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Business

European Gas Prices Surge on Nord Stream Shut Down

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European energy prices surged after Russia shut down natural-gas flows through a major pipeline, threatening to add to economic woes for businesses and households across the continent.

Natural-gas futures in northwest Europe, which reflect the cost of fuel in the wholesale market, jumped more than 30% in early trading Monday. They remain below the all-time high recorded in late August.

State-controlled Gazprom PJSC extended a halt to flows through Nord Stream late Friday. Moscow blamed the suspension on technical problems. European governments described it as an economic attack in retaliation for their support of Ukraine.

Over the weekend, governments in Sweden and Finland offered billions of dollars of guarantees to utilities to prevent a meltdown in energy trading. Officials fear the loss of imports through Nord Stream could lead to a further leap in power prices and saddle utilities with cash payments to energy trading exchanges that they may struggle to meet. A wave of failed payments could undermine financial stability, officials said.

“This has had the ingredients for a kind of a Lehman Brothers of energy industry,” Finland’s Economic Affairs Minister

Mika Lintilä

said Sunday. 

Swedish and Finnish government officials worked through the weekend on programs designed to make sure electricity producers can meet exchange payments known as margin calls. Stockholm is home to

Nasdaq

Clearing AB, a subsidiary of

Nasdaq Inc.

that processes most derivative trades in the Nordic power market, which includes Finland and the Baltic countries.

Under the Swedish plan, the government would provide guarantees to eligible companies, which could then use the guarantees to borrow from banks and pay the exchange clearinghouse. The Swedish government would have license to extend up to 250 billion kroner, or $23 billion, in guarantees, said a finance-ministry official.

The Finnish government plans to offer 10 billion euros, or $10 billion, in guarantees. 

Nasdaq Clearing spokesman David Augustsson said the measures would help the power market act in an orderly manner Monday. “This is an extreme time of uncertainty and the addition of government liquidity guarantees will add an extra layer of stability,” he said.

Last week, European Energy Exchange AG, the main European venue for power trading outside the Nordics, said Germany and other European Union members should help companies fund margin payments. A spokesperson didn’t respond to requests for comment on Sunday.

Russia’s state-controlled Gazprom PJSC extended a halt to flows through the Nord Stream pipeline late Friday.



Photo:

HANNIBAL HANSCHKE/REUTERS

Armed with the guarantees, utilities and other energy companies would find banks more willing to lend money to cover margin payments, the Swedish official said. The Swedish parliament will vote on the program Monday and it would take effect the same day if approved. One concern is that the clearinghouse itself might default, the official said.

“This threatens our financial stability. If we don’t act soon it could lead to serious disruptions in the Nordics and Baltics,“ Swedish Prime Minister Magdalena Andersson said Saturday at a news conference outlining the plan. “In the worst-case scenario we could fall into a financial crisis,” Ms. Andersson added.

When utilities agree to deliver gas or power, they lock in prices by selling futures contracts. Exchanges charge one payment, known as initial margin, when trades are placed to collect collateral. They then call for or return money each day depending on whether the position gains or loses value.

As prices rise, utilities’ short positions shed value and the companies pay the exchange. They recoup the money when they deliver gas or power, but the difference in timing has led to massive outflows of cash that some firms have struggled to fund. At times a vicious cycle has emerged in which extreme price moves boost margin calls, prompting companies to bail out of trades and sparking more volatility.

“No one’s got the money to pay to trade,” said Justin Colley, an analyst at Argus Media. “Putting up these margin payments every day is just causing problems for everyone—not just the small companies, but also the big companies, the national utilities.”

The guarantees could add to the mounting cost for governments of aiding households and businesses through a historic rise in energy prices largely caused by Moscow’s move to cut gas exports. On Sunday, Germany unveiled its third energy relief package this year, worth €65 billion, to shield consumers.

European energy ministers are due to hold an emergency meeting Friday to discuss options for dealing with skyrocketing electricity prices, such as a possible price cap for non-gas sources of power generation.

They will also consider energy companies’ cash concerns. The Czech Republic, which holds the EU’s rotating presidency, is expected to put forward several options for ministers to consider, including the temporary suspension of power derivatives markets and a European credit line for energy market participants, an EU diplomat said.

European gas and power prices have been wildly volatile. They shot to records in late August before slumping last week after the European Union said it would change the structure of the power market to bring down prices for consumers and businesses. Nordic and Baltic prices have been especially turbulent, in part because a drought curbed hydropower generation in Norway.

Tom Marzec-Manser, gas analyst at ICIS, said he expected gas and electricity prices to rise again Monday in response to Gazprom’s shut-off. “Meeting demand, whatever that might turn out to be, is going to be that much harder,” he said.

To a certain extent, energy markets were already girding for Russia to completely cut off gas supplies. Gazprom had reduced Nord Stream flows to 20% capacity in the weeks before the shutdown.

Some factors could act to bring prices down after an initial leap, traders and analysts said—including the action taken by Nordic governments. Weather forecasts suggest there might be greater power generation from wind farms, reducing demand for gas. 

Uniper,

one of the two biggest buyers of Russian gas in Europe until recently, said last week it had fully drawn down a €9 billion credit line from German state lender KfW. The company said it had asked to borrow an extra €4 billion to make margin payments and buy gas to make up for lost deliveries from Gazprom.

—Kim Mackrael contributed to this article.

Write to Joe Wallace at joe.wallace@wsj.com

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World

Russia to Keep Nord Stream Pipeline Shut, Citing Mechanical Problems

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Russia indefinitely suspended natural gas flows to Europe via a key pipeline hours after the Group of Seven agreed to an oil price cap for Russian crude—two opposing blows exchanged between Moscow and the West in an economic war running parallel to the military conflict in Ukraine.

Kremlin-controlled energy company Gazprom PJSC said late Friday it would suspend supplies of gas to Germany via the Nord Stream natural-gas pipeline until further notice, raising the pressure on Europe as governments race to avoid energy shortages this winter.

Gazprom said it had found a technical fault during maintenance of the pipeline, which connects Russia with Germany under the Baltic Sea. The company said the pipeline will remain shut down until the issue is fixed, without giving any timeline.

The pipeline was due to resume work early Saturday after three-day maintenance. Before the maintenance, the pipeline was operating at 20% of its capacity.

Russia first began throttling supplies via Nord Stream in June, saying that needed maintenance was being prevented by Western sanctions imposed following Russia’s invasion of Ukraine. The notion was dismissed by European officials as an excuse for Russian President

Vladimir Putin’s

regime to use its gas exports to punish Europe for its support of Ukraine.

Western leaders are preparing for the possibility that Russian natural gas flows through the key Nord Stream pipeline may never return to full levels. WSJ’s Shelby Holliday explains what an energy crisis could look like in Europe, and how it might ripple through the world. Illustration: David Fang

A complete shutdown of Nord Stream will compel European governments to accelerate their push to become independent of Russian gas ahead of the winter months and could force them to ration energy—a move that would hurt industrial companies and tip the continent’s already fragile economy into a recession.

