BRUSSELS (BLOOMBERG) - European gas prices surged on Wednesday (April 27) after Russia halted flows to Poland and Bulgaria, escalating regional tensions and delivering a warning to the continent that it is serious about cutting supplies amid a standoff over fuel payments.
Gazprom suspended gas supplies to Bulgaria's Bulgargaz and Poland's PGNiG due to non-payment in roubles, the Russian gas producer said in a statement on Wednesday (April 27).
Benchmark Dutch futures soared as much as 24 per cent to €127.50 (S$186.50) per megawatt-hour, the highest level since April 1.
For weeks, Moscow and the European Union have been locked in a dispute, with President Vladimir Putin ordering payment from "unfriendly" buyers in the Russian currency, and the bloc saying that the demand is a breach of sanctions. Poland has been particularly vocal in its criticism of Russia over the war in Ukraine.
Russia's move creates additional demand, as Poland and Bulgaria will need to buy gas to replace flows, according to Jefferies Group. Orders for gas flowing from Germany to Poland via the Yamal-Europe pipeline surged on Wednesday, data from network operator Gascade show.
Russia is Europe's largest gas supplier, and the halt in supplies essentially removes from the EU's toolkit the option of imposing sanctions on the fuel. It also indicates the use of energy as a weapon as the conflict ripples beyond Ukraine's borders.
"Any buyer rejecting the new payment procedure out of hand is running a very real risk of supplies being cut," said Ms Katja Yafimava, a senior research fellow at the Oxford Institute for Energy Studies.
The focus now turns to other European capitals, particularly in Germany and Italy, which are both major importers of Russian gas. There was no immediate reaction from Berlin. The government in Rome is now monitoring the situation, according to a person familiar with the issue.
Shipments via the Nord Stream pipeline to Germany were little changed, flowing at about the link's maximum capacity, data from the operator show. Orders for Russian gas via Ukraine were again muted. Natural gas transit to Hungary is flowing according to plan, and the country has devised a way to pay Gazprom for it, Foreign Minister Peter Szijjarto said in a video message on social media.
In Poland, PGNiG's contract is for 10.2 billion cubic metres a year, equivalent to 50 per cent of demand or 60 per cent of imports, and the country does not currently have enough capacity to replace the volume, Jefferies said.
Payments for this month's gas supplies - which are affected by Mr Putin's demand - are due in late April and May, and European officials and executives have been trying how best to respond. There was an indication last week that the EU was suggesting a potential way out of the standoff.
The halt in Russian flows to Poland and Bulgaria should have "only modest physical impact" on north-west European gas balances, according to Goldman Sachs Group analysts led by Ms Samantha Dart. However, it raises the stakes for the EU "on whether the new gas payment system would violate sanctions and, hence, will likely keep market volatility elevated", they added.
Poland's government said on Tuesday that it has enough fuel in storage to withstand the supply disruption. Bulgaria has secured gas for at least a month, according to its energy minister. The end of the heating season in Europe this month has also reduced the need for immediate supplies, though buyers are now starting to fill storage sites for next winter.
Benchmark European futures traded 11 per cent higher at €115 per megawatt-hour during morning trade in Amsterdam. The British equivalent traded 6.6 per cent higher.
