Europe is changing the rules of the game in the gas market: Russia will win or lose

Price swing

One of the intrigues of the past winter season was how Europe would survive the winter without Russian gas and how much the exchange price for “blue fuel” would change in this case. The Europeans had cause for excitement. The anomalous change in natural gas prices in Europe began in April 2021. Prior to this, the cost of “blue fuel” fluctuated around $230 per thousand cubic meters and nothing foreshadowed any “historical” changes in this market. However, in a matter of months, quotes jumped eight times: by October, futures for the supply of raw materials in the main continental hub TTF in the Netherlands came close to $2,000.

Then, as a result of the introduction of restrictions related to the coronavirus pandemic, the demand for energy resources decreased significantly: gas consumption in the countries of the Old World dropped noticeably. Only Europe did not have its own capacities to patch up holes in the fuel balance at that time. During the crisis, most commodity companies managed to significantly reduce hydrocarbon production. Europe’s own sources of gas, including the UK, have been reduced by about a quarter, leading to the deepest gap between supply and demand in the market.

The owners of the main raw materials took advantage of the situation and did not miss the opportunity to warm their hands on the troubles of Europe. For example, Qatar, which is gradually gaining the pedestal of the world’s main supplier of liquefied gas, increased the shipment of raw materials abroad by 20%, and was able to hold a football world championship with the proceeds. But most of all, American mining companies were able to cash in on European fuel problems, which increased the sale of energy resources to overseas partners by at least twice. In the first three quarters of 2021, the United States exported LNG for almost $43 billion. For comparison, Gazprom then earned a little over $33 billion.

In the first half of 2022, the exchange price of “blue fuel” continued to break records of price increase. In August, the price of 1,000 cubic meters exceeded $3,500, which allowed analysts to assume that gas prices would soon rise to $5,000. European countries, which had already begun to prepare for the abandonment of Russian hydrocarbons, urgently filled their underground storage facilities, generously paying for any offers of market speculators.

According to Western media, European countries spent 3.3 times more on gas purchases last year than a year earlier, when they used cheap Russian gas, which has now fallen out of favor with them. At the same time, international industry experts still assure that the “cream” from sky-high gas prices was removed not by manufacturing enterprises that could invest the funds received in the development of new storerooms of underground minerals, but by exchange traders who momentarily buy and sell “paper » contracts for the supply of energy resources.

By the winter of 2022, the panic on commodity trading floors subsided. Gas storage facilities in Europe were bursting with accumulated cubic meters, and a warm winter allowed the countries of the Old World to go through the upcoming heating season painlessly. Quotes of “blue fuel” first fell to $850, and in March 2023 they fell below $450 per thousand “cubes”.

Exchange against all

Europe is well aware that a more or less successful winter season does not cancel the fundamental problems of the continent with gas supplies in the absence of Russian raw materials. Therefore, they decided to reshape their entire fuel market in a new way. The EU countries have approved the limit level of gas prices, above which “blue fuel” will not be able to be traded on the stock exchanges and negotiated in private transactions of the union members. Moreover, the cost “ceiling” is set not only against Russia, but also in relation to any, even the most attractive to the West, suppliers – the same Qatar, for example. Naturally, the producing states did not like this: Doha responded with a tough ultimatum to the introduction of artificially generated quotations, declaring that it would refuse exports on the conditions offered by Europe. According to the Minister of Energy of the Middle East Emirate Saad Al-Kaabi, artificial interference in the free energy market will violate the rules of competition and jeopardize investment in the planet’s raw materials industry.

Meanwhile, the execution of the new mechanism runs the risk of being a rather complicated process. Its main meaning is as follows: if the cost of a thousand cubic meters exceeds 180 euros per MW per hour (about $ 2,000 per thousand cubic meters) and is fixed at this level for some time, then the auction may be interrupted in order to prevent speculators from earning beyond measure.

In addition, the EU leaders are going to rid the Old World raw materials market from the dominance of large energy suppliers and provide an opportunity for all buyers to conclude deals on the purchase or sale of hydrocarbons that are optimal in price terms. Already this spring, the European Union is going to announce a special collective tender for the supply of gas. Potential exporters of hydrocarbons are American, African and Middle Eastern companies, contracts with which Brussels plans to conclude no later than June. The main feature of the project will be the possibility of joint acquisition of energy resources by European countries. When creating such a “cartel of buyers”, when combining financial and logistical resources, it will be much easier for its members to purchase large lots of raw materials, in order to then divide them in proportion to the share of each in the transaction. According to the plan, if the “cartel of buyers” is dissatisfied with the cost of “blue fuel”, it can stop trading until the moment of price stabilization. At the same time, the issue of limiting off-exchange transactions, during which producers and buyers enter into direct agreements for the supply of energy resources, remains open.

