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Europe lurches closer to energy crisis as Kremlin cuts off gas supply to Shell


gazprom gas

gazprom gas

Europe lurched closer to an energy crisis on Tuesday after the Kremlin cut off gas supplies to major buyers including Shell.

Russia’s state-owned gas supplier, Gazprom, said supplies to Shell in Germany as well as to Ørsted in Denmark will be cut off on Wednesday after they refused to bow to Putin’s demands to pay in roubles.

Gazprom cut supplies to the Netherlands on Tuesday after doing the same to Poland, Bulgaria and Finland this month, weaponising gas amid its war in Ukraine.

FTSE 100 company Shell produces fossil fuels itself, but also has a vast trading division that buys gas from companies such as Gazprom and sells it on.

The company said in March that it planned to withdraw from its involvement in Russian energy “in a phased manner”. It has now been forced to abandon the market immediately.

Responding to Gazprom’s statement, Shell said on Tuesday: Shell has not agreed to new payment terms set out by Gazprom.

“We will work to continue supplying our customers in Europe through our diverse portfolio of gas supply.

“Shell continues to work on a phased withdrawal from Russian hydrocarbons, in compliance with applicable laws and regulations.”

The Shell contract cut by Gazprom involves a maximum of 1.2bn cubic metre of gas per year, delivered in Germany for Shell to sell where it is needed.

The EU imported about 155bn cubic metres of gas from Russia in 2021, amounting to about 40pc of its gas consumption.

The Kremlin last month ordered buyers in “unfriendly” countries to pay for gas in roubles, in what was seen as retaliation over sanctions and efforts to isolate Moscow over its war on Ukraine.

Most of Gazprom’s contracts with European buyers remain in place after they found ways to comply with the demand, with the amount cut off thought to equal less than 20bn cubic metres in total.

Ørsted said on Tuesday its supplies from Gazprom would be cut off at 6am on Wednesday.

Mads Nipper, chief executive, said the company “stand[s] firm in our refusal to pay in roubles”.

He added since there is no direct gas pipeline between Russia and Denmark, Russia cannot cut the country off, but Denmark will need to buy more on the European market.

Mr Nipper said: “We expect this to be possible.

“We are in ongoing dialogue with the authorities, and we trust that the authorities, who have the overall overview of the supply situation in Denmark, are prepared for the situation.”

James Huckstepp, manager for European gas analytics at S&P Global Platts, said efforts to replace Russian supplies are being helped by lower demand in Asia owing to Covid lockdowns and other factors, although things will become more difficult towards the end of the year.

It comes as Westminster is considering paying for a supply of coal to keep power stations online that would otherwise be shutting before winter. Energy companies Drax, EDF and Uniper would receive the supplies and delay the closure of some coal plants in September, Bloomberg reported.

Britain gets less than 4pc of its gas directly from Russia but there are concerns about a significant knock-on effect in Britain if Russia goes further in cutting off supplies to Europe over the next few months.

Whitehall planners have warned that under a worst case scenario, first reported by the Times, electricity would need to be rationed to 6m homes in the morning and evenings.

Gas is used to generate more than a third of Britain’s electricity, and the electricity market is already set to be tight this winter due to the planned closure of some UK power plants and ongoing problems with nuclear reactors in France.

Corrosion problems with reactors run by EDF mean up to half of the state-owned French giant’s fleet could be out of action during the colder months.

This could result in France importing more electricity from Britain, putting an extra strain on supplies.

Meanwhile, the UK market is about to lose several significant power stations, including the Hinkley Point B and Hunterston B nuclear plants, and a Government auction to secure backup generation capacity fell short, with generators offering up less than what was requested.

Kathryn Porter, an independent energy consultant and founder of Watt Logic, said this meant that the amount of spare power available during the busiest periods of demand – also called the capacity margin – would be extremely tight this winter.

She said: “With six gigawatts of capacity set to close later this year and us exporting more to France, it pretty much wipes out any spare margin that we have.

“The whole system becomes a lot more fragile. And this, I think, is a huge worry.

“This winter, we could be consistently exporting to France. When you take that, plus all the plant closures that are planned for this year, plus the shortfall on the capacity market, I worry that we will have pretty much no capacity margin for this winter.

She said that in extreme scenarios where there are electricity shortfalls, National Grid may ask big energy users such as manufacturers to rein in their consumption to ease the pressure.

A spokesman for National Grid ESO (electricity system operator), which manages the electricity capacity market, said the company would publish its official winter forecasts in July.

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