“By further reducing gas deliveries, Russia is tightening the screws on the EU,” said Janis Kluge, an expert on Russia at the German Institute for International and Security Affairs. “Europe will now have to take its efforts up a notch to conserve more gas.”

At the same time, the move deprives Moscow of its most potent economic leverage on the continent and could remove any remaining misgivings in European capitals about raising sanctions on Moscow for fear of retribution.

“Until it is repaired, gas transport via Nord Stream is completely stopped,” Gazprom said Friday.

Moscow and the West have been engaged in an economic war since Russia invaded Ukraine in February. Western democracies have inflicted economic and financial sanctions on Russia, and Moscow has tried to choke unfriendly countries’ access to its natural gas, which Europe uses for heating and electricity production.

ArcelorMittal SA,

one of the world’s largest steelmakers, was the latest industrial giant to say it is reducing European production capacity amid the energy crisis. The company said Friday it will close two of its plants in Germany amid soaring electricity costs.

Steelmaking is particularly energy intensive, alongside other industries like fertilizer and chemical production and glass making.

G-7 countries said on Friday they would impose a cap on the price of Russian oil. The mechanism would force buyers seeking to insure their shipment via insurers located in a G-7 or European Union country to observe the price limit on their purchases. The cap, whose level will be set at a future meeting, originated in a U.S. initiative and has been under discussion for months.

Russia has said countries imposing a cap wouldn’t receive any Russian oil. Sales of oil make up a far bigger share of Russian state revenues than sales of natural gas.

Inspectors from the United Nations’ nuclear agency visited the Russian-occupied Zaporizhzhia nuclear-power plant, despite shelling near the facility for which Ukraine and Russia exchanged blame. On Friday, Ukraine accused Russia of hindering access to the plant. Photo: Yuri Kochetkov/Shutterstock

Hours before Gazprom’s Nord Stream announcement, German Finance Minister

Christian Lindner

praised the G-7 decision, saying “Russia is generating big profits from the export of commodities such as oil, which is something we must push back on vigorously.”

The cap, he added, would help combat inflation in the EU.

Russia would have enough capacity via other gas pipelines to Europe to compensate for the Nord Stream shortfall. However, flows via these other routes declined following the start of the war in Ukraine.

Ukraine halted one gas-transit route in May, blaming interference by Russian forces. Deliveries through another, called Yamal, which traditionally transported gas from Russia to Europe, have stopped this year due to sanctions imposed by Russia on the Polish part-owner.

Germany’s economy minister,

Robert Habeck,

said this week that the country can’t count on Nord Stream during the winter.

In reaction to the Nord Stream closure, a spokeswoman for the ministry said on Friday that Germany was far better prepared than a few months ago.

“We have already seen Russia’s unreliability in the past few weeks, and accordingly we have unwaveringly and consistently pursued our measures to strengthen our independence from Russian energy imports,” the spokeswoman said.

Klaus Müller, head of Germany’s energy regulator, said the country would need to boost gas imports from other suppliers, continue to fill up gas stores and cut gas consumption.

European officials had expected that the Kremlin would use gas flows to keep markets and governments on edge and erode support for Ukraine among Western voters.

Gazprom’s shutting down of Nord Stream “under fallacious pretenses is another confirmation of its unreliability as a supplier,” European Commission spokesman Eric Mamer wrote on Twitter.

A senior manager of a German gas company formerly controlled by Gazprom said Friday that he expects local importers of gas channeled via Nord Stream to stop paying for their contractual obligations with Gazprom.

Natural-gas prices have broken records in recent weeks amid the energy crunch, though they have also dropped sharply in the past days, with some analysts crediting the speed at which Europeans have been filling up their gas storage facilities through the summer.

Goldman Sachs analysts said that the Nord Stream outage would cause prices to surge again. The Gazprom decision “will reignite market uncertainty regarding the region’s ability to manage storage through winter, driving a significant rally,” the bank said in a note to clients.

Gazprom began throttling gas flows in June, citing technical problems with the turbines. The company insists that a key turbine couldn’t be sent to Russia after it was maintained in Canada because of international sanctions on Moscow. But Germany, where the turbine was located, said that there are no obstacles, and that Moscow was in fact blocking the turbine’s return to Russia.

On Friday, Gazprom said that it found an oil leak in a turbine at the compressor station of the pipeline. Gazprom said that similar issues had been found with other turbines this summer that have led to the reduction of the gas flows.

Gazprom said it had notified German company

Siemens Energy AG

, which maintains the turbines, of the new leak. Gazprom said that the necessary repairs could only be done in a specialized repair facility. Previously, some turbines for the pipeline had been repaired by Siemens Energy in Canada.

Siemens Energy said that Gazprom’s announcement wasn’t a technical reason for stopping operation. “Such leakages do not usually affect the operation of a turbine and can be sealed on site. It is a routine procedure during maintenance work,” the company said. It said it wasn’t currently contracted for maintenance work but is ready to assist.

Europe has been preparing for a possible Russian gas cutoff, with EU gas- storage facilities filling up faster than expected this summer, to over 80%.

Still, if Nord Stream remains shut, Europe’s gas stores would end the winter at 26% of their capacity, which would complicate Europe’s situation next winter, Massimo Di Odoardo, vice president for gas and liquefied natural gas research at energy consulting firm Wood Mackenzie, wrote this week.

Germany, which received more than half of its gas from Russia before the war in Ukraine, has been racing to diversify its supply of gas and to install floating liquefied natural gas terminals to ship in gas from the U.S. and elsewhere. In recent months, Germany’s gas imports from Norway, Belgium and the Netherlands have far outweighed the reduced Russian flows.

The country is close to hitting its 85% gas storage target, initially set for Oct. 1. German officials, however, have warned that reaching the next milestone of 95% by Nov. 1 would be challenging unless companies and households cut consumption.

The 760-mile-long Nord Stream pipeline first opened in 2011. Russia and a consortium of European energy companies built a second pipeline, Nord Stream 2, running alongside the original one, that would have doubled capacity. But the German government froze the project in February over the war in Ukraine.

—Bojan Pancevski contributed to this article.

Write to Georgi Kantchev at georgi.kantchev@wsj.com and Andrew Duehren at andrew.duehren@wsj.com

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Business

Warren Buffett Not Expected to Bid for Control of Occidental Following Approval for Bigger Stake

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Warren Buffett’s

bid to boost his big stake in

Occidental Petroleum Corp.

OXY 9.88%

even further isn’t expected to serve as a prelude to a full takeover of the resurgent energy company by the widely watched billionaire, at least for now.

In a regulatory filing Friday, the Federal Energy Regulatory Commission said that Mr. Buffett’s

Berkshire Hathaway Inc.

BRK.B -2.30%

had received permission to buy up to 50% of the driller’s shares. The news stoked speculation that Berkshire could be gearing up to acquire Occidental.

Analysts have said Occidental’s oil business would complement Berkshire’s existing energy holdings, which include utilities, natural gas and renewables. Mr. Buffett has a warm relationship with Chief Executive

Vicki Hollub

and has publicly praised her efforts to turn the company around after its acquisition of Anadarko Petroleum Corp. and her plans to pay down debt and increase dividend payouts.

