Stress Test in Baumgarten

The accident in the Austrian gas hub Baumgarten showed all the expenses of Brussels' spot thinking.

Officials of the European Commission like to speculate about EU progress in the gas market (certainly under their keen leadership), achieved in the sphere of the natural gas spot trading development. They cheerfully report that a significant part of long-term contracts for the supply of gas to the European Union are now tied to prices on so-called "hubs", sites where it is possible to buy or sell spot volumes, and this is the only reliable indicator of pricing for the European consumers.

On December 12, 2016, this blissful picture collapsed like a house of cards, or like the career of an actor who played the main character in the eponymous series. Two extraordinary accidents are the explosion and fire on the gas pipeline in the area of the Austrian gas hub in Baumgarten, which supplies gas to Austria, Slovenia, Croatia, part of Hungary and the industrialized north of Italy. They are supplied with Russian gas, which almost completely flows to Baumgarten through the territory of Ukraine. This led to a complete stoppage of gas transit through Austria and the declaration of a state of emergency in Italy.

Most spot markets turned out to be in a state of groggy. The prices in Baumgarten itself, a suburb of Vienna, whose name is literally translated as a "garden of trees", jumped by 50%. This is despite the fact that Gas Connect, the operator of the Austrian gas transmission networks, did not impose restrictions on the supply of gas to the country's consumers. The spot price of gas in Italy simply flew into space, surpassing $ 1,000 per thousand cubic meters, 3.5 times higher than the day before, and 4.5 times more than gas prices in Gazprom's long-term contracts.

And it must be said that only 75 million cubic meters of gas fell out of the supply balance. This is slightly more than 10% of the Gazprom daily export to Europe and Turkey. For Austria, this is a more significant figure - about 60% of the flow of gas entering the country for own needs and transit. Even for Italians, the picture was not so dramatic. The flow of Russian gas from Austria, according to Snam Rete, the operator of the Italian gas transportation system, on December 12 fell by 70 million cubic meters if compared to the previous day. But in Italy's total daily balance this is only 20%. As a result, gas consumption decreased by 30 million, gas extraction from storage facilities increased by 30 million cubic meters, and it was made from strategic reserves created under European directives, rather than from commercial reserves. Algeria increased supplies for another 10 million cubic meters.

That is all. No solidarity and increased supplies of Norwegian or Dutch gas from other EU countries, which is constantly spoken in Brussels, as one of the achievements of the new gas system in Europe. However, there were objective reasons - on the same day there were technical problems with gas supplies from Norway and the British sector of the North Sea. Especially there was no increase of liquefied natural gas supply, which for a long time was declared the savior of Europe from Russian dependence. As a result, there was panic in the markets with high price rally. Fortunately, the Austrians were able to solve the problem quickly and resumed transit only 15 hours after the explosion.

What lessons can be learned from this, apart from the obvious - no route can be superfluous for Europe, no matter what the talking heads in Brussels, Warsaw or Washington say, trying to resist the "North Stream-2" or the "Turkish Stream"? First, spot sites, even the most marketable ones, are critically dependent on the state of the infrastructure. Not only that they themselves are extremely volatile, they regularly have panic ups or collapses. Both for gas consumers and for producers this is a huge risk factor, highly undesirable for sustainable development and energy security. Second, two years ago the European Commission conducted speculative stress tests: what would be if Russia stops supplying gas completely or only through Ukraine? The very formulation of the question was political. Supposedly Russia can leave Europe without gas, and we - the Europeans - at the expense of solidarity, UGSF and LNG are able to overcome this, again at the expense of "far-sighted" decisions of Brussels. The real tragic stress test showed that these mechanisms do not work, and spot markets are hysterical. And if, God forbid, there is a real protracted transit crisis in Ukraine, especially in the second half of winter, when the storage facilities are already usually devastated, and the colds can be quite Siberian, this will be a real catastrophe for European energy security and for Russian interests.

The set of risks that can provoke this transit crisis is by no means exhausted by the malfunction of the filter separator that illuminated the sky above Baumgarten. Only to list them you will need fingers of both hands, beginning with political instability in Ukraine, the possibility of applying for the transit gas of the ridiculous antimonopoly case of Kiev against Gazprom and ending with the banal depreciation of the Ukrainian gas transportation system built 40 years ago.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.