Moscow limits German and Polish gas flows as ‘warning’

Poland said on Wednesday it was receiving 20 percent less gas than normal from Russia and a German gas operator said its supplies of Russian gas were slightly reduced.

Some European officials believe Moscow could use disruptions to the gas deliveries on which Europe depends as its trump card in a confrontation over Ukraine that has already brought ties between Moscow and the West to their lowest since the Cold War.

Russian gas monopoly Gazprom issued a statement saying it was pumping gas to all destinations "according to the resources available for exports and for the continuing pumping to storage facilities in the Russian Federation".

But Gazprom did not deny the levels of supply this week to Poland - a former Communist country with which Moscow's relations have chilled - were lower than they were previously.

The disruption comes as the European Union prepares to impose a new round of sanctions on Russia over its intervention in Ukraine, a step that Russian officials had warned would bring consequences for Europe.

"This is a warning signal for the EU not to go any further with the sanctions," said Pawel Poprawa of the Institute for Energy Studies in Warsaw, when asked about the reduced gas supplies to Poland.

Polish gas pipeline operator Gaz-System said the reduction in supplies from Russia had forced it temporarily to stop re-exporting natural gas to Ukraine.

Gazprom has halted supplies to Western-leaning Ukraine over a pricing dispute, and the "reverse flows" from neighboring EU states are crucial for keeping Ukraine's economy afloat.

Russia meets around a third of European gas demand, sending almost half of these supplies via Ukraine.

Most of the rest goes through the Yamal Europe route via Poland and on to Germany as well as through the Nord Stream pipeline, which goes directly from Russia to Germany under the Baltic Sea.

The disruption appeared to affect the Yamal Europe route only, with no significant reduction reported in volumes being shipped along other routes.

Reduced volumes

Polish gas monopoly PGNiG said that on Monday it received around 20 percent less gas than contracted and around 24 percent less on Tuesday. It said customers had not been affected for now, and the missing volumes were being met from other sources.

The company, in a statement, said it was seeking clarification on why the volumes were reduced.

Germany's biggest utility, E.ON is facing slightly reduced gas supplies from Russia, a spokesman for the company said on Wednesday.

"This is not alarming due to well-stocked reserves and sufficient availability on hubs," the spokesman said. He declined to say by how much supplies were reduced in percentage terms.

Under its contracts with customers, Gazprom has the right to adjust the gas export flow, and European utility traders said Wednesday's fluctuations were within contractual ranges.

The reduced volumes are unlikely to have a knock-on effect for customers in Europe unless they drag on for weeks.

Mild temperatures mean that demand for fuel is relatively low, and European operators have been building up reserves of gas in storage in anticipation of possible disruptions.

Countries in central Europe which also receive gas from Gazprom, but by other routes, reported that there was no significant disruption.

Slovakia, a major hub for Russia gas exports to Europe, said volumes were slightly down but within the normal range. Operators in Hungary, Bosnia, Serbia, Bulgaria and Romania said there was no disruption to their supplies.

Hawkish Poland

Ties between Warsaw and Moscow are tense.

Poland has lobbied the European Union hard to impose tougher sanctions on Moscow, and it is to host elements of a new NATO rapid reaction force, created in response to the Russian intervention in Ukraine.

Weeks before Russia imposed restrictions on many food imports from Western countries, it had blocked imports of Polish apples and meat. Some Polish officials said Moscow was punishing Warsaw for its hawkish stance over Ukraine.

Twice in the past decade, Moscow responded to natural gas price disputes with Ukraine by cutting off supplies, affecting its European clients further down its pipelines.

But a cut-off would also hurt Gazprom hard. With revenue cut, Gazprom's finances would be affected. It cannot compensate by borrowing from the West because sanctions bar Western financial services from lending to the firm.

Turning off the taps is also technically difficult. The gas has nowhere else to go but out to customers. It is impossible to severely scale back extraction volumes at Gazprom's fields, nor could such huge amounts of gas be safely flared off.

The Italian option

Import-reliant Italy uses gas to fuel almost half its power plants, triggering fears the conflict between Russia and Ukraine as well as tit-for-tat sanctions between the West and Moscow could disrupt deliveries by Gazprom to Europe.

"It's a problem. In the short term, Italy has no alternative to Russian gas," said Leonardo Maugeri, ex-strategy head at Italian major Eni and now at Harvard Kennedy School.

Italy's winter gas prices are trading 2.6 euros ($3.43) per megawatt hour above rival benchmarks in northwest Europe, underscoring the view that its energy supplies are most vulnerable to Russian gas cuts and cold snaps.

In 2006 and 2009, price disputes between Russia and Ukraine, which pumps half of Moscow's gas supply for Europe, triggered widespread disruptions and prompted Italy to rush through emergency measures that included tapping strategic gas reserves.

Although things are different this year due to a mild spring and summer and low demand in crisis-hit Europe, just a month of freezing weather with key gas supplies down could see supply shortfalls in Italy, and former Eni CEO Paolo Scaroni has warned a halt to Russian gas flows would raise prices and could cause supply problems.

Risks this year are particularly high after price cuts led Italy to boost Russian imports to 49 percent of supply in the first half, up from 41 percent in 2013 and 32 percent in 2012. At the same time, the glut of Russian gas has led Italian buyers to snub alternative supply deals, reducing its options. Algeria has become key in safeguarding supplies.

"If the agreement between Sonatrach and Eni enables Algerian gas to come back to Italy then even a prolonged disruption from Russia shouldn't have much effect, but without Algerian supply it could make things tight," Wood Mackenzie energy analyst Massimo Di-Odoardo said.

Algeria used to be Italy's biggest gas supplier, but booming internal demand, flagging production, and attractive Asian LNG markets led to a 40 percent drop in flows to Italy last year.

Yet analysts say Italy could increase Algerian imports relatively easily, albeit at a higher price.

"Volumes with Algeria can probably be raised but I doubt it could be done without having to pay a price," Harvard Kennedy School's Maugeri said.

Other counter measures to avoid a supply crisis include gas tanker imports, using up gas stocks, as well as shifting towards burning more oil and coal.