But Mr. Buffett hasn’t informed Occidental of any plans to acquire a controlling stake in the company, according to people close to the matter. Given Mr. Buffett’s well-known aversion to hostile deal making, it would be out of character for him to make a bid without sounding out the company’s executives and directors first.

Owning such a big stake—Berkshire is Occidental’s largest shareholder—gives him major influence over the company already, and acquiring control could cost him a hefty premium to the current share price. The stock closed Friday at $71.29, up nearly 10% on the news, giving the company a market capitalization of about $66 billion.

Why would Berkshire seek out permission to buy more of Occidental, then?

For one, it was close to running up against FERC-imposed investing limits.

Filings show Berkshire currently has a 20% stake in Occidental. It also has warrants to purchase another 83.9 million common shares and 100,000 shares of preferred stock that pay a hefty dividend—both of which it acquired after helping Occidental finance its 2019 acquisition of Anadarko.

If Berkshire were to exercise the warrants, its stake would rise to roughly 27%. That would have exceeded the 25% limit FERC allowed for before Friday’s ruling.

“This is not a company that’s going to raise regulators’ hackles,” said Cathy Seifert, an analyst for CFRA Research.

It should also give Berkshire breathing room in case share buybacks or other company moves decrease the amount of shares outstanding, thus increasing its percentage stake.

There are other reasons to doubt a Berkshire takeover of Occidental is imminent.

One of them is price, said David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business.

So far, Berkshire has bought virtually all of its Occidental shares at a price in the range of $50 to $60, Mr. Kass said. The highest price Berkshire paid was $60.37 in July, according to filings.

Mr. Buffett is a well-known bargain-hunter, so it is difficult to imagine Berkshire rushing to buy more Occidental shares at the current price, Mr. Kass said. The shares are up 146% for the year, boosted by a rally in the price of oil, compared with an 11% decline for the S&P 500.

People familiar with deliberations at Occidental said the company’s leadership believes Mr. Buffett might consider making an offer if oil prices fall, bringing down Occidental’s stock price. If Mr. Buffett made an offer the company viewed as fair, a majority of the Occidental’s board would likely approve presenting it to shareholders, one of the people said.

Mr. Buffett didn’t respond to a request for comment. An Occidental spokesman declined to comment.

Mr. Buffett is currently represented as a passive shareholder in Occidental, based on the so-called 13G filing he has on record with the U.S. Securities and Exchange Commission. If he were to change his intentions and hold meaningful discussions with the company about a full-on takeover, he would likely need to change his filing to a 13D, which is required by large shareholders who intend to get actively involved in the running of a company.

Taxes could also play a role in Mr. Buffett’s bid for a bigger minority stake in Occidental. Corporations with a stake of at least 20% in another company are eligible to deduct 65% of dividends received, up from the standard 50%.

Berkshire’s 20% stake also allows it to include a proportionate share of Occidental’s earnings in its own results. That could give its earnings a multibillion-dollar boost annually, based on analyst estimates of Occidental’s earnings. Before the most recent purchases, disclosed this month, Occidental fell below the 20% threshold for both benefits.

Since Berkshire started buying Occidental shares in February, Mr. Buffett has had a friendly and collaborative relationship with Ms. Hollub, and the pair speak regularly, according to people familiar with the matter.

When Mr. Buffett bought another slug of Occidental shares this spring, he called Ms. Hollub to let her know about the transaction, according to one of the people. Ms. Hollub was driving at the time and pulled over to take the call, the person said.

Mr. Buffett’s message was simple: “Keep doing what you’re doing,” he told Ms. Hollub.

Berkshire’s growing ties with Occidental have an unexpected link to Mr. Buffett’s earliest days of investing.

At age 11 in 1942, Mr. Buffett made his first investment: three shares of Cities Service’s preferred stock. Forty years later, Occidental went on to acquire the oil company, which Ms. Hollub had just joined the year before.

Mr. Buffett’s investment in Occidental this year shows his first stock purchases “coming full circle 80 years later,” Mr. Kass said.

—Benoît Morenne contributed to this article.

Write to Akane Otani at akane.otani@wsj.com, Christopher M. Matthews at christopher.matthews@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

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Business

Warren Buffett’s Berkshire Hathaway Cleared to Buy as Much as Half of Occidental’s Shares

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In a regulatory filing Friday, the Federal Energy Regulatory Commission said that Berkshire Hathaway had asked for and received its permission to buy up to 50% of the driller’s shares. Berkshire has been loading up on Occidental’s shares this year, amassing roughly 20% of the company’s stock, public filings show, leaving many analysts to speculate whether Mr. Buffett would seek control of the company, one of the largest U.S. oil producers.

Occidental’s shares jumped to lead stock gains among the S&P 500 Friday, rising 9.9% after the publication of the ruling. The company’s stock has risen about 146% this year, far and away tops in the S&P 500 stock index, which is down 11% this year.

Berkshire requested the authorization on July 11 and said at the time it owned approximately 18.72% of the outstanding common shares of Occidental, according to the federal ruling. Berkshire has since added shares and earlier this month said in a securities filing that it held roughly 20% of Occidental’s common stock. Berkshire also owns warrants to buy another big slug of Occidental’s common stock as well as $10 billion worth of preferred shares that pay Berkshire about $800 million annually, filings show.

“It is concluded that the Proposed Transaction is consistent with the public interest,” Carlos D. Clay from the FERC’s Office of Energy Market Regulation wrote in the filing.

A spokesman for Occidental confirmed that Berkshire could now buy up to 50% of common shares and didn’t comment further. A Berkshire Hathaway representative didn’t respond to a request for comment.

Mr. Buffett has invested billions in renewables such as wind-farm projects through Berkshire’s energy unit and has also added oil companies to the holding company’s portfolio in recent years.

Chevron Corp.

is now one of Berkshire’s largest stock investments.

Occidental has raked in high profits from elevated oil prices, netting $3.7 billion in the second quarter. The profits are a dramatic turnaround for the company, which lost around $14.8 billion in 2020 after the global pandemic gutted oil demand. Berkshire’s stock purchases, as well as that of the many investors who follow Mr. Buffett’s moves, have helped lift Occidental’s shares to the head of the broad rally in energy stocks.

Occidental’s ill-timed $38 billion deal to take over rival Anadarko Corp. in 2019 loaded the company with debt, leaving it in a perilous position as oil prices tumbled during the pandemic. Chief Executive

Vicki Hollub

made deep spending cuts over the past two years, moved to rein in growth and focused on using cash to pay down debt.

The company has repaid $8 billion in debt this year to bring it to $22 billion, down from nearly $36 billion a year ago, according to the company and analysts. Occidental’s endeavor to reach investment-grade status and its cash-generating capabilities have made it an attractive target for Mr. Buffett, said Neal Dingmann, an analyst with Truist Securities. “It’s a great sort of hedge against a lot of his other businesses to own such a high free-cash-flowing business,” he said.

