks are already appearing. We’re hearing from the Hungarian government, the chief spokesperson quoting the foreign minister in a tweet, which I think we can show you. He’s saying, “For Hungary, this decision is completely unacceptable and its implementation is out of the question.” He continues, “The proposal completely ignores the interests of Hungary.” We’re seeking more clarity on this from the Hungarian government, but they are certainly very opposed to it. They have been opposed to a number of the measures that have sought to sort of garner agreement on an EU wide level. But it shows how controversial this is and how powerful Russia’s leverage still is when it comes to its energy supplies.

Becky: (03:01)
It was an IMF report today, significantly downgrading global growth this year, which pointed out that in the European space, there could be even further downgrades, should things get really difficult this winter. The ripple effect of this Russian war on Ukraine is really being felt in the heart of Europe, isn’t it?

Clare Sebastian: (03:26)
It really is. I mean the German economy, the biggest in Europe, is the most reliant on Russian gas. That’s one of the reasons why this is so impactful. The IMF has downgraded global growth from 6.1% to 3.2%. They say, if Russia cuts the gas to Europe completely, then it will go to 2.6%. So you can see the impact there. And there is that uncertainty still, this is still hanging over Europe. Russia has used this tactic of incrementally reducing these supplies, to sort of hold over Europe, this leverage. And that is why we see this urgency today with these demand cuts.

Becky: (03:58)
I spoke to the spokesman for the Turkish president, the other day, Ibraham Kalin. We were talking about whether he believed Russia could be trusted with this grain deal, the export of grain. Not just Ukrainian grain, of course, but Russian grain and fertilizer through the Black Sea in the Bosporus, in order to try and sort of prevent this catastrophic food crisis. And he made a point, which I think is important. I think we have this sound. He made a point which was effectively… I don’t think we have it, but anyway. His point was, Europe shouldn’t really be surprised by Russia’s efforts, at this point, to weaponize gas. After all, these swingeing sanctions against the Russian oil industry have, quite frankly, had a massive impact on the Russians, hasn’t it?

Clare Sebastian: (04:49)
Right. And even before that, this has been part of Russia’s playbook for a long time. Remember, I mean, you and I remember, the gas cuts to Ukraine over a number of years, about a decade ago. So this is something that they have weaponized before. And oil, this is coming more from the European side, the EU has now announced this gradual embargo on Russian oil. You don’t really see Russia weaponizing its oil supplies quite as much as you do with its gas supplies, because oil is a much bigger part of the federal budget. Gas is smaller, so they’re able to use that. And plus, the prices are now so high that they’re making even more money than before, even though the exports are down.

Becky: (05:25)
Keep an eye on the Euro, of course, roundabout parity, that currency fragile in the face of what could be a significant downturn in economic growth going forward for Europe. Thank you very much indeed.

Becky: (05:38)
Cuneyt Kazokoglu, works on transitioning to new forms of energy with the global energy consultancy, FGE. And that’s something we can talk about. Before we do that, this was a compromised deal and reflects the fact that European countries, of course, are in very different positions, when it comes to reliance on gas from Russia, and reliance on gas for their electricity as a whole. A one-size-fits-all mandate from the EU was just not going to work, was it?

Cuneyt Kazokoglu: (06:09)
No, it’s not going to work. And the cracks show, basically, you can see between the Mediterranean countries. There are political aspects there, of course. I’m pretty sure countries like Greece, looking back to the Euro crisis, how Germany has treated Greece back then, now sort of feel a little bit of schadenfreude. But also technical aspects as well. Like countries like Spain, France, Portugal, for example, are not connected to the… Not very much connected to the European gas networks. So they cannot do really much for Germany in that context. Quite contrary, actually, Spain is a big LNG importer.

Becky: (06:41)
Yeah, this was a significant announcement. And, quite frankly, we are talking about the potential for gas rationing, come the winter in Europe. And less individual consumers, small to medium sized enterprises and industry can slash demand at this point. Has Europe done enough, do you think, or could we see further swingeing cuts?

Cuneyt Kazokoglu: (07:09)
Well, you can always see further, of course. I mean the question is how much is enough? First of all, you have to acknowledge that at this scenario Russia is not going to cut gas supplies to Russia, sorry, to EU. So that’s not in Russia’s interest anyway, so they will continue. Now a little bit lower, but come winter, they will probably raise the supplies as well.

Cuneyt Kazokoglu: (07:29)
So this has two advantages from the Russian perspective, of course. So they keep the European resilience relatively low ahead of winter on one side. And on the other side, of course, they are jacking up the gas price basically. I mean, today it’s approaching again 200 Euro per megawatt hour, and that’s basically welcome cash for Russia. So overall, the gas supply will not diminish and disappear. But of course the fear from the cut is actually more effective than the cut itself at the moment.

Becky: (07:59)
How do you rate European leadership at this point when it comes to such a critical issue as gas demand and supply? It’s not just the winter, of course, we’re having a heatwave this summer. So the air conditioning units oft times working off gas fired electricity as well. How do you rate it and has Europe thought this through enough, do you believe?

Cuneyt Kazokoglu: (08:22)
No, not really. I mean, again, these are a little bit going to those political analysis, but overall it is a mess really, to be honest with you, I mean, it’s not quite…

Becky: (08:34)
A mess that has a ripple effect on these European economies. I mean, we’ve seen an IMF downgrade.

Cuneyt Kazokoglu: (08:39)
[inaudible 00:08:39].

Becky: (08:39)
Of course.

Cuneyt Kazokoglu: (08:39)
You have to consider, we are now in a very, very tight LNG market, starting from end of last year towards, according to our analysis, towards 2026, even. So that issue Europe is facing right now is probably not the end of the road. We will see the same theater in winter 2024, in winter 2025, even. So it will repeat itself. And of course, with the high gas prices, countries like Japan, South Korea, for example, are ready to pay the premium. But other countries, such as Pakistan, Bangladesh, for example, they are basically priced out of the market.

Becky: (09:14)
You talked about this sort of sense of schadenfreude by the likes of the Greeks and, potentially, the Italians as well, when actually the country that’s in the real crosshairs at this point when it comes to industry, and it is the industrial sort of heartland of Europe, is Germany, at this point.

Becky: (09:32)
Do you see the ambition for reducing reliance on Russian energy accelerating? Do you see the ambition quick enough? I know that this has come at everybody very quickly. It’s your business to talk about sort of clean energy, diversified fuels, going forward. What are we seeing behind the scenes?

Cuneyt Kazokoglu: (09:55)
Yeah. Behind the scenes to be frank, I mean, there’s a good likelihood that actually the German industry pressures the German government to cut a deal behind the scenes with Putin, like tell him basically we are going to subscribe to 10 years of gas supplies and supply us that amount of gas. So there is no option for Germany, in particular, to get rid of the reliance…

Becky: (10:19)
So this is the Europeans stepping down effectively. And so that would suggest a fracturing in this European unity. Do you believe that that is now happening?

Cuneyt Kazokoglu: (10:30)
Yes, absolutely. And also from the Putin’s perspective, not cutting the gas, 100% creating this fracturing. Because if he would actually cut the gas 100%, then of course the whole Europe should act together and cooperate. But now, he supplies a little bit, supplies that country and this country, and then basically he creates this fracture. So he plays the game. I mean, I know that sounds really cynical and so on and given the current tragedy, but he plays the game really well in comparison to the Europeans, in this game.

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