As heating oil prices fall with the onset of warmer weather, there are renewed fears that the recent letter from the President of the European commission to Vladimir Putin, saying he hopes Russia doesn’t renege on its gas obligations to Europe, that gas bills could be adversely affected in the near future.
British wholesale prices for natural gas had already risen sharply in the past weeks over fears Moscow could take over eastern Ukraine, a vital entry point for Russian supplies piped into Europe.
Gas prices for delivery next winter rose 5 percent, at 63.10 pence a therm.
Ukraine is one of Europe’s key gas supply hubs. The former Soviet republic imports around half of its gas needs from Russia, which also meets a third of the European Union’s demand. Forty percent of EU-bound Russian gas flows through Ukraine.
The recent signing of gas deal the after 10 years of negotiations is seen as a reaction from Vladimir Putin to EU nations such as Germany stating it’s intentions to become less reliant on Russian gas.
Europe’s need to diversify away from Russian gas is hardly new. Russia’s tendency to use gas as a political tool to put pressure on Ukraine and Europe has demonstrated the risks of relying on one partner. More globally, growing concern around climate change and its impact on national security as a “threat multiplier” has lent support to the world’s reduced use of fossil fuels. Yet events in Ukraine and the Sino-Russian gas deal have accelerated the urgency with which Europe needs to seek new energy sources.
We still have some time to do so. Despite the deal with China, Russia in the short term will continue to need the European market. It is likely that China received some concession on price, given that this was the major sticking point delaying the deal since the discussions began, but it means that Russia’s exports to China will not replace the revenue Russia relies on from its European exports. Russia will also have to pay to build the pipeline infrastructure to China, and gas will only be transported from 2018.
But there is no doubt that, in the long term, Russia gains the upper hand in pipeline politics over Europe by engaging with an alternative gas partner as it may threaten to divert gas earmarked for Europe to China.
”It’s a very big deal because it changes the calculus of EU natural gas.” says Jeffrey Sommers, commenting on news website RT.com, thinks that although the European bargaining position with Russia on gas prices will be weakened, it won’t have too much of an adverse affect on prices in the EU, “…As far as the gas deal goes between China and Russia, the only thing that it might do with regards to Europe is to leave Europe with a little bit less bargaining power over prices for gas, so Russia’s position is a little bit stronger vis-à-vis Europe when it comes to bargaining future contract prices for gas.”
The affect on gas prices will only become more apparent as the relationship with Russia as an energy exporter unfolds over the coming years and whether the UK are able to lessen it’s reliance on gas by pursuing alternative energy such as shale gas. For now though there are more pressing concerns over the stability of Ukraine and it’s relationship with Russia that has more bearing on it’s affect on gas prices in the EU.