Occidental has raked in high profits from elevated oil prices, netting $3.7 billion in the second quarter.



Photo:

Reuters Staff/REUTERS

Mr. Buffett has made no secret of his admiration for Ms. Hollub, describing her as one of the best executives in the business. In 2019, he acquired $10 billion in preferred stock to help the company pay for the Anadarko deal.

“What Vicki Hollub was saying made nothing but sense,” Mr. Buffett said at Berkshire’s annual shareholder meeting in April. Occidental looked like “a good place to put Berkshire’s money,” he added.

Mr. Buffett had to show his hand to the market because power plants controlled by both Occidental and Berkshire Hathaway feed the same grid in Louisiana. Occidental owns a power plant in Taft, La., that feeds its chemical plant next door. Leftover power is sold on the local grid, which Berkshire Hathaway Energy plants also feed.

FERC ruled that since Occidental’s plant accounts for just 0.48% of the capacity connected to the region’s grid, a combination with Berkshire “will not have an adverse effect on competition” in the local electricity market. Mr. Buffett had to ask, though, before beefing up Berkshire’s Occidental stake.

In recent years, Occidental has ventured into renewables through its Oxy Low Carbon Ventures unit. This new focus dovetails with Berkshire’s own investments in renewable energy and puts Mr. Buffett’s company in a position to benefit from tax breaks, said

Bill Smead,

chief investment officer at Smead Capital Management.

“We see Berkshire’s filing as a vote of confidence in the oil macro and the value proposition in energy equities,” said Kevin MacCurdy, a managing director at investment firm Pickering Energy Partners.

Write to Benoît Morenne at benoit.morenne@wsj.com and Ryan Dezember at ryan.dezember@wsj.com

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World

Russia Resumes Nord Stream Natural-Gas Supply to Europe

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BERLIN—Russian natural gas began flowing again at a reduced volume through a critical pipeline into Europe on Thursday, according to its operator, buying time for governments to decouple from the Kremlin’s exports amid what they expect will be an increasingly unreliable supply of energy from Moscow heading into the winter.

The Nord Stream pipeline connecting Russia with Germany under the Baltic Sea resumed operation after its annual maintenance, ending 10 days of tense speculation about whether President

Vladimir Putin’s

regime would cut off the gas flow to Europe in retaliation for Western sanctions after his invasion of Ukraine.

The operator, Nord Stream AG, said the pipeline was in the process of restarting, which would take a few hours. “Gas is flowing,” a spokesman for the operator said.

The spokesman said flows are expected to be at pre-maintenance level of around 40% of total capacity, but it would take a few hours to reach that volume. One of the German network operators, NEL Gastransport GmbH, later said Thursday that this volume of gas was currently flowing through the pipe, as also confirmed by Nord Stream’s own online monitoring tool.

The German energy regulator said gas flows could reach 40% of capacity Thursday.

“Unfortunately, the political uncertainty and the 60% cut from mid-June remain,” the regulator’s head, Klaus Müller, said on Twitter.

The restart sent wholesale European natural-gas prices down 5% Thursday to €154.55, the equivalent of about $157.50, a megawatt-hour. Including Thursday’s fall, prices have fallen by 14% over the past week but have more than doubled this year and are more than four times as high as 12 months ago. The rally has propelled electricity prices to historic highs across Europe. Broader financial markets were steady Thursday as investors awaited earnings reports from major U.S. companies and an expected interest-rate increase by the European Central Bank.

A compressor station in Mallnow, Germany.



Photo:

filip singer/Shutterstock

The pipeline has been operating below capacity since Russia began throttling supplies in June, invoking technical issues related to Western sanctions against Russia.

Mr. Putin earlier this week said Russia would meet its contractual obligations for gas deliveries to Europe. The Nord Stream pipeline is the main conduit for Russian gas into Europe. Mr. Putin also warned that Western sanctions adopted to punish Russia in the wake of the invasion could cause further disruptions and cap pipeline volumes as low as 20%.

European officials and executives had worried the pipeline might not restart at all, or do so at even lower volumes. While gas is now flowing again, how much Russia sends—and for how long—will be closely watched by European capitals, who are in the midst of filling reservoirs for the higher-demand winter just a few months away.

An abrupt cutoff would have pushed Germany, Europe’s largest economy and industrial powerhouse, and several of its neighbors into a severe recession, according to most economists. But even reduced flows and the uncertainty regarding future supplies mean governments may still be forced to ration energy and subsidize mounting costs for households, experts and officials say.

Nord Stream channels gas extracted from Siberia by state-controlled Gazprom PJSC.

Mr. Putin this week blamed the drop on the absence of a turbine that had been held up in Canada after undergoing repairs because of Western sanctions, but is now on its way back to Russia.

Berlin and most Western experts said the cut in supplies was an attempt to pressure the West into easing sanctions and to push up gas prices. Several German officials and a Gazprom manager in Europe told The Wall Street Journal that Nord Stream had an elaborate contingency system with at least one spare turbine available at all times.

German officials say they expect the pipeline to continue to operate at its reduced pre-maintenance capacity—a level they think was deliberately set to prevent Germany and others from building up enough gas reserves for the winter. Because of technical reasons related to the pressure levels in the pipeline, Nord Stream can’t transport volumes below 30% of its capacity of 55 billion cubic meters a year.

A German government minister said that Mr. Putin was deliberately causing anxiety in the global energy markets, but that he was unlikely to sever supplies completely because it would remove his leverage and risk a harsher response from the West.

The reduced flows and uncertainty are already hitting Germany’s economy. The largest gas utility,

Uniper SE,

is in bailout talks with the German government. The company said Monday that it had drawn down a €2 billion, or $2.04 billion, credit line with German state-owned KfW bank. A German Economy Ministry spokesperson said Monday that the government was working with Uniper and its Finnish parent,

Fortum Oyj,

to find ways to help the company.

Germany and other European Union nations, which pledged to end purchases of Russian energy by 2024, are now working on two basic contingency plans.

The Nord Stream pipeline has been operating below capacity since Russia began throttling supplies in June.



Photo:

Markus Schreiber/Associated Press

The first envisages a status quo, with Nord Stream operating at around 40% of its capacity. Under that scenario, Germany, where gas storages are currently 65% full, would have to significantly reduce consumption compared with the previous year to avoid a shortfall in the winter. Some regions, however, are expected to be more severely affected, possibly triggering local measures such as limited factory shutdowns and a cut in supply to some businesses.

Under this scenario, Germany would be unable to completely fill its reserves before year-end, leaving the country vulnerable to new surprise supply cuts and keeping energy prices high.

This could be politically explosive for Berlin, with some 66% of Germans currently feeling that the government isn’t doing enough to tackle high energy prices, while 53% believe the sanctions are hurting Germany more than Russia, according to a Forsa poll published on Wednesday.

“We need to prepare for a war economy…the next two winters will be difficult,” said

Günther Oettinger,

a former chief energy official of the EU and German politician. “Our very democracy is in danger of disruption from the energy costs fallout.”

