Environment

Natural gas prices in Europe jump after Ukraine blocks Russian flows

KYIV, UKRAINE: Director General of Gas Transmission System Operator of Ukraine LLC (GTSOU) Serhiy Makogon. GTSOU will block Russian gas flows via two key entry points in Russian-occupied territory from Wednesday, May 11, 2022.
Yuliia Ovsiannikova/ Ukrinform/Future Publishing via Getty Images

European natural gas prices jumped after Ukraine’s state-owned grid operator suspended Russian flows through a key entry point.

Gas TSO of Ukraine on Tuesday announced force majeure – unforeseeable circumstances that prevent the fulfilment of a contract – the first declaration of its kind since Russia invaded Ukraine on Feb. 24. It said it would not accept flows through its Sokhranivka entry point, which delivers Russian gas to Europe, from Wednesday.

The operator has also blocked gas transport through its border compressor station Novopskov, through which almost a third of gas (up to 32.6 million cubic meters per day) from Russia to Europe is moved.

TTF European natural gas prices were up more than 6.4% by around 9:15 a.m. London time on Wednesday, according to Refinitiv data.

Both the Sokhranivka gas metering station and Novopskov are situated in Russian-occupied areas of eastern Ukraine, and GTSOU blamed “the actions of the occupiers” for the interruption to gas transit.

“As a result of the Russian Federation’s military aggression against Ukraine, several GTS facilities are located in territory temporarily controlled by Russian troops and the occupation administration,” GTSOU said in a statement.

“Currently, GTSOU cannot carry out operational and technological control over the CS ‘Novopskov’ and other assets located in these territories. Moreover, the interference of the occupying forces in technical processes and changes in the modes of operation of GTS facilities, including unauthorized gas offtakes from the gas transit flows, endangered the stability and safety of the entire Ukrainian gas transportation system.”

The operator said it would still be able to fulfill its transit obligations to European partners by rerouting gas to the Sudzha interconnection point, which is located in Ukrainian-controlled territory.

“The company repeatedly informed Gazprom about gas transit threats due to the actions of the Russian-controlled occupation forces and stressed stopping interference in the operation of the facilities, but these appeals were ignored,” GTSOU added.

Sergei Kupriyanov, a spokesman for Gazprom, said Ukraine’s request would be “technologically impossible” and that the company sees no grounds for the decision, the Associated Press reported.

Timothy Ash, senior EM sovereign strategist at BlueBay Asset Management, said in an email Wednesday that he was surprised that Ukraine had not cut gas and energy transit earlier, in the absence of an energy blockade being imposed by Europe.

“Russia is itself hitting Ukrainian fuel depots and supplies, so maybe this is a Ukrainian response to that,” he added.

The threat of Russia cutting off natural gas flows to Europe has prompted the European Union to ramp up its search for alternative suppliers, with Russia accounting for around 40% of all EU natural gas imports.

Economists and traders have warned that a full-blown energy blockade could have dire implications for pricing and inflation, with veteran natural gas trader Bill Perkins telling CNBC in April that such a move could trigger “catastrophic pricing” this winter.

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