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Europe’s energy market remains vulnerable, but Member States are making efforts to curb their dependency on Russia. Meanwhile, Romania is unable to capitalize on its assets.
Gas and gas markets in Europe
The gas market is actually a commodity exchange. Gas prices vary depending on supply and demand, weather, demographics, industrial growth / decline, geography (access to and use of natural resources that determine the energy wealth / poverty of a specific region), interconnectivity, storage capacities or replacement values.
The demand for natural gas is higher during the cold season due to the need to provide thermal energy to the population. The warmer the winter, the lower the demand for gas, hence the lower their prices. In the primary energy mix, thermal energy ranks first with 35%, followed by transport with 27% and then electricity production with 21%. Most of the thermal energy is obtained from gas.
The geography of a specific region also influences the volume and price of gas. The southern region of Europe is warmer than the northern one, which makes demand lower on the ground. A region that is closer to a gas field is likely to have access to a gas transportation network and cheap gas. In a lowland region, building a network of gas pipelines can be cheaper compared to mountainous regions. Gas is traditionally cheaper in a more industrially developed region with a larger population.
The replacement value of gas in the geographical context also comes into play. The seacoasts of the North Atlantic Ocean and the Baltic Sea have greater wind potential compared to southern Europe. Therefore, low-cost wind power successfully replaces gas energy.
Energy storage requires a suitable geography and access to storage technologies. Gas is stored in former salt mines or liquefied furnaces, while electricity is stored in reservoirs (we’re talking about technologies certified on the market). In fact, very little energy is actually stored. As a result, energy is non-fungible on a large scale. In other words, it is not a commodity.
Yet energy is traded on commodity-like stock markets. Thus, energy was standardized, trading in scalable quantities (cubic meters of gas at standard pressure - mc, or the energy contained in one mc, megawatt hour - MWh). But this is where time comes into play, more specifically the period when energy is needed. The “financialization” of energy is also a factor, that is, the emergence of trading instruments and specific markets. The most important energy exchange in Europe is TTF in the Netherlands. Another important gas market is the one in Vienna.
The energy weapon, part of Russia’s arsenal targeting Europe
The Russian Federation has realized it can influence the economies of developed states by fueling their dependency to its energy exports. The 2011 “Gerasimov Doctrine” clearly stipulates this is the path Moscow should follow. Two European gas supply routes have been developed, one to the north via Nord Stream I and II, with a capacity of 110 bcm/year and the southern Blue Stream (16 bcm/year) and Turk Stream (31.5 bcm/year), totaling 47.5 bcm/year. Adding to these are pipelines crossing Ukraine, which can transfer up of 178 bcm/year to the European Union. Russian Federation gas exports to the EU peaked in 2019, standing at 185 bcm (billion cubic meters).
Shortly after the 2020 pandemic, Moscow started raising the price of gas, eying higher profits in order to secure financial resources for the coming war.
February 24, 2022 marks a turning point in gas flows from Russia to the European Union, as the latter started curbing its imports. This resulted in an unfulfilled demand, which in turn led to price hikes across the board. The maximum value for gas prices was recorded in the summer of 2022.
Fig. 1 – The fluctuation of gas prices in the five years (Credits: tradingeconomics.com)
The European Union was forced to operate a change of strategy: it increased investments in renewable energy and secured new sources of gas, oil and coal, renouncing Russian energy imports.
Despite its investments in renewable energy, the European Union has remained dependent on gas imports because their replacement value is high. Today, imports originate from several sources: Norway has increased its production and transit to Europe, and so has Azerbaijan. Other sources of pipeline supply are Algeria and the UK. Another supply route is that of liquefied natural gas, transported mainly from the United States and Qatar.
Fig. 2 – Europe’s dependency on gas imports in the last five years (Credits: Smart Energy Association)
The EU’s energy “independence”, a fragile reality
Since the launch of the full-scale invasion in Ukraine, the EU’s imports of Russian natural gas dropped seven times compared to 2021 levels. Russian gas is still being transported to Europe via Ukrainian pipelines and Turk Stream.
In May 2024, however, Russia’s gas exports to the EU went up 39% compared to January.
Fig. 3 – EU27 natural gas imports (Credits: brugel.org)
Fig. 4 – EU 27 natural gas imports from Russia via Ukraine kept level in 2024 (Credits: brugel.org)
Fig. 5 – EU27 natural gas imports via Turk Stream went up in May 2024 (Credits: brugel.org)
Imports were ramped up following an outage that affected Norway’s gas supply network, in order to avoid an increase in gas prices. Hence the idea that any incident affecting any pipeline or LNG terminal spells additional vulnerabilities for the European Union, with the potential of triggering price hikes.