The second scenario, seen in Berlin as less likely according to German officials, foresees an end to Russian gas supplies before the end of the year, triggering an emergency plan that would allow Chancellor

Olaf Scholz

to take control of the gas market and ration consumption.

Under legislation that protects households and critical infrastructure, rationing would hit mainly businesses, leading to a drop in Germany’s gross domestic product of between 5% and 6% in 2023, according to estimates by

Deutsche Bank.

With many European countries that depend on Russian gas reliant on supplies transiting through Germany, irregular or dwindling supplies through Nord Stream would have effects across the continent.

The EU this week issued guidelines recommending measures to cut gas consumption by 15% between August 2022 and March 2023, including by limiting the temperature in office spaces to 66 degrees this winter.

Germany’s immediate neighbors are working on their own contingency plans.

Germany and Austria negotiated a deal to share their gas-storage capacity and help each other’s regions that are at risk of fuel shortages.

“Russian dictator Vladimir Putin is using energy as a weapon against us. It is clear that the cooperation with Germany, through which almost all gas flows to us, will be essential for us in this direction,” Josef Sikela, the minister of industry and trade of the Czech Republic, told reporters earlier this month.

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Europe is also adjusting its gas infrastructure, which has so far been largely geared to receive supply from Russia. Belgium and Germany are working to expand the capacity of a pipeline connecting the two nations, while Austria and Italy are looking into importing their infrastructure to be able to channel more Norwegian gas into their storage.

The Netherlands, once among the world’s largest gas producers, is considering temporarily prolonging the life of a gas field scheduled for closure after mining work there caused numerous earthquakes.

Many governments are trying to secure gas from other suppliers, from Norway to Algeria, the U.S. and Qatar, which often comes in the form of liquefied natural gas transported by ship.

Germany is building several LNG terminals on its coast to receive shipments from faraway countries and has chartered five floating terminals that can handle those inflows in the short term. Increased LNG purchases by EU nations—Germany alone is investing over €15 billion—have caused a shortage on the global market, leaving countries such as Pakistan struggling to access supply.

Berlin, meanwhile, has said it would review its decision to shut down its three remaining nuclear-power plants. It is already planning to increase use of coal to produce electricity this winter to save gas for heating.

Write to Bojan Pancevski at bojan.pancevski@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com

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World

Vladimir Putin Says Russia Will Honor Gas Commitments, but Warns of New Nord Stream Curbs

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Russian President

Vladimir Putin

said Russia would fulfill its commitments to supply natural gas to Europe but warned that flows via the Nord Stream pipeline could be curbed soon if sanctions prevent additional maintenance on its components.

Nord Stream, the main artery for Russian gas to Europe, is currently down due to regular maintenance and European governments are worried the Kremlin won’t restore its flow when the work ends Thursday. A prolonged outage could prompt governments to ration energy, hurting industry and hitting already fragile economic growth.

In comments late Tuesday after his visit to Tehran, Mr. Putin said that Kremlin-controlled energy exporter Gazprom PJSC, pipeline operator’s majority shareholder, “has always fulfilled and will fulfill all of its obligations.”

But the Russian president added that flows might fall to some 20% of capacity as soon as next week if a pipeline turbine that was undergoing repairs in Canada isn’t returned to Russia soon. Mr. Putin said that another turbine had to go for maintenance on July 26.

Even before the maintenance began, Gazprom last month cut deliveries on the pipeline to 40% of its capacity, blaming Canadian sanctions that had prevented the return of the turbine being repaired there. European officials have dismissed the turbine explanation as a pretext for Moscow to try and wreak economic havoc on the continent.

Germany has been racing to return the turbine to Russia after Canada earlier this month tweaked its own sanctions, allowing turbines for the Nord Stream pipeline to be repaired and returned to Russia.

The European Union is pressing governments to step up their energy-conservation campaigns, rolling out new plans for possible rationing on Wednesday. The commission’s plan is expected to offer guidelines for curbing energy use and establish criteria governments can use to determine which industries to give priority to if there isn’t enough gas to go around. The guidelines also call for public buildings to limit air conditioning to 77 degrees Fahrenheit and cap thermostats at about 66 degrees during colder months.

Gazprom has invoked force majeure for its failure to deliver contractually agreed natural-gas shipments in recent weeks, according to European energy companies. It isn’t clear whether the notice—a legal declaration that exempts the company from fulfilling contractual obligations because of circumstances outside its control—covers a potential decision by Russia not to resume Nord Stream flows after the maintenance.

While some European officials have in recent days cast doubt on whether Nord Stream would come back online on Thursday, Mr. Putin’s comments helped fuel expectations the pipeline would restart. Separately, flows of gas through the pipeline spiked several times on Tuesday, which analysts say could be pressure tests ahead of the end of the maintenance.

Analysts at Goldman Sachs said they expected the pipeline to come back online Thursday at its pre-maintenance capacity of 40%.

A full stop “would remove flexibility from Russia’s supply decisions, once you’re at zero, there’s only one place to go: up,” the bank wrote in a note to clients on Tuesday, adding that such a scenario would also deprive Russia of gas revenues.

But Mr. Putin’s new warning that the flows could be curbed to 20% next week shows that Moscow will continue to use gas to squeeze Europe, even if it doesn’t completely cut it off, analysts say.

“It’s absolutely clear that Moscow is cutting supplies for geopolitical reasons—it wants to create a European gas crisis this winter to bring Europe to its knees to the point where it cuts support to Ukraine and forces Kyiv to concede to Moscow’s demands,” said Timothy Ash, senior strategist for BlueBay Asset Management LLP in London.

Mr. Putin also warned the West that its plan to cap the prices of Russian oil would rock global markets and push prices up.

“Now we are hearing all sorts of crazy ideas about limiting the volume of Russian oil and capping the Russian oil price,” Mr. Putin said. “Oil prices will skyrocket,” he added.

Write to Georgi Kantchev at georgi.kantchev@wsj.com

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Business

Saudi Aramco Posts Record Quarterly Profit on Surging Oil Prices

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DUBAI—Saudi Arabia’s national oil company said Sunday that its net income rose more than 80% to record highs in the first quarter of the year, a surge that shows how some of the world’s biggest state-owned energy producers are benefitting from a price boom accelerated by Russia’s invasion of Ukraine.

Saudi Arabian Oil Co., known as Aramco, said its quarterly profit swelled to $39.5 billion in the quarter, a period during which Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries, continued to rebuff U.S. requests to pump more oil to help tame surging crude prices, instead sticking by an agreement with Russia to only marginally increase output.

The agreement with Russia allows for production increases of around 400,000 barrels a day each month, but it has done little to stem the rise in oil prices, and the Saudis have pumped less than their share, according to the International Energy Agency.

Western countries including the U.S. have responded to Russia’s invasion of Ukraine by sanctioning exports of Russian oil, leading to fears of less oil in the market and higher prices. Some of Europe’s biggest economies are scrambling to find new sources of natural gas to replace Russian fuel on which they remain highly dependent.

