Dr Nakhle argues that any sanctions on the Nord Stream II pipeline won’t affect Europe in the short term since the pipeline is not operational yet. The question, however, is how will Russia react if the pipeline isn’t allowed to become operational at all. In the extreme (and unlikely) scenario of Russia cutting off all of its gas supplies to Europe, the continent will surely suffer a lot and the consumer will pay the price at the end of the day.
On whether Russia deliberately restricted some of its gas supplies to Europe to pressure the opening of the Nord Stream II pipeline, Dr Nakhle says that this is most likely the case, in addition to technical and commercial reasons. But for Russia, a more strategic objective was behind this move, namely to gain support for its favoured long-term oil price-indexed contracts instead of spot pricing mechanisms. In this respect, Russia’s message to existing and potential customers is clear: market pricing doesn’t bring energy security.
This year, Europe was lucky to have a warmer-than-average winter, compared to last year, which somehow dampened a little bit the consequences. However, the winter season is not over yet and the upcoming weeks will prove if Europe will overcome this critical time of the year.
Dr Nakhle adds that Russia needs Europe as much as, or even more than, Europe needs Russia. High gas prices in Europe were able to attract additional supplies namely from the US (in the form of Liquified Natural Gas (LNG)), North Africa and Norway. In contrast, Russia cannot easily replace the European gas market as it relies on it for more than 80% of its gas exports. This is another reason why Russia puts great value on Nord Stream II as it gives it a competitive advantage particularly over US LNG.
With the current crisis, Dr Nakhle expects that some European countries might reconsider long-term gas contracts but unlikely to switch entirely back to such a mechanism. One of the main pillars of the economic union is to have a free market where spot pricing falls directly under. In addition, the LNG trade is becoming more liquid and, thus, facilitates the pursuit of such an objective. The establishment of strategic gas storage will gain more ground following the crisis.
Watch the full discussion (in Arabic):
“European gas crunch: Calm before the storm?“, Dr Carole Nakhle, Dec 2021
“Global Economy and Energy Markets Weekly Commentary – 13th Feb ’22“, Christof Rühl, Feb 2022
“Did Russia deliberately cause the gas crisis in Europe?“, Dr Carole Nakhle, Jan 2022
“Gas crisis in Europe“, Dr Carole Nakhle, Jan 2022