The EU countries agreed on a price cap on Russia’s oil at $60 per barrel recently. The cap is to be reviewed every two months. A similar mechanism is being discussed for natural gas now, but there is no consensus so far. Should the cap be actually introduced, how is it going to work on the gas market?

Those two mechanisms are of different nature. The oil price cap is a political mechanism used to control the sales of Russia’s oil to third countries, as well as the business of the EU-based service companies. This isn’t about the European market really. The gas price cap is a way to somehow hold down the gas price in Europe.

The conceptual difference is that the EU countries agreed on an embargo on Russia’s oil, transported by sea, in advance. Therefore, Russia does not supply any oil to the EU anymore, and the price cap would only regulate its supplies to other countries and how the EU-based service companies would work with those supplies.

Those countries that did not back the oil price cap are not really tied to this decision, as it’s more of a political nature. Obviously, buyers are using it to pressure Russia and purchase oil at a lower price, but that’s as far as it goes. The gas situation is different: no embargo is planned against Russia’s supply of natural gas to the EU so far.

The second difference is the proportion of Russia’s commodities. At the moment, the EU receives about 7% of all gas it consumes from Russia.

Currently, most of the gas supplies to Europe are of liquefied natural gas (LNG) from the US and Qatar, as well as from Norway and Algeria. None of these suppliers is going to settle for restrictions.

If the EU sets the price cap at, say, $3,000 for 1,000 cubic metres, this will mean that no gas would be sold in Europe above that price. But then again, this isn’t a decision against Russia as it now only has a minor share among Europe’s gas supplies. Such a decision may trigger a negative response from the key suppliers in the US, Qatar, Norway, and Algeria.

Moreover, if the gas price remains at over $3,000 per 1,000 cubic meters for a long time, then the EU industry would need to be shut down completely and moved overseas, like to the US or elsewhere. It’s going to be completely non-competitive with such gas prices. Therefore, this is not a gas price cap, but, let’s say, a lethal blow against the entire EU industry (and not only industry, but also other consumers, even ordinary people).

Is this why the European countries have not reached an agreement so far?

They cannot agree because a price cap, should it be introduced, may scare off sellers who said many times that they would not tolerate any non-market restrictions. Thus, they may simply refuse to supply gas.

My opinion is that there is very little chance a gas price cap would be introduced because the risk is too high, and nobody wants this to happen. This is why the EU considers a $3,000 per 1,000 cubic meters option; this won’t be a limit but rather a price that would cause the stock exchange to close should the price level be exceeded.

So, the restriction will have zero impact on the prices?

If the price cap is introduced at $3,000 per 1,000 cubic meters, there will possibly be no impact until the price reaches that level. That is, until some major supplier says: “We won’t be supplying gas to the EU any longer.” This would automatically raise the prices, and Europe has enough stress right now.

Well, the price would stand at over $2,000 rather than $1,500, and if more suppliers make the same statement, the price would become enormous, like $4,000–5,000 per 1,000 cubic meters or even higher. The price cap will be breached anyway, and Europe will be left with no gas. Everyone understands that any event may trigger even more negative impact than there is now.

The issue with the European gas market is not the price cap or the maximum gas price, it is those exact mechanisms the EU had been developing for a long time. The Union constructed an ultra-liberal pricing model based on spot markets. Spot markets seem to be a great thing because they react to short-term factors emerging almost every day, sometimes every hour, but this is, at the same time, its downside: the volatility is too high.

During the 2020 pandemic, prices would go below $40 per 1,000 cubic metres, and now the price stands at $1,500, that means, 40 times higher. The problem is, to a large extent, in the pricing mechanism. An agreement with Gazprom or Norway like the one that existed before and fixed a certain price level subject to changes based on the oil reference basket, would allow for less volatile pricing: it used to be around $200–300 per 1,000 cubic metres for many long years. But now a different pricing model is being used, and here’s the result.

Russia has stated that it would not supply its oil to the countries that join the price cap. What kind of responsive measures may Russia declare if a gas price cap is introduced?

Russia’s statement is somewhat absurd because the countries in question have imposed an embargo on the Russian oil anyway. The US and Canada did it in the spring, the UK joined them in the summer, while the EU imposed the embargo on 5 December. Norway is the only country that joined the price cap but didn’t impose an embargo, but Norway has never bought any oil from Russia as it is an oil exporter itself.

In fact, it doesn’t matter at all whether Russia stops its supplies or not. Look, Russia currently exports 42 million cubic metres of gas to Europe via Ukraine each day, or over 15 billion cubic metres a year. This is a miserable amount of gas; it is less than 3% of Russia’s total gas production. So, it doesn’t matter at all if this 3% is there or not.

[Europe] may stop buying gas immediately by simply blocking the gas pipe. It’s important, however, that Gazprom may file a lawsuit should this happen. Russia has virtually lost Europe’s gas market, but we’re speaking about the gas that is transported via pipes. We shall, however, see record high supplies of liquefied gas this year, both in terms of physical volume and total worth.

It is most likely that eventually Russia will only supply liquefied gas to Europe. However, liquefied gas is unstable merchandise: it sells to Europe today and may be sold to Asia tomorrow. It’s a thing that may be resold many times before it reaches the final consumer. Liquefied gas will always find its buyer on the global market.

