EU rushes to help industry as Russian gas cut-off rocks markets

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Gas prices in Europe soared, stock prices fell and the euro sank on Monday after Russia stopped pumping gas to Europe through a major supply route. , sending a new tsunami through the European Union economy that has not yet recovered from the COVID-19 pandemic.

EU governments are rushing to approve billions of dollars worth of packages of measures to prevent power companies from being devastated by a liquidity crisis and to protect households from rising energy bills, after Russia’s state-controlled Gazprom (MCX: GAZP ) said it would stop pumping gas through the Nord Stream 1 pipeline due to a fault.

Europe has accused Russia of militarizing energy supplies in retaliation for Western sanctions imposed on Moscow over its invasion of Ukraine. Russia blamed “Western collective” sanctions for causing the gas supply problems.

A number of European power distributors have already gone under and some big generators could be at risk, hit by caps limiting price increases they can pass on to consumers or trapped by hedging bets with gas prices now a 400% more than a year ago.

“This has had the ingredients for a kind of Lehman Brothers of the energy industry,” Finnish Economic Affairs Minister Mika Lintila said on Sunday, referring to the US bank that collapsed in 2008 and started the global financial meltdown.

Finland intends to offer 10 billion euros ($10 billion) and Sweden 250 billion Swedish kronor ($23 billion) in liquidity guarantees to their energy companies.

“The government program is a financing option of last resort for companies that would otherwise be threatened with insolvency,” said Finnish Prime Minister Sanna Marin.

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Power companies often sell power in advance to lock in a certain price, but must hold a “minimum margin” deposit in case of default before supplying power. The required margin deposit has skyrocketed with rising electricity prices, making it difficult for companies to find cash to cover new demands.

PROTECT CUSTOMERS

Germany, more dependent than most EU states on Russian gas, has offered a multimillion-dollar bailout to power company Uniper (ETR: UN01 ). Berlin said it would spend at least 65 billion euros to protect customers and businesses from rising inflation fueled by rising energy prices.

The benchmark gas price was up 35% on Monday and more than 400% for the year, after Russia said on Friday that an equipment leak on Nord Stream 1 meant it would remain closed beyond the maintenance shutdown. three days last week.

European financial markets reeled at the news. The euro sank to its lowest level in 20 years and European stocks fell.

Nord Stream 1, which runs under the Baltic Sea to Germany, has historically supplied around a third of the gas Russia exported to Europe, although before last week’s maintenance outage it was already running at just 20% capacity.

“The gas supply problems arose because of the sanctions imposed on our country by Western states, including Germany and the UK,” Kremlin spokesman Dmitri Peskov said on Monday. “There are no other reasons leading to supply problems.”

In addition, the Kremlin spokesman claimed that Russia would retaliate if the G7 countries imposed a price cap on Russian oil . “There can only be retaliatory measures,” he said.

Russia also sends gas to Europe via a pipeline through Ukraine, another important route. But those supplies have also been reduced during the crisis, leaving the EU scrambling to find alternative supplies to refill gas storage facilities for the winter.

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EMERGENCY PLANS

Some energy-intensive European industries, such as fertilizer and aluminum manufacturers , have already reduced their output. Other industries, already facing semiconductor shortages and logistical bottlenecks, are having to contend with rising fuel bills.

Several EU states have put in place emergency plans that could lead to energy rationing and fuel fears of a recession, with soaring inflation and rising interest rates.

“We cannot rule out that Germany will study the possibility of rationing gas,” Uniper Chief Executive Klaus-Dieter Maubach told Reuters on the sidelines of the Gastech conference in Milan.

Germany, which is installing liquefied natural gas (LNG) terminals to be able to transport the fuel and expand its supply from global suppliers, is in the second phase of a three-stage gas emergency plan. In the third phase there would be a rationing of the industry.

The global LNG market was already saturated as the world economy absorbed supplies in the recovery from the pandemic. The Ukraine crisis has added more demand.

Norway, one of Europe’s top producers, has been pumping more gas to European markets but is unable to fill the gap left by Russia.

Energy ministers from EU countries will meet on 9 September to discuss options to curb rising energy prices, including caps on gas prices and emergency credit lines for players in the energy market, according to a document seen by Reuters.

Klaus Müller, chairman of Germany’s Federal Network Agency energy regulator, said in August that even if Germany’s gas stores were 100% full, they would be empty in two-and-a-half months if supplies were completely shut down. Russian gas flows.

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Germany’s storage facilities are now 85% full, while facilities across Europe hit a target of 80% last week.

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