- Gazprom announced that Nord Stream 1 will close for three days, from 31 August to 2 September, for maintenance.
- The market fears a longer outage and Europe’s benchmark gas price ended the week at record highs.
- Industry and households face a winter of high costs, and it is time to review supply contracts and consumption.
On Friday 19 August 2022 Gazprom announced that it would close the Nord Stream 1 gas pipeline for three days, from 31 August to 2 September, to service the only compressor turbine it had left in operation. The company said that afterwards flows would resume at about 33 million cubic metres a day, the level already being carried, a fifth of the pipeline’s capacity.
The market reacted immediately. The benchmark European gas contract, the Dutch TTF, closed on Friday at a record high of about 245 euros per megawatt hour and rose sharply again on Monday, by more than 10%. Rarely has a news item as technical as a three-day maintenance stop had so visible an effect on Europe’s energy bill.
Why a maintenance stop matters
Nord Stream 1 links Russia and Germany under the Baltic Sea and, before the war, was one of the main routes for Russian gas to Europe. Since mid-June Gazprom had cut its flow in several stages, which it attributed to technical problems and sanctions, while European governments saw political pressure in it.
Hence the market’s mistrust: nobody could be sure that the pipeline would resume flows after the stop. In July, after a ten-day annual maintenance, gas had flowed again, but at a level below the previous one, and that precedent weighed. In a market with little room for manoeuvre, fear of an outage is enough to raise the price of gas. Moreover, much of the liquefied natural gas that Europe buys to replace Russian gas comes from a global market in which it competes with Asia, which limits its ability to absorb a sudden fall in pipeline supply.
Effects on industry and households
Gas sets the price of electricity on the wholesale market when it is the last technology needed to meet demand, and it is a direct input for industries such as chemicals, ceramics, glass or paper. When it rises, production costs increase and margins narrow for those who cannot pass them on. In Spain, the effect on electricity had been cushioned since June by the cap on the gas used to generate power.
For households the impact arrives with a delay through bills and product prices. Several European states were already preparing saving and support measures, within the plan for voluntary reduction of gas demand agreed in July by the Twenty-Seven. The combination of high prices and the risk of shortage forces us to think about winter in advance. Companies may feel it sooner: their contracts are often indexed to market prices and the cost passes almost immediately to the profit and loss account.
What to review
Energy-intensive companies should review their supply contract type (fixed or indexed price), its expiry and revision clauses, and discuss with their supplier or adviser the medium-term hedging options. It is also worth analysing what share of the cost can be passed on to customers and with what lag.
An energy contingency plan, identifying critical processes, avoidable consumption and fuel or self-generation alternatives, is a useful tool for businesses of any size. This is general information; each company should assess its contracts and exposure with its adviser.
When the market fears an outage, the price runs ahead of reality, and the bill arrives all the same.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