Many believe that Europe is facing a very tough winter, and people will need to stock up firewood and flashlights. Do you agree with those predictions?

As a matter of fact, the Europeans have prepared well for this. This happened for two reasons. Reason number one is that China did not collect its contracted gas, and the EU bought it out although it was intended to be for China. Reason number two is that the volumes of industrial manufacturing have decreased: Europe started shutting down factories or cutting their consumption because the gas became too expensive. This helped Europe fill its gas storages to the brim.

Additionally, the current volumes remain the same because there is a flow of tankers with liquefied gas coming into Europe. It’s going to be okay this winter, nobody is going to freeze to death, the worst thing that could happen is that some people may go broke because of the high prices.

The next year is going to be tougher, though: the question is whether China is going to collect its contracted gas or not. This depends on whether China is going to abandon its zero COVID tolerance policy and remain on lockdown as it did this year. Basically, this here will be the main risk for Europe’s gas supply in the next year.

So, the EU has managed to reduce its dependence on Russia’s gas?

Yes, they have, although it’s unclear whether this was done intentionally or by chance. The fact is: someone blew up the Nord Stream pipeline and contributed to Europe becoming less dependent on Russia’s gas. It turned out the formula was very simple.

If something goes wrong with Ukraine’s gas pipe, Europe will decrease its dependence on Russia’s gas to zero. Put that aside, and the volumes Europe required came to it out of the clear blue sky. Since Asians did not collect their gas from the market, Europe managed to grab all the gas could while it was flowing towards the EU for $2,000 per 1,000 cubic metres the entire summer. Additionally, the suspension of manufacturing and extra work done by coal power plants helped decrease consumption levels.

The ultimate goal is to give up buying Russian gas completely, right?

The EU has virtually done this already. What does 15 billion cubic metres mean to the market where over 400 billion is being sold each year? Russia’s share is less than 4%. It should be noted, however, that countries in the Balkans still receive gas through the TurkStream pipeline, and some decent volumes still remain there. Let me repeat myself: Russia’s share on the European market is 7% at most.

Was it Europe’s stake on liquefied gas and alternative suppliers that worked?

Yes. They will need to last at least until 2025 when new productions of liquefied gas will start to appear. The global volumes of liquefied gas will increase by that time. So, they will need to live through two winters, roughly speaking: 2023–2024 and 2024–2025. It is going to become easier from then on, and they will be able to relax completely by 2027 because they will certainly find as much gas as they need by that time.

Will Europe switch to LNG entirely?

Not entirely since they have gas pipes from Norway and Algeria. And they produce some of their own gas, too. However, the lost volumes of Russia’s gas will be entirely replaced by LNG.

Turkey and Russia are discussing a new gas hub for Europe. How is it supposed to work while the sanctions are in place and who’s the main beneficiary party here?

That’s a great choice of words from you here: Turkey and Russia for Europe. It’s not enough for Turkey and Russia to be discussing this, Europe is the third party, and its participation is also necessary. I don’t see anyone in Europe so far who would discuss receiving gas from this sort of hub, and I have a feeling there won’t be anyone ready to discuss this. The reason is that this project is most probably a stillborn one, but this card had to be played anyway in terms of politics: it’s some sort of political haggle with Erdoğan. Additionally, he asks for gas discounts. So, I’m guessing that all this talk is a way for Erdoğan to force a discount, and for Russia to become even closer friends with Erdoğan on other geopolitical issues. The project itself is but pretext.

How will Russia’s gas supplies change within the next ten years?

The European market is no longer a thing for Russia, and Russia must deal with it, as simple as that. Of course, the volumes of gas Russia sells to China are not to be compared with the European market. Russia spent over half a century to develop this trade with Europe, and it’s a pity that it ended up like this. The Soviet Union used to “fight” for gas pipelines, spoke out against sanctions and made arrangements in the 1970s. The USSR managed to keep the European market for itself even despite the Cold War, and Russia failed to do so.

How will this energy clash affect Russia’s budget and economy?

The sanctions indeed hit hard and will keep hitting hard in the future. Russia managed to live through this year more or less easily due to high prices on energy commodities. The physical volumes of supplies matched last year’s levels. In terms of worth Russia is going to supply 10% more oil by the end of this year than in 2021.

The same thing will work out for coal and gas, I believe. In the first half of 2022 Russia exported its gas at full capacity and at a very high price which wasn’t a thing in 2021. The gas price in the first half of 2022 was three times as high as last year. Obviously, the second half of the year was disastrous, but the entire year turned out to be more or less okay thanks to the first half.

Russia won’t be supplying gas to Europe any longer, and all of its oil will be exported to Southeast Asia and India, perhaps, Africa and Middle East, too. The Druzhba pipeline remains, however, it is not subject to sanctions, and will be used for future supplies.

At the same time, the losses European countries suffered from this situation which began back in 2021 — the imbalance of energy and sanctions policies, and so on — are worth €1 trillion. It’s not going to get any better next year, too (according to various estimates, in 2022-2023, the losses of European countries from the energy crisis will amount to a minimum of €500 billion or as high as €1.6 trillion. — Novaya-Europe).