Russia's Gazprom declares force majeure on gas supplies to Europe

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LONDON — Russia's Gazprom has told customers in Europe it cannot guarantee gas supplies because of 'extraordinary' circumstances, according to a letter seen by Reuters, upping the ante in an economic tit-for-tat with the West over Moscow's invasion of Ukraine.

The July 14 letter from the Russian state gas monopoly said it was retroactively declaring force majeure on supplies dating from June 14. The news comes as Nord Stream 1, the key pipeline delivering Russian gas to Germany and beyond, is undergoing annual maintenance meant to conclude on Thursday.

The letter added to Europe's fears that Moscow could keep the pipeline mothballed in retaliation for sanctions imposed on Russia over the war in Ukraine, heightening an energy crisis that risks tipping the region into recession.

Known as an 'act of God' clause, force majeure is standard in business contracts and spells out extreme circumstances that excuse a party from their legal obligations.

Gazprom did not respond to a request for comment.

Russian gas supplies have been declining via major routes for some months, including via Ukraine and Belarus as well as through Nord Stream 1 under the Baltic Sea.

A trading source, asking not to be identified because of the sensitivity of the issue, said the force majeure concerned supplies through Nord Stream 1.

"This sounds like a first hint that the gas supplies via NS1 will possibly not resume after the 10-day maintenance has ended," said Hans van Cleef, senior energy economist at ABN Amro.

“Depending on what ‘extraordinary’ circumstances have in mind in order to declare the force majeure, and whether these issues are technical or more political, it could mean the next step in escalation between Russia and Europe/Germany," he added.

Uniper, Germany's biggest importer of Russian gas, was among the customers who said they had received a letter, and that it had formally rejected the claim as unjustified.

RWE, Germany's largest power producer and another importer of Russian gas, also said it has received a force majeure notice.

"Please understand that we cannot comment on its details or our legal opinion," the company said.

TURBINE DELAY

Gazprom cut the pipeline's capacity to 40% on June 14, citing the delay of a turbine being maintained in Canada by equipment supplier Siemens Energy.

Canada sent the turbine for the pipeline to Germany by plane on July 17 after repair work had been completed, Kommersant newspaper reported on Monday, citing people familiar with the situation.

It will take another five to seven days for the turbine to reach Russia, the report said, provided there are no problems with logistics and customs. Germany's economy ministry said on Monday it could not provide details of the turbine's whereabouts.

But a spokesperson for the ministry said it was a replacement part that was meant to be used only from September, meaning its absence could not be the real reason for the fall-off in gas flows prior to the maintenance.

Austrian oil and gas group OMV, however, said on Monday it expected gas deliveries from Russia through the Nord Stream 1 pipeline to resume as planned after the outage.

"Gazprom's motivations are uncertain, but the declaration will not have a material impact on the current landscape," said Zongqiang Luo, gas analyst at consultancy Rystad Energy.

The European Union, which has imposed sanctions on Moscow, aims to stop using Russian fossil fuels by 2027 but wants supplies to continue for now as it develops alternative sources.

For Moscow and for Gazprom, the energy flows are a vital revenue stream as Western sanctions over Russia's invasion of Ukraine, which the Kremlin terms a "special military operation," have strained Russian finances.

According to the Russian Finance Ministry, the federal budget received 6.4 trillion roubles (US$114.29 billion) from oil and gas sales in the first half of the year. This is compared to planned 9.5 trillion roubles for the whole 2022.

The grace period for payments on two of Gazprom's international bonds expires on July 19, and if foreign creditors are not paid by then the company will technically be in default.

(Reporting by Julia Payne; additional reporting by Christoph Steitz in Frankfurt, Bozorg Sharafedin in London, writing by Nina Chestney in London; Editing by David Goodman, Edmund Blair and Barbara Lewis)