Russia-Austria gas dispute stokes fears of new energy crisis

Europe's latest gas dispute with Russia blew up over the weekend after bubbling beneath the surface for months. On Saturday, Russian state-owned energy giant Gazprom cut deliveries to Austria after the Alpine nation threatened to impound some of the gas as compensation for a contractual dispute it had won.

The Austrian utility OMV said in a statement that no gas delivery was made from 6 a.m. local time (05:00 UTC/GMT) on Saturday.

Austrian Foreign Minister Alexander Schallenberg accused Moscow of "once again using energy as a weapon," while European Commission President Ursula von der Leyen, the head of the European Union's executive arm, said Russian President Vladimir Putin was trying to "blackmail" Austria and Europe. She added that the bloc was "prepared for this and ready for winter."

Austria, along with Hungary, Slovakia and the Czech Republic, is still heavily reliant on Russia for gas. Vienna said it had sufficient stocks to cover the shortfall. OMV said last week that domestic gas storage was at more than 90%.

But European natural gas prices rose to a one-year high as traders got wind of the worsening dispute. Between Thursday and Tuesday, prices had shot up by more than 7% to €46.63 ($49.34) per megawatt-hour (MWh).

Utlities in Austria, Germany, Finland, France and Czechia have taken disputes with Gazprom to the ICC for arbitrationImage: Weingartner-Foto/CHROMORANGE/picture alliance

What is the Russian-Austrian gas dispute about?

In January 2023, OMV sought arbitration from the International Chamber of Commerce (ICC), saying the Russian gas giant had caused supply disruptions at the height of the European energy crisis that erupted after Russia launched its full-scale invasion of Ukraine a year earlier.

Historically Europe’s largest natural gas supplier, Moscow significantly cut pipeline flows in 2022, citing technical issues and payment disputes, while seeking political leverage in the face of international sanctions over the conflict.

Having relied on Russia for up to 40% of their gas supplies, European countries scrambled to line up alternative supplies and boost gas storage, amid skyrocketing prices. In August 2022, the Dutch TTF gas benchmark surged to over €300 per MWh.

Last Wednesday, the Paris-based ICC ruled in OMV's favor, awarding the Austrian utility €230 million in damages, plus interest and costs, the company said.

The ICC is a body recognized for resolving international commercial disputes and its rulings are binding on all parties. The ICC had previously ruled in favor of Germany's Uniper, entitling it to over €13 billion in damages for non-delivery of Russian gas.

OMV said in a statement that it would "recover awarded damages" by "offsetting its claims against invoices under the Austrian gas supply contract with Gazprom Export." OMV warned of a possible "deterioration of the contractual relationship" with Gazprom, which it acknowledged could lead to a "potential halt of gas supply."

How could the dispute impact Europe's energy security?

The 2022 energy crisis left Europe's gas market highly sensitive to any supply issues, with any further outages likely to spike prices higher.

Already this year, heating demand across Europe has increased as a result of colder temperatures, and although EU gas storage facilities were 95% full on November 1. Reuters news agency reported that, ahead of winter, gas withdrawals had begun earlier than last year.

Before this row, Austria's gas imports from Moscow made up 80% of deliveries. Alfons Haber, the head of the country's energy regulator E-Control said Gazprom supplies had been reduced by between 12 and 15% due to the dispute but insisted that "homes will not be cold either this winter or next," even if Russia cuts supplies altogether.

Europe still receives Russian gas via Ukraine but a transit deal is due to expire at the end of the yearImage: Imago/Zuma

However, this latest dispute is further exacerbated by the impending closure of transit pipelines in Ukraine by which Austria, Hungary and Slovakia receive much of their Russian gas. Kyiv has refused to renew the gas transit deal with Moscow as part of efforts to reduce economic ties with Russia, so it will expire at the end of the year. Ukraine earns transit fees worth 0.5% of the war-torn country's gross domestic product (GDP).

Some analysts believe the Russian gas volumes via Ukraine to Austria could nearly half if the row with Gazprom worsens, as OMV's next payment is due on November 20.

"OMV may withhold this next payment, which would be around €213 million, but this could trigger Gazprom in cutting that contract off immediately," Tom Marzec-Manser, head of gas analytics at consultancy ICIS, told the Financial Times.

The termination of the transit deal could further disrupt Russian gas supplies to European countries that rely on this route.

The EU is working on alternatives, including a possible gas swap deal with Azerbaijan that could see European countries still buy Russian gas but without having to negotiate with the Kremlin. Critics say the proposals would undermine Western sanctions on Moscow and continue Europe's dependence on Russian energy.

Despite the concerns, for now, Russian gas is still flowing to Europe. Russian news agency TASS on Monday cited Gazprom as saying that overall supply to Europe was unchanged, suggesting that new European buyers had been found.

Reuters news agency said Austria's gas was likely being diverted to Slovakia, Hungary and the Czech Republic, with smaller volumes going to Italy and Serbia.

Edited by: Uwe Hessler