The result has been a boon for traditional fossil-fuel producers in the Middle East. With oil prices rising as high as $139 a barrel in recent months and consistently above $100, Saudi Arabia has seen its fastest economic growth in a decade.

Last week, Saudi Aramco overtook

Apple Inc.

as the world’s most valuable company, with its market value rising to $2.4 trillion.

The Ukraine invasion and rising global oil prices have benefited Saudi Arabia. A gasoline station in Kenya.



Photo:

simon maina/Agence France-Presse/Getty Images

Soaring energy prices have also showered Western oil producers such as

Shell

PLC and

Exxon

Mobil Corp. with cash. But the companies are largely using the cash to reduce debt, accelerate share buybacks and otherwise reward investors, rather than increase exploration and other capital spending. Some have also suffered multibillion-dollar write-downs from their withdrawal from Russia.

For many members of OPEC and a coalition of Russia-led oil producers, known as OPEC+, high oil prices have been a windfall, providing a vital boost to their economies after years of slow growth due to relatively low prices, some OPEC delegates and analysts say.

Though the kingdom is trying to diversify away from oil, Aramco remains the engine of the Saudi economy. The company pumped an average of 10.2 million barrels a day between January and March, the most of any company in the world.

Crown Prince Mohammed bin Salman is seeking to restructure the Saudi economy by 2030.



Photo:

SAUDI PRESS AGENCY/REUTERS

Aramco is spending billions of dollars to up its oil production capacity from 12 million barrels a day to 13 million by 2027 and plans to increase its gas output by more than 50% by 2030.

Aramco is also looking to develop opportunities in refining and petrochemicals, known in the industry as the downstream sector. In recent months it bought a stake in a Polish refinery and said it would invest in a 300,000-barrel-a-day refining and petrochemicals complex in China.

Other Middle East energy producers are profiting from the energy-price boom.

Qatar, one of the world’s biggest natural-gas producers, is in talks to supply Germany, France and other European countries with long-term supplies of liquefied natural gas. In Iraq, one of the world’s biggest oil producers, officials say a windfall of more than $20 billion in oil revenues is putting the country on its strongest financial footing in years. Even Iran, where U.S. sanctions have crippled the oil industry, has ramped up exports in recent months.

In Saudi Arabia, gross domestic product in the first quarter expanded 9.6% from a year earlier, according to the kingdom’s statistics authority. London-based consulting firm Capital Economics estimates the Saudi economy will grow around 10% this year. That is far stronger than the 6.3% growth currently expected by most analysts, it said.

Saudi Arabia recorded a budget surplus equivalent to $15.3 billion for the first three months of 2022, the finance ministry said Sunday, bolstered by a 58% increase in oil revenues compared with the same period last year. It is the biggest surplus since the government began announcing budget figures on a quarterly basis six years ago.

Saudi Aramco’s first-quarter capital expenditure stood at $7.6 billion. The firm has previously set its full-year capital expenditure guidance at $40 billion to $50 billion, with further growth expected until around the middle of the decade.

Despite its free cash flow rising 68% to $30.6 billion, Aramco kept its quarterly dividend, a vital revenue source for the Saudi government, unchanged at $18.8 billion and approved the distribution of one bonus share for every 10 shares held in the company. That allowed the firm to reduce its gearing—a measure of debt as a percentage of equity—from 14% at the end of December to 8% at the end of March.

In March last year, Aramco’s gearing rose to 23%, above the company’s self-imposed cap of 15%, forcing Aramco to return to the debt market to meet its dividend commitment.

The Saudi government, with a stake of more than 94% in Aramco, has sought to monetize the country’s massive oil assets and use the proceeds to invest in industries outside of oil as part of Crown Prince

Mohammed bin Salman’s

plan to restructure the economy by 2030.

To help meet that goal, Prince Mohammed has tasked the Public Investment Fund to invest in companies and industries untethered to hydrocarbons. The government also transferred the $29.4 billion it raised from Aramco’s initial public offering on the Saudi stock exchange in 2019 to the PIF to deploy.

Earlier this year, the Saudi government said it transferred Aramco shares worth about $80 billion to the PIF as part of efforts to diversify the kingdom’s hydrocarbon-dependent economy.

—Ghassan Adnan and Stephen Kalin contributed to this article.

Write to Summer Said at summer.said@wsj.com

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Business

Warren Buffett Says Markets Have Become a ‘Gambling Parlor’

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OMAHA, Neb.—As recently as February,

Warren Buffett

lamented he wasn’t finding much out there that was worth buying. 

That is no longer the case.

After a yearslong deal drought, Mr. Buffett’s

Berkshire Hathaway Inc.

BRK.B -2.55%

is opening up the spending spigot again. It forged an $11.6 billion deal to buy insurer

Alleghany Corp.

Y -0.62%

, poised to be Berkshire’s biggest acquisition in six years. It bought millions of shares of

HP Inc.

HPQ -2.53%

and

Occidental Petroleum Corp.

OXY -3.40%

And it dramatically ramped up its stake in

Chevron Corp.

CVX -3.16%

, making the energy company one of Berkshire’s top four stock investments.

The big question: Why?

“It’s a gambling parlor,” Mr. Buffett said Saturday of the markets over the past few years. He added that he blamed the financial industry for motivating risky behavior among investors. While he finds speculative bets “obscene,” the pickup in volatility across the markets has had one good effect, he said: It has allowed Berkshire to find undervalued businesses to invest in again following a period of relative quiet. 

“We depend on mispriced businesses through a mechanism where we’re not responsible for the mispricing,” Mr. Buffett said.

Mr. Buffett, 91 years old, shared his thoughts on the state of the markets, Berkshire’s insurance business and recent investments at the company’s annual shareholder meeting in downtown Omaha.

Berkshire also held votes on shareholder proposals, with investors ultimately striking down measures that asked Berkshire to make its board chairman independent and called for the company to disclose climate risk across its businesses. 

Shareholders eager to score prime seats lined up for hours before the doors opened in the arena where Mr. Buffett; right-hand-man

Charlie Munger,

98; and Vice Chairmen

Greg Abel,

59, and

Ajit Jain,

70, took the stage. As Mr. Buffett entered, a lone audience member took the opportunity to send a message. “We love you,” the person shouted. 

Mr. Buffett appeared equally enthused to see the thousands of shareholders sitting before him. 

It was a lot better being able to be with everyone in person, he said.

Up until recently, Berkshire had largely been sitting on its cash pile. Its business thrived; a recovering economy and roaring stock market helped push net earnings to a record in 2021. But it didn’t announce any major deals, something that led many analysts and investors to wonder about its next moves. Berkshire ended the year with a near record amount of cash on hand. (After Berkshire’s buying spree, the size of the company’s war chest shrank to $106.26 billion at the end of the first quarter, from $146.72 billion three months earlier.)

Mr. Buffett’s feeling that there were no appealing investment opportunities for Berkshire quickly gave way to excitement in late February, he said Saturday, when he got a copy of Alleghany Chief Executive

Joseph Brandon’s

annual report.

The report piqued his interest. He decided to follow up with Mr. Brandon, flying to New York City to talk about a potential deal over dinner. 

