From the Editor: Russian gas price cap still eludes EU [Gas in Transition]

The EU continues to debate the introduction of a price cap on Russian gas supply, without any tangible progress. The proposal has been discussed at length since August, but member states simply cannot agree on the details.

The lack of progress may well be a good thing, however. Indeed, it may be that the European Commission itself is against the measure, which would explain why it initially proposed a price ceiling in late November that was so high that it would not have been triggered at all this year, even when TTF prices spiked at an all-time high in late August.

The commission suggested a cap of €275/MWh, or close to $3,000/’000 m3 on the front-month TTF contract. But for the cap to be triggered, that threshold would have to be breached for two weeks, and if the price exceeded the LNG reference price by €58/MWh for 10 consecutive days.

No surprise that member states that have pushed for a price cap were disappointed. Reportedly the Czech Republic has suggested lowering it to €220/MWh, and reducing the number of days that the price can exceed the cap to only five days. If this cap were agreed on, it would come into force if the front-month contract went as high as it did in late August.

However, even this lower ceiling could prove ineffectual, unless there were further changes to the commission’s proposal. The commission notably only refers to the cap on the front-month TTF contract, meaning there would be no implication for other contracts, including intraday, day-ahead, quarters and two or three month ahead trading.

Traders could simply avoid trading the front-month contract, or they could continue buying and selling it on platforms outside the EU’s jurisdiction. What is more, the International Exchange (ICE) managing European gas trading has warned Brussels that it will consider relocating from Amsterdam to London, where the cap would not apply.

However, the EU could well decide to beef up the measures, perhaps by applying the cap to other contracts, and getting other Western countries to apply it too, although the latter would take considerable political efforts. And here is where the real danger lies.

The EU’s creation of a liberalised and highly liquid gas market over the last few decades is one of its greatest accomplishments. And despite the energy crisis, the market continues to function effectively today. In response to tight supply, the market incentivised the arrival of record amounts of LNG to Europe, to replace lost Russian supply, and has encouraged necessary reductions in demand.

If an effective cap were imposed, it is likely that the crisis would be exacerbated. Less LNG would arrive, and pipeline suppliers could also have less incentive to send their gas. Norway, for example, might opt to sell more of its spot volumes to the UK, and Russia has already threatened to cut off supply completely if the measure is adopted.

Oil price cap arrives

In contrast, the EU successfully agreed with G7 countries and Australia on introducing a cap on seabound Russian oil supplies on December 5, coinciding with the start of its embargo on most Russian crude oil imports. But this measure is also likely to be fruitless.

Most of the largest global shipping and insurance companies are based in EU or G7 nations, and will be barred from providing services for Russian shipments unless the oil is sold at no more than $60/barrel. However, flaws in the measure are already becoming apparent.

Firstly, Cypriot media has reported that around a fifth of the oil tanker fleet that had been registered in the country migrated to other jurisdictions in the two months prior to the cap’s introduction. Other major shipping registries in Greece and Malta could see similar impacts. These countries are demanding compensation from Brussels for the loss of business. Some insurance companies could also relocate.

Meanwhile, there is no indication yet that China, the biggest buyer of Russian oil, will comply. Reuters has already reported that Chinese independent refiners are continuing to buy Eastern Siberian ESPO crude at prices above the cap, and it seems unlikely that they will stop.

India too has said it will not observe the cap, although its oil companies are currently receiving Russian cargoes at prices well below the threshold anyway, according to Reuters. As the oil market likely tightens as a result of recovering demand in China, the prices they pay for Russian oil will likely rise.

Return to the status quo?

Another notable highlight this month has been interesting results from a poll conducted by the Oxford Institute for Energy Studies that revealed that gas industry executives, policymakers and consultants are divided about whether Russia could once again become the EU’s key gas supplier. Despite political rhetoric, the poll showed a 40-40% split over whether Russia could regain its former status, while the remaining 20% were undecided.

Renowned Bloomberg energy columnist Javier Blas commented on the poll, stating he believed Russian gas was here to stay, likening the situation to how the US resumed buying Iraqi oil only a few years after liberating Kuwait.

“I’m with the ‘yes’’ crowd – even if Vladimir Putin stays in the Kremlin,” he wrote in an opinion piece. “As much as European leaders vow they won’t return to business as usual after the war in Ukraine, the inescapable realistics of geography and markets can trump even the most determined policy makers.”

The poll shows that despite Brussels’ various efforts to deprive Moscow of revenues to fund its war in Ukraine, stakeholders have little confidence in its commitment to break energy ties with Russia.