The EU has agreed on a gas price ceiling. How critical is this for Gazprom

The EU countries, after lengthy consultations, agreed on a compromise option for limiting the gas price to about $2,000 per 1,000 cubic meters. m. This is many times higher than the pre-crisis level,

On Monday, December 19, the EU countries agreed on a gas price ceiling at all European hubs in the amount of €180 per megawatt hour (about $2,000 per 1,000 cubic meters). The restriction will take effect from February 15, 2023, at first the ceiling will not apply to OTC transactions, REUTERS specifies.

“This is a great success achieved in the last days of the Czech Presidency of the EU! We have agreed to limit the price of gas,” Czech Prime Minister Petr Fiala wrote on his Twitter page. “Thus, we have reached a very important agreement that will provide affordable energy to European households and companies.”

An agreement to limit gas prices in the EU was reached at the fifth emergency meeting of the Energy Community Council of Ministers. As a result of trading on December 19, futures at the most popular gas hub in Europe, Title Transfer Facility (TTF), fell by more than 9% to $1,165 per 1,000 cubic meters. m.

“This is a violation of the market pricing process, an encroachment on the market process, any references to the “ceiling” cannot be acceptable,” said Russian presidential spokesman Dmitry Peskov. According to him, RUSSIA will need time to "thoroughly weigh the pros and cons" in developing response measures. Sergei Kupriyanov, a spokesman for Gazprom, Russia's only pipeline gas exporter, declined to comment.

How will the restrictions work?

The idea of ​​setting a ceiling on gas prices similar to the cap on Russian oil prices ($60 per barrel, effective December 5) has been discussed in the European Union for several months. European politicians explained that the introduction of the ceiling is necessary in order to avoid sharp price hikes in the future, caused, among other things, by problems associated with gas supplies from Russia. At the end of November, the European Commission proposed setting a ceiling on gas prices at €275 per megawatt hour (about $3,000 per 1,000 cubic meters). The restriction, as proposed, takes effect if futures for pipeline gas on the TTF exceed the set level for two weeks, and the difference between the prices of pipeline and liquefied natural gas (LNG) exceeds €58 ($616 per 1 thousand cubic meters) in within ten trading days.

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But this level was almost three times higher than the current gas prices, although it was slightly higher than the peak values ​​​​of this summer. On December 11, it became known that a group of 12 EU countries, including Belgium, Greece, Italy, Poland, Bulgaria, Romania, Latvia, Lithuania, Slovakia, Slovenia and Croatia, demanded that the proposed ceiling be lowered. The Czech Republic presiding in the EU first proposed to reduce it to €220, and then to €180 per megawatt hour. The limit will be introduced if the TTF futures exceed this threshold for three days. At the same time, the difference with the LNG prices included in the mechanism decreased to €35.

Exchange prices will be monitored by the EU Agency for Cooperation between Energy Regulators (ACER); if it notices an excess, it will publish a "market correction message" on its website, the EU Council said in a statement.

The introduced measure is aimed mainly against Gazprom, since its contracts are mainly tied to forward quotations for a month ahead and beyond (the ceiling concerns them), said Sergey Kapitonov, an analyst at the Skoltech Energy Transition Project Center and ESG. And, for example, the Norwegian company Equinor sells almost all of its gas on a "day ahead" basis, he adds.

Why some countries were against the ceiling

On December 19, EU energy ministers held a test vote on the introduction of a gas price ceiling, and nine out of 27, including Hungary and Germany, opposed it, said Hungarian Foreign Minister Peter Szijjártó. According to BLOOMBERG, Berlin has expressed concern that the price ceiling could make the EU market less attractive to other gas suppliers at a time when European authorities are looking for an alternative to Russian supplies. But a qualified majority voted in favor, and such a decision does not require 100% approval.

Hungary has always been against such restrictions, Szijjártó said, because it could jeopardize Europe's energy supply. He called the gas price ceiling a senseless and harmful measure, since the heating season has already begun and the measure is introduced retroactively. The Minister fears that this decision may affect the long-term contract for the supply of 4.5 billion cubic meters. m annually for 15 years, which Budapest signed with Gazprom in September 2021. Last week, Szijjártó spoke with Russian Deputy Prime Minister Alexander Novak, who, according to the Hungarian minister, warned him that in the event of a ceiling on gas prices in the EU, the terms of Russian-Hungarian contracts could be revised. The Russian side did not comment on these negotiations.

The agreed-upon price ceiling only protects the European gas market from sharp fluctuations in spot prices, Kapitonov says. About 80% of the gas consumed by Europe is supplied on a spot basis, so this measure looks logical against the backdrop of possible interruptions in supplies and natural disasters, he said. But it will have a real effect, most likely, only by the heating season next year, the expert is sure. The ceiling of €180 per MWh exceeds current prices, which means that it most likely will not help to reduce them, but it will be able to protect against future surges, agrees Dionis Cenusha, an expert at the Center for Eastern European Studies (Vilnius).

How will this affect Gazprom?

In 2021, Russia accounted for about 45% of European gas imports and about 40% of consumption. Last year, Gazprom delivered 155 billion cubic meters to the EU and Turkey. m of gas, this year, according to the International Energy Agency, imports from Russia will drop to 60 billion cubic meters. m.

Russian gas supplies began to decline after the start of Russia's special military operation in Ukraine, the imposition of Western sanctions (they did not directly affect gas), Moscow's demands to pay for gas in rubles, the cessation of transit through Poland and the Nord Stream offshore pipeline, and other interruptions. Against this background, Europe began to look for alternative suppliers, including LNG producers, and gas prices reached record levels, exceeding $3,000 per 1,000 cubic meters. m, which is ten times more than the pre-crisis level.

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Gazprom, in turn, had to reduce production. According to the company's preliminary data, following the results of 11 and a half months of 2022, it decreased by 19.6%, to 394.1 billion cubic meters. m. Gazprom also stepped up work on redirecting supplies to Asia. But according to the forecast of the International Energy Agency, Russia will need at least ten years to increase gas supplies to the east.

At the moment, the EU decision is rather symbolic for the Russian company, since the agreed price ceiling level significantly exceeds the average price under the concern's contracts, says Kapitonov. But already next year, it will potentially be possible to talk about lost income, the expert admits.