Warren Buffett headed in to speak to shareholders at Berkshire Hathaway’s annual meeting in Omaha, Neb., on Saturday.



Photo:

SCOTT MORGAN/REUTERS

If the chief executive hadn’t reached out, “it wouldn’t have occurred to me to write to him and say, ‘Let’s get together,’” Mr. Buffett said.

Berkshire’s decision to build up a 14% stake in Occidental also came about with a report. Mr. Buffett said he had read an analyst note on the company, whose stock is still trading below its 2011 high, and decided the casino-like market conditions made it a good time to buy the stock.

Over the course of just two weeks, Berkshire scooped up millions of shares of the company. 

“I don’t think we ever had anything quite like we have now in terms of the volumes of pure gambling activity going on daily,” Mr. Munger said. “It’s not pretty.” 

But the amount of speculation in the markets has given Berkshire a chance to spot undervalued businesses, Mr. Munger said, allowing the company to put its $106 billion cash reserve to work.

“I think we’ve made more because of the crazy gambling,” Mr. Munger said.

Another business that caught Berkshire’s eye? Chevron. Berkshire’s stake in the company was worth $25.9 billion as of March 31, up from $4.5 billion at the end of 2021, according to the company’s filing. That makes Chevron one of Berkshire’s four biggest stockholdings, alongside

Apple,

American Express Co. and Bank of America Corp.

Neither Mr. Buffett nor Mr. Munger specifically addressed Berkshire’s decision to increase its Chevron stake.

But the two men offered a defense of the oil industry. It is a good thing for the U.S. to be producing more of its own oil, Mr. Buffett said. Mr. Munger went further, saying he could hardly think of a more useful industry. 

At the meeting, Mr. Buffett also revealed that Berkshire has increased its stake in

Activision Blizzard Inc.

The company now holds a 9.5% position in Activision, a merger-arbitrage bet from which Berkshire stands to profit if

Microsoft Corp.’s

proposal to acquire the videogame maker goes through.

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At the end of the day, Berkshire doesn’t try to make its investments based on what it believes the stock market will do when it opens each Monday, Mr. Buffett said.

“I can’t predict what [a] stock will do…We don’t know what the economy will do,” he said.

What Berkshire focuses on is doing what it can to keep generating returns for its shareholders, Mr. Buffett said. Berkshire produced 20% compounded annualized gains between 1965 and 2020, compared with the S&P 500, which returned 10% including dividends over the same period.

“The idea of losing permanently other people’s money…that’s just a future I don’t want to have,” Mr. Buffett said.

Write to Akane Otani at akane.otani@wsj.com

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World

Germany Drops Opposition to Embargo on Russian Oil

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BERLIN—Germany is now ready to stop buying Russian oil, clearing the way for a European Union ban on crude imports from Russia, government officials said.

Berlin had been one of the main opponents of sanctioning the EU’s oil-and-gas trade with Moscow.

However on Wednesday, German representatives to EU institutions lifted the country’s objection to a full Russian oil embargo provided Berlin was given sufficient time to secure alternative supplies, two officials said.

The German shift increases the likelihood that EU countries will agree on a phased-in embargo on Russian oil, with a decision possible as soon as next week, diplomats and officials say. However, how quickly the bloc ends its Russian oil purchases, and whether it also uses measures such as price caps or tariffs, is still being negotiated. The U.S. is pressing its European allies to avoid steps that could lead to a protracted increase in oil prices.

Europe’s debate on banning Russian oil has shifted decisively in recent days with Germany and some other countries taking practical steps to replace Russia with other suppliers. Some member states remain cautious about the economic impact of an oil embargo, including Hungary, Italy, Austria and Greece, diplomats say. All 27 EU governments must approve an oil ban.

The oil moves come as EU nations scramble to help member states Poland and Bulgaria make up for a natural gas shortfall after Russia stopped deliveries this week in reaction to what it said was the two countries’ refusal to pay for imports in rubles. The Kremlin demands EU buyers pay into special bank accounts where deposits would be converted from euros and dollars into rubles.

The EU pays state-controlled Russian firms around €1 billion, equivalent to $1.05 billion, a day for energy, according to estimates by Bruegel, a Brussels-based think tank. Critics have said that these funds are bankrolling Russian President

Vladimir Putin’s

regime and its war in Ukraine.

The consequences of harsh economic sanctions against Russia are already being felt across the globe. WSJ’s Greg Ip joins other experts to explain the significance of what has happened so far and how the conflict might transform the global economy. Photo Illustration: Alexander Hotz

On Thursday, Gazprom PJSC, Russia’s biggest gas producer, said profit soared in 2021 on the back of higher gas and oil prices.

Senior officials from EU member states discussed oil sanctions at length on Wednesday and the European Commission, the EU’s executive body, will hold further discussions with EU countries in coming days before presenting a proposal probably early next week, officials and diplomats say.

U.S. Treasury Secretary

Janet Yellen

said last week that a full European oil embargo on Russia would push up international oil prices, hurting a fragile global economy, and might “actually have very little negative impact on Russia,” which would benefit from higher oil prices on its remaining exports. She suggested Europe could keep buying oil while restricting Russia’s access to payments, echoing talk in Europe of making payments into an escrow account.

The EU imports between 3 million and 3.5 million barrels of oil a day from Russia, sending just under $400 million in payments daily, according to Bruegel. That amounts to some 27% of EU oil imports. Oil and gas revenues accounted for 45% of Russia’s federal budget in 2021, according to the International Energy Agency.

Many companies have been self-sanctioning, according to analysts and traders, avoiding trade in Russian oil over reputational concerns and the risk that the Western pressure campaign could soon encompass Moscow’s energy exports. That is already contributing to a sharp fall in Russian oil exports, according to the IEA.

EU officials designing the next sanctions proposals have to factor in that it will take some European oil refineries time to adapt to receive non-Russian crude. They also acknowledge that for countries such as landlocked Hungary, which receives its Russian oil through pipelines, adjusting to a Russian oil embargo will be complex.

The bloc is considering the option of combining a gradual phaseout of oil purchases with more immediate measures to reduce demand or cut payments to Moscow, such as a price cap or a tariff on oil imports. Another possibility is to phase out shipped oil purchases quickly and pipeline deliveries more slowly.

“There are all sorts of things that we’re running through,” said a senior EU official. “The aim is to hit the Russians as hard as possible while at the same time minimizing” the cost.

While Germany has swung behind the idea of phasing out Russian oil purchases, Berlin remains skeptical of price caps, tariffs and proposals to put Russia’s oil payments into escrow accounts.

German officials doubt that Mr. Putin would maintain oil deliveries if the EU unilaterally cut the price it pays, and they caution that Russia could easily sell its oil to other customers such as India and China instead of accepting a lower European price.

Berlin’s change of mind on oil came after it struck a deal with Poland that will enable Germany to import oil from global exporters via the Baltic Sea port of Gdansk, officials said Wednesday.

The Polish port is located close to the PCK oil refinery in Schwedt, Germany, which is controlled by the Russian oil giant

Rosneft

and receives crude via a Russian pipeline known as Druzhba, Russian for friendship.

