Joint Gas Purchasing – a new EU tool to curb rising energy costs

Energy - April 5, 2023

The European Union plans to make its first move as a group of buyers in the international gas market next month, when the first tender for suppliers is due to be launched. The common platform, considered by some analysts to be a future “cartel”, would include the 27 EU member states plus “the three neighbours of the Union”, EU officials announced, and have so far only spoken specifically about Ukraine. According to estimates by specialists, the next three years’ needs are 24 billion cubic metres of gas, for which, EU officials say, there are already 50 interested suppliers from the US, the Middle East and Africa.

The April tender follows months of talks in which European leaders sought to find the best way to secure supplies for member states, some of which are still dependent on Russian gas. According to some analysts, the measure would also prevent some member states with “deeper pockets” from overcharging for gas at the expense of poorer ones. The creation of such a gas-pooling platform has been discussed in EU forums since the middle of last year, amid rising inflation as a result of rising energy prices.

In the context of the energy crisis, among the measures proposed last year was the voluntary saving of 15% of Member States’ gas reserves by the end of March. The aim of this measure: the saved gas to be used and distributed jointly to the countries most affected by a possible total cut-off of Russian supplies. This means EU countries must ensure that their local firms take part in aggregating gas demand with volumes equivalent to 15% of the amount of gas needed to fill a country’s gas storage to 90% of capacity. At the level of the entire European Community bloc, this 15% requirement would be equivalent to 13.5 billion cubic metres of gas, a small fraction of the EU bloc’s total gas imports, which in 2021, according to Eurostat data, stood at 338 billion cubic metres. Voluntary savings could, however, become mandatory, say some analysts.

The high gas price reduces the competitiveness of European companies in the race against rivals  US and China

Joint gas purchases are thus a new tool the EU bloc wants to use to curb rising energy costs triggered by the disruption of Russian supplies after the invasion of Ukraine. As well as fuelling inflation, the price Europe pays for gas in this context reduces the competitiveness of European companies in the race against rivals in the US and China, noted European commission vice-president Maros Sefcovic. He told Bloomberg.com in an interview in early March that the bloc plans to take its first steps in the global gas market in April as a buyers’ group in a bid to lower energy prices. Once the auction is launched, the EU expects the first contracts with suppliers to be signed sometime around June, it said. Sefcovic says there is interest in joint gas purchases from industrial consumers in sectors such as steel, aluminium, ceramics, glass and automotive production. On the supply side, there are more than 50 companies around the world interested in signing contracts with Europe. After the first tender, the EU will organise more joint purchases on a regular basis to ensure Europe has enough gas.

Even though gas storage in European countries is already 61% full, thanks to a mild winter, the focus has already shifted to refilling storage before the next winter season. 

“I am against a relaxed attitude that the toughest period of the year is over because we don’t know what this year has in store for us. What is increasingly important is that we need to address the price issue. We can’t fuel our economy at such a big price differential compared to the US and China,” the European official stressed.

According to the conclusions of the recent summit in Brussels, a draft of which was seen by Reuters and quoted by Agerpres, EU leaders could ask companies to take part in the joint gas purchasing scheme.

“The Council of EU leaders calls on all parties involved to make full use of the joint gas purchasing mechanism,” the draft says.

This comes at a time when, a few months ago, part of the European press reported, quoting EU officials, that some large energy firms had expressed reluctance to participate in joint gas purchases. According to the sources quoted, they argued that they could already negotiate their own agreements with suppliers and expressed doubts that the EU scheme would lead to lower prices.

Ukraine’s presence in the buying group – a certainty

EU Energy Commissioner Kadri Simson, quoted by Reuters, recently announced that Ukraine will take part in the EU’s scheme to pool gas purchases from global markets to supply two billion cubic metres (bcm) of fuel, the amount the Kiev authorities estimate is needed to supplement their own gas production.

Another EU neighbour, Norway, currently Europe’s largest supplier of natural gas and one of the main suppliers of gas to the EU, has announced that it is “not worried” about what some have called the creation of a “cartel” of buyers. Indeed, Energy Minister Terje Aasland, quoted by Reuters, said after a discussion with EC Vice-President Maros Sefcovic that the platform could help connect companies such as Norwegian state-owned giant Equinor with small industries that need a stable gas supply. Discussions also focused on Norway’s role as a reliable supplier to the European market, after the country replaced Russia to become Europe’s largest gas supplier after Moscow’s invasion of Ukraine. On the other hand, Aasland explained that the EU, which is committed to becoming climate neutral by 2050 and moving to renewable energy, must give clear support to Norway’s plans to expand oil extraction from offshore fields.

60% of the gas used in EU countries still comes from imports

At the beginning of the Ukraine crisis, when the Russian invasion began, Europe was on average more than 40% dependent on Russian gas. Today, more than 60% of the gas used in EU countries still comes from imports. A quarter comes from Norway and the rest from other sources, such as Algeria or Nigeria (supplier to Spain). But Europe last year massively increased its gas imports from the US, paying almost five times as much for them in the first eight months of 2022 (more than €30 billion) compared to the whole of 2021. 

In addition to being the world’s No. 1 producer of natural gas, the US became the world’s leading LNG (liquefied natural gas) exporter in the first half of 2022. The announcement was made by the US Energy Information Administration (EIA) shortly after the signing of the agreement with the EU, which made the US one of Europe’s leading LNG suppliers.

“To reduce the European Union’s dependence on gas imports from Russia,” the US and the European Commission signed an agreement on the 25th of March last year on gas deliveries to Europe, under which at least 50 billion cubic metres will be delivered annually by 2030. This represents a third of the gas bought from Russia annually by 2022”.

Given the world’s fierce demand for natural gas, these European imports come at the expense of poorer nations such as Pakistan and India, which could face energy shortages or be pushed into new deals with Russia. These possible new economic alliances could have a medium and long term impact on EU countries as a result of the fact that we will see a possible wave of products manufactured in these two countries on the European market.