So far, one can only guess about the effectiveness of the created trading platform. “A cartel of buyers will not allow balancing the European energy market, but will only lead to a conflict of interests among the organization’s members who insist on a low price of raw materials, and sellers who will not benefit from artificially adjusted quotes,” said Natalya Milchakova, Leading Analyst at Freedom Finance Global. – The EU is trying to achieve price reductions by increasing the number of buyers who will simultaneously demand certain preferences from the miners. Will not work”.

According to the expert, if a single exchange is created, different EU countries will actually unite into a single client dependent on several suppliers. It is possible to agree with one exporter on affordable quotations and long-term supply of energy carriers, but other suppliers can rearrange their contracts for other regions where it will be more profitable for them to sell hydrocarbons. “As a result, the EU will not be able to significantly reduce energy costs. When the number of sellers of affordable fuel decreases, and their number will objectively become less due to Russia’s withdrawal, then a gas shortage, no matter what cartels, cannot be avoided, ”Milchakova is sure.

Meanwhile, Saad al-Kaabi believes that soon Europe will face an aggravation of the energy crisis due to the depletion of existing gas reserves. True, according to him, this winter, thanks to the filled storage facilities, “everything will be in order.” The future replenishment of their fuel resources may become a headache for the countries of the continent. “Perhaps until 2025 the energy issue (for the EU – “MK”) will be more than problematic, ”the Financial Times quotes the minister as saying.

Stock pocket pulls

Well, how, against the background of these global changes, does Russian gas, or rather, our export of “blue fuel” feel on the European energy market? In 2022, Gazprom’s supplies to key foreign markets for the holding fell by 46%, to 101 billion cubic meters, which was the lowest figure in the company’s history. Almost all of the decline was in the EU countries, deliveries to which were reduced by 2.5 times. As a result, the net profit of the monopoly decreased by more than 72% to 747 billion rubles. In turn, gas supplies to China via the Power of Siberia export pipeline, as Deputy Prime Minister Alexander Novak said, over the same period increased 1.5 times to a record value of 15.5 billion cubic meters. Such a breakthrough should already signal to our European opponents that Russia is capable of coping with the challenges of the West.

Aleksey Grivach, deputy general director of the National Energy Security Fund, believes that for the domestic fuel sector, an attempt by the West to set a price “ceiling” for gas will not be critical. “Russian gas is sold mainly through pipelines and in accordance with long-term contracts,” the expert explains. – The final cost of the contracts is determined by a special formula that takes into account not only the spot prices of “blue fuel”, but also oil quotes. At the initial stages, when Europe tries to apply the developed mechanism in a hurry, it is possible that there will be problems with deliveries under existing agreements, since their pricing is tied to hubs, including the Dutch TTF.”

Since the structure of Russia’s oil and gas revenues is dominated by revenues from the export of “black gold” rather than “blue fuel”, then our losses in the western direction of the gas market, at least this year, will not have too much negative impact on the state budget. “Nevertheless, in the next two or three years, Gazprom, with the help of the state, will have to work out a detailed plan for expanding the geography of energy supplies,” Milchakova believes. — One gas pipeline from Russia to the Celestial Empire, the Power of Siberia, already exists and shows good results. If now its throughput is about 20-22 billion, then by 2025 it promises to increase to 38 billion cubic meters. An additional pipeline through Kazakhstan is being designed. In India, most likely, over time, domestic producers will arrange the shipment of LNG.”

By the way, in the foreseeable future, even European customers will be able to purchase Russian gas in larger volumes than at present. Bypassing European sanctions may allow the launch of the Turkish trade hub, after transportation through which the “citizenship” and “toxicity” of raw materials will be almost impossible to determine. True, there is a suspicion that after the large-scale tragic events associated with the earthquake in Turkey, this project will be postponed for some time.

As Vladimir Putin stated, in the course of the latest talks, Russia and China coordinated the main parameters for the construction of the Power of Siberia-2 gas pipeline. According to Alexander Novak, Gazprom has been instructed to work out in detail the project for creating this route. “The faster, the more efficient and better,” the Deputy Prime Minister noted, adding that one new pipe to the Celestial Empire would completely replace the destroyed Nord Stream.

However, deliveries to China and India may run into the demand of local buyers for a discount provided for in long-term contracts. In any case, the expansion of oil exports to the Asia-Pacific region was accompanied by significant discounts, reaching up to 20-40% of the barrel’s market quotations.

Information is already appearing that Gazprom’s exports to the Celestial Empire are carried out at prices half that of European quotations for “blue fuel”. It is quite natural that at first Moscow will have to provide such preferences to Beijing in order to sell the produced cubic meters.

Dynamics of average gas prices in Europe (per thousand cubic meters):

April 2021 $250

July 2021 $500

October 2021 $2000

January 2022 $1100

May 2022 $950

September 2022 $1700

December 2022 $845

January 2023 $785

March 2023 $450

According to the Dutch trade hub TTF.