The Gdansk port infrastructure, which is equipped to receive oil supertankers, is connected to the Russian pipeline with a separate link operated by Poland. This means oil imports to Gdansk could be immediately channeled through the pipeline to the Schwedt refinery, replacing Russian supplies, government officials said.

Oil imports to Gdansk, Poland, could be channeled to the Schwedt refinery, replacing Russian supplies.



Photo:

Michal Fludra/Zuma Press

The Schwedt refinery was the biggest obstacle to Germany accepting a ban on Russian oil imports because thousands of jobs in the region depend on it and there was no alternative supply to feed it until now, the officials said.

The Polish deal was necessary because the German port closest to the refinery, Rostock, doesn’t have the capacity to receive supertankers. In addition, Germany’s railways no longer operate oil wagons. The landmark deal was announced on Wednesday by German Economy Minister

Robert Habeck

during a visit to Poland.

Some 12% of Germany’s oil consumption relies on Russian imports, down from 35% before the war, Mr. Habeck said in a video statement posted on his ministry’s social media. He said Germany was now ready for the possibility that Rosneft would stop channeling oil, a scenario he said would no longer spell disaster for the German economy.

“Rosneft is a Russian state company and they have no interest in processing non-Russian oil,” Mr. Habeck said.

Should Rosneft refuse to process non-Russian oil imports, Germany could put the refinery under state management under laws protecting strategic assets. Berlin has already assumed stewardship of the main Russian gas-trading hub in Germany, a subsidiary of Russia’s state-controlled Gazprom.

Write to Bojan Pancevski at bojan.pancevski@wsj.com, Laurence Norman at laurence.norman@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com

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US

Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales

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Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.

The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.

China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of

Saudi Arabian Oil Co.

, known as Aramco.

Russia’s attack on Ukraine helped push the price of oil to over $100 a barrel for the first time since 2014. Here’s how rising oil costs could further boost inflation across the U.S. economy. Photo illustration: Todd Johnson

It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.

China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market. For China, using dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion.

China has stepped up its courtship of the Saudi kingdom. In recent years, China has helped Saudi Arabia build its own ballistic missiles, consulted on a nuclear program and begun investing in Crown Prince

Mohammed bin Salman’s

pet projects, such as Neom, a futuristic new city. Saudi Arabia has invited Chinese President

Xi Jinping

to visit later this year.

Saudi Foreign Minister Faisal bin Farhan met Chinese Foreign Minister Wang Yi in China in January.



Photo:

Anonymous/Associated Press

Meanwhile the Saudi relationship with the U.S. has deteriorated under President Biden, who said in the 2020 campaign that the kingdom should be a “pariah” for the killing of Saudi journalist Jamal Khashoggi in 2018. Prince Mohammed, who U.S. intelligence authorities say ordered Mr. Khashoggi’s killing, refused to sit in on a call between Mr. Biden and the Saudi ruler, King Salman, last month.

It also comes as the U.S. economic relationship with the Saudis is diminishing. The U.S. is now among the top oil producers in the world. It once imported 2 million barrels of Saudi crude a day in the early 1990s but those numbers have fallen to less than 500,000 barrels a day in December 2021, according to the U.S. Energy Information Administration.

By contrast, China’s oil imports have swelled over the last three decades, in line with its expanding economy. Saudi Arabia was China’s top crude supplier in 2021, selling at 1.76 million barrels a day, followed by Russia at 1.6 million barrels a day, according to data from China’s General Administration of Customs.

“The dynamics have dramatically changed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer and they are offering many lucrative incentives to the kingdom,” said a Saudi official familiar with the talks.

“China has been offering everything you could possibly imagine to the kingdom,” the official said.

More on Relations Between the U.S., Saudi Arabia and China

A senior U.S. official called the idea of the Saudis selling oil to China in yuan “highly volatile and aggressive” and “not very likely.” The official said the Saudis had floated the idea in the past when there was tension between Washington and Riyadh.

It is possible the Saudis could back off. Switching millions of barrels of oil trades from dollars to yuan every day could rattle the Saudi economy, which has a currency, the riyal, pegged to the dollar. Prince Mohammed’s aides have been warning him of unpredictable economic damage if he moves ahead with the plan hastily.

Doing more sales in yuan would more closely connect Saudi Arabia to China’s currency, which hasn’t caught on with international investors because of the tight controls Beijing keeps on it. Contracting oil sales in a less stable currency could also undermine the Saudi government’s fiscal outlook.

Some officials have cautioned Prince Mohammed that accepting payments for oil in yuan would pose risks to Saudi revenues tied in U.S. Treasury bonds abroad and the limited availability of the yuan outside China.

The impact on the Saudi economy would likely depend on the quantity of oil sales involved and the price of oil. Some economists said moving away from dollar-denominated oil sales would diversify the kingdom’s revenue base and could eventually lead it to repeg the riyal to a basket of currencies, similar to Kuwait’s dinar.

“If it is (done) now at a time of strong oil prices, it would not be seen negatively. It would be more seen as deepening ties with China,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

The Saudis still plan to do most oil transactions in dollars, the people familiar with their talks say. But the move could tempt other producers to price their Chinese exports in yuan as well. China’s other big sources of oil are Russia, Angola and Iraq.

The Saudi move could chip away at the supremacy of the U.S. dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit.

“The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as reserve currency,” said economist Gal Luft, co-director of the Washington-based Institute for the Analysis of Global Security who co-wrote a book about de-dollarization. “If that block is taken out of the wall, the wall will begin to collapse.”

Talks with China over pricing oil in yuan started before Prince Mohammed, the de facto leader of the kingdom, made his first official visit to China in 2016, people familiar with the matter said. The crown prince asked the kingdom’s then-energy minister

Khalid al-Falih

to study the proposal, the people said.

Mr. Falih instructed Aramco to prepare a memo that heavily focuses on the economic challenges of switching to the yuan pricing.

“He really did not think that was a good idea but he could not stop the talks as the ship had already sailed,” said another person familiar with the meetings.

Saudi officials in favor of the shift have argued the kingdom could use part of yuan revenues to pay Chinese contractors involved in mega projects domestically, which would help mitigate some of the risks associated with the capital controls over the currency. China could also offer incentives such as multibillion-dollar investments in the kingdom.

Another official familiar with the talks said yuan pricing could give the Saudis more influence with the Chinese and help convince Beijing to reduce support for Iran.

Ali Shihabi, who sits on the board of Neom and formerly ran a pro-Saudi think tank in Washington, said the kingdom can’t ignore China’s desire to pay for oil imports in its own currency, particularly after the U.S. and EU blocked the Russian central bank from selling foreign currencies in its reserves stockpile.

“Any doubts countries had about the need to diversify into Yuan and other currencies/geographies would have ended with that huge step,” Mr. Shihabi tweeted in response to this article.

—David S. Cloud contributed to this article.

Write to Summer Said at summer.said@wsj.com and Stephen Kalin at stephen.kalin@wsj.com

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