Fig. 6 – EU27 natural gas imports from Norway increased in 2024 (Credits: brugel.org)
Studies reveal that, in fact, renewable energy is more expensive. The output (capacity factor) is lower, resulting in a dependency on China, a country that holds monopoly over critical materials (98% of the EU’s imports of metals and rare earths are from China), used by solar and wind farms to produce and store renewable energy. The European Union has traded the Russian fuel monopoly for the Chinese monopoly on critical materials. We should also factor in the intermittence of renewables and the lack of storage capacities, which have exposed the electricity transmission and distribution networks to vulnerabilities.
That leads to the first conclusion, namely that importing gas, regardless of its origin, is cheaper than introducing new technologies to replace it.
Many recent analyses show that the EU’s decarbonisation policies and goals are not feasible. Thus, we have witnessed warnings from the economic sector, operators saying that the European Union’s economic growth rate has slowed down due to the increase in energy prices. The result is that the EU’s economy is outperformed by those of its main competitors - the United States and China.
European companies have cautioned the European Commission about the declines in industrial production caused by energy price dynamics. This led to the deindustrialization of the EU. The business sector calls for a reindustrialization plan for the European Union.
The European Union lags behind the United States and China in several key sectors for a number of reasons, including: the political and economic fragmentation of EU27 compared to other competitors, the shortage of resources, the EU’s reliance on the resources of (mainly) unfriendly states, the shortage of EU investment in technology and innovation, the absence of EU tech giants to compete with American and Chinese counterparts. We can also list here a shortage of industrial policies and strategies, the plethora of strict regulations regarding competition, the environment, citizen protection and population ageing.
We can thus conclude there is a high probability that the European Commission will change its objectives in the near future.
Why is Romania disconnected from the European gas market and has higher prices?
Although Romania is a gas producer, it is not part of the European Gas Market.
Fig. 7 – Members of the EU gas market (Credits: EEX)
There is only one connection that links Romania to Western countries via Hungary, with the possibility of importing 2.63 bcm/year and the possibility of exporting 1.75 bcm/year. Compared to national consumption, it varies between 10 bcm/year in warm winters and 13 bcm/year in cold winters.
Prices in Romania should be significantly lower compared to elsewhere in Europe, because Romania’s gas production exceeds 10 bcm/year.
Fig. 8 – Interconnections of Romania’s gas transport grid to neighboring countries (Credits: entsog.eu)
Fig. 9 – Capabilities of Romania’s gas transport interconnections to neighboring countries (Credits: transgaz.ro)
Romania’s interconnections with Ukraine are currently decommissioned due to the absence of a standing import – export agreement.
Still, prices in the European Union are usually lower compared to Romania.
Here is why:
- the Romanian market is small, with only three extraction companies operational (Romgaz, OMV Petrom and BSOG), one company that holds the transport monopoly (Transgaz), two large distribution companies (Engie and Delgaz Grid) and 55 suppliers (companies that trade gas, most of them merely acting as brokers);
- the National Agency for Mineral Resources (ANRM) has not issued any exploration and exploitation permits in 14 years (the Prospecținui report for the Bucharest Stock Exchange);
- exploitation of the 30-bcm deposit from Caragele has also been blocked;
- authorities have delayed the exploitation of Neptun Deep for 20 years;
- ANRM's decision that the excise tax on natural gas should be based on the prices of the gas traded on the Vienna stock exchange, which is manipulated by Gazprom, where the price is higher than the extraction costs in Romania.
Adding to all that is the poor management of the Romanian Commodities Exchange, the only place where gas is traded, which was not able to develop a clearing house tasked with ensuring the completion of transactions. This means that only 0.4% of total gas consumption at national level is traded on the Commodities Exchange.
Thus, comparing the two exchanges, we notice that the Romanian market traded gas for 40 euros/MW, while in Amsterdam gas sold for 33.355 euros/MW.
Fig. 10 - Cotațiile BRM (sursa: brm.ro)
Fig. 11 –TTF quotations (Credits: ice.com)
The obvious conclusion follows: Romanian state authorities and the Romanian gas industry have no intention to connect to the European gas markets! Most of the production is controlled by the state. Romgaz (a company where the Romanian state holds the 70% majority package) and Petrom (20% of which is state-owned) account for over 80% of production. The state collects over 70% of the price of gas sold, according to the latest volume published by professor Dumitru Chisăliță. Thus, decision-makers are unlikely to support lower gas prices because that would cut down budget revenues.
