Central Europe feels the cold as Russian gas flows hit limits

By bne IntelliNews February 2, 2012

bne -

Central European countries reported lowered gas imports on February 1 after Russia's gas export monopolist Gazprom announced it had diverted extra flows to its domestic market amidst the sudden cold snap. While Poland and the Czech Republic downplayed the news, the fact that Russia has cut volumes as temperatures hit new lows for this winter will do little to improve European customers' view on it as a reliable energy supplier.

Worries over that reputation saw Russia on February 2 do an about face and claim that on the contrary, it has actually raised gas exports to Europe to match demand, hinting instead that transit countries, including Poland, could be responsible for the shortfalls further west.

Poland appeared worst hit on February 1 as large commercial consumers saw their supplies cut, whilst the Czech Republic said that although imports have dropped, it faces no complications thanks to the build-up of underground storage through what has been an extremely mild winter until late January. The European Commission reported that Slovakia has also seen supplies fall by 10%. Hungary was the only Visegrad country not to report any fall in volumes.

Keeping home warm

Gazprom originally announced on January 31 that it would redirect some of its European gas exports to the domestic market to satisfy higher-than-expected local demand on the back of severe winter temperatures. Supplies into Italy via the Austrian border were reduced by 10% compared with normal levels, the European Commission said the same day.

The Central European states are at the forefront of the erratic relationship between Gazprom and Europe - its only major export market - thanks both to the fact that they operate as transit countries for customers further west and because they are extremely dependent on Russian gas in their energy mix. That confluence saw them amongst the hardest hit when supplies were cut during Russia's gas wars with Ukraine in 2006 and 2008-09, and has more recently seen them struggle to keep up in the Europe-wide push on Gazprom to lower prices as global spot prices have fallen.

The Russian giant announced in mid-January that it had agreed small price reductions with France's GDF, Germany's Wingas, Italy's Sinergie Italiane, Austria's Econgas, and Slovakia's Slovensky Plynarensky Priemysel. However, Poland's gas import monopolist PGNiG and Germany's RWE - which is the major importer to the Czech Republic - had both already launched arbitration proceedings against Gazprom's refusal to negotiate and were conspicuous by their absence from the list.

Gazprom said on February 1 that it is meeting all minimum contractual commitments in Europe, despite the cuts, and the EU reported it envisages no problems from the limit on imports. Energy Commission spokeswoman Marlene Holzner said, "[EU] member states are currently able to cover the Russian missing volumes with gas from underground storage and alternative routes and suppliers. Given the surplus of gas in the European markets in the previous weeks, the commission is confident that the market is able to allocate gas where it is most needed," she added, as quoted by newswires."

Poland's gas monopoly PGNiG appears to be the hardest hit thus far, announcing that it has cut gas supplies to the country's top refiner PKN Orlen, as well as chemical companies Pulawy and ZCH Police, reports Reuters. Gas pipe operator Gaz System demanded the cut in anticipation of a hike in gas demand from 65m cubic metres (cm) to beyond 70m cm a day, PGNiG said, as the severe cold batters the country. Media reports also said supplies through the Yamal pipeline, which transits Poland and supplies the German market, were down 10% from recent levels.

However, Gaz System spokeswoman Malgorzata Polkowska insisted: "There are no troubles with gas supplies. This is a standard procedure. Temperatures are down, there's higher demand for gas and PGNiG already filed for using compulsory stocks," she said. "To do that, we need to use all tools at hand and commercial limitations are one of them."

Meanwhile, RWE's Czech unit said that despite a drop in imports, it envisages no problems in the country, despite dependence on Russia for 80% of its gas. "Supplies of natural gas from Russia for use in the Czech Republic are currently somewhat lower," spokesman Martin Chalupsky reported, according to Dow Jones. "This condition, however, doesn't present any problem for us or for customers of RWE. We will cover demand without any complications," Chalupsky said, adding that thanks to the mild winter thus far, underground gas stocks are at above-normal levels.

Following the reports of shortfalls, however, Gazprom representatives did a U-turn to claim flows to Europe have actually been increased substantially and that there shouldn't be any material shortfalls, while unnamed sources quoted by Russian business daily Vedomosti suggested transit countries are actually to blame for the lowered volumes reaching Europe.

Ron Smith at Citigroup explains that, "the difference could be due to either some intermediate countries (Ukraine, Poland, etc) taking extra from the pipeline system to ensure their power plants are fully supplied, or European countries are putting in requests that they know are higher than Gazprom can meet in this peak demand situation, as any undelivered requests are then subtracted from take-or-pay minimum levels of consumption for the full year."

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