Experts estimate Moscow’s losses from the severance of energy ties with Europe

Alexey Miller’s recent statement looks no less resonant. According to the head of Gazprom, in the very near future pipeline exports to China may reach the level that we had in relation to Europe. But how? After all, in the eastern direction there is still no corresponding infrastructure even remotely comparable to the Russia-Europe energy bridge, built back in the Soviet era of “developed socialism”.

“Let’s do the math,” suggests Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation. — In 2021, before the start of the North Atlantic Treaty Organization, Gazprom supplied no more than 10 billion cubic meters of gas to China, while about 160 billion to Europe. Today, the Power of Siberia gas pipeline delivers approximately 15–16 billion cubic meters to China at the estimated capacity of 38 billion, which is planned to be reached only in 2025. In addition, it is planned to build another gas pipeline through which up to 10 billion cubic meters of gas will flow from Sakhalin Island to the northern regions of the PRC annually. If the Power of Siberia-2 project is implemented, and this may not happen before 2028, another 50 billion will be added.”

Accordingly, summing up, we get no more than 100 billion, says Yushkov. And even if we take into account the LNG supplied to China from the Sakhalin-2 and Yamal LNG projects, it will still not be possible to reach the European figure.

Technical dead end

As for the idea voiced by the head of the Ministry of Energy Nikolai Shulginov, it, alas, has no basis in reality. The numbers clearly demonstrate this. At the end of the first half of 2023, Gazprom pumped only 12.1 billion cubic meters of pipeline gas to EU countries, according to Reuters calculations. Even compared to the volumes in 2022, the lowest since the last years of the USSR, supply volumes to the once largest and most profitable market for Russia have collapsed almost threefold. By the end of the year they will amount to a maximum of 23–25 billion cubic meters. And this is not at all connected with political will: states do not regulate the issue of supplies – neither national governments, nor official Brussels. The root of the problem is different: there is no technical or physical ability to pump raw materials in the same way.

Both lines of the Nord Stream 1 gas pipeline with a capacity of 55 billion cubic meters in the Baltic Sea have not been operating since sabotage in September 2022. One of the two lines of the Nord Stream 2, which was built but never put into operation, was also disabled as a result of an explosion. The Yamal-Europe gas pipeline with a capacity of almost 33 billion cubic meters is not functioning: after Warsaw nationalized Gazprom’s share in the operator of the Polish section of the company EuRoPol (GAZ), Moscow responded by imposing sanctions against the company. Finally, Kiev closed one of its two transit routes to Europe – through the Sokhranovka gas distribution station (GIS) in the Lugansk region (due to hostilities), without touching the section passing through the Sudzha GIS on the border between the Sumy region of Ukraine and Kursk region of Russia. It is capable of pumping up to 15 billion cubic meters of gas, but in reality this does not happen. Gazprom also still has one of the two lines of the Turkish Stream at its disposal, but it is not always loaded at its full capacity of 15.75 billion cubic meters. The result is somewhere around 20–25 billion.

Meanwhile, the collapse of pipeline supplies from Russia is forcing Europe to look for ever new sources of raw materials. Moreover, wherever necessary, purchases have been expanded, in particular, in the USA, Qatar, Algeria, and Azerbaijan. The largest EU economy, Germany, intends to take the missing volumes as much as Nigeria, which exported 23 billion cubic meters to the European continent in 2021 (while Gazprom exported about 50 billion to Germany alone), and in 2022 – just over 20 billion However, increasing supplies is hampered by a tangle of problems: local factories are constantly underutilized due to the unstable situation in the region, resource extraction is complicated by theft and vandalism on gas pipelines. Nigeria has the largest gas reserves in Africa, but poor infrastructure and production technology.

Brussels and Berlin placed particular hopes on the Trans-Saharan gas pipeline with a capacity of 30 billion cubic meters, through which gas from Nigeria would flow to Europe through Niger and Algeria. The agreement on its construction was signed in 2009, and after almost thirteen years of freezing, the project was revived in July 2022 against the backdrop of the energy crisis in the EU. However, the military coup in Niger this summer virtually eliminated the chances of creating a gas pipeline, which would have cost the parties $13 billion. In any case, the costs and labor costs would be incomparable with the final profitability. However, there is an alternative option – the construction of a gas pipeline along the Nigeria-Morocco route along the coast (Trans-African Pipeline). But, firstly, the agreement is far from being signed, and secondly, the project price is twice as much – $25 billion.

Buy at exorbitant prices

“Large-scale pipeline supplies from Russia played the role of a stabilizing factor for the European gas market,” says Igor Yushkov. — On the continent they knew well that under existing contracts it was possible to order even more raw materials than were originally specified there. No matter how much you order, everything will be sent to you according to the previous price conditions. Moreover, there were no problems either with pipeline capacities or with production ones. Today this guaranteeing supplier for Europe is lost. And when it doesn’t have enough gas to satisfy some of its needs, it is forced to find the necessary volumes on the international market and buy from competitors at exorbitant prices.”

At the same time, the European Union has set a course to reduce dependence on fossil fuels and achieve carbon neutrality by 2050. But this is a long-term strategy, and for now the situation is different. Let’s say that now the demand for gas on the continent is at a reduced level. In September, when the temperature factor does not yet affect consumption, it decreased by 7% (year-on-year) and was more than 20% below the average for 2017-2021. European industry has not yet recovered from the degradation of demand of the past two years caused by abnormally high prices.

“We see a mixed picture on the EU gas market,” says Yushkov. — Since the heating season has not yet begun, current consumption is very moderate, and underground gas storage facilities (UGS) are filled to capacity. At the same time, prices are still quite high: in October they rose from $400 to $600 per thousand cubic meters, then adjusted in the range of $500–600. And these rather strong price fluctuations have become a kind of new normal for Europe, which depends on a number of factors, including the slightest weather changes. For example, as soon as the wind subsides, production at wind power plants drops, and accordingly, the demand for gas increases, along with the price. It can change by several hundred dollars per thousand cubic meters within a few days. And if frost hits, daily consumption will require even more expensive raw materials. Plus, the situation for the Old World is complicated by China: having lifted coronavirus restrictions this year, Beijing is actively increasing the volume of LNG purchases, competing more and more fiercely with the European Union for it.”

The greatest influence on prices, as always, is the balance of supply and demand, notes Freedom Finance Global analyst Vladimir Chernov. In the case of natural gas, demand for it increases during the heating season, but since underground storage facilities in the EU are now almost 100% full, a cold snap on the continent is unlikely to seriously affect its price. Geopolitics traditionally plays a role here, in particular, the sharp increase in tensions in the Middle East, but so far it does not seem that gas supplies to world markets could be interrupted because of this.

Substitution difficulties

It is clear that against the backdrop of everything that has happened with the export of Russian pipeline gas over the past year and a half, the current situation of Gazprom (read – the state) cannot be called cloudless. First of all, in terms of operational results. Not only did the company lose key routes and huge volumes of supplies to non-CIS countries, but in the second half of 2022 it suffered a net loss of 1.3 trillion rubles (it had to spend half of all cash reserves in its accounts to cover it), but today its products sold for an average of $445 per thousand cubic meters compared to $830 last year. It also cannot compensate for the growing fiscal burden: now the energy giant is forced to pay an additional mineral extraction tax in the amount of 600 billion rubles per year during 2023–2025. The logic of this tax was to withdraw excess income due to abnormally high gas prices. However, since they corrected significantly over the year, Gazprom stopped receiving excess profits.

Simply put, not much remains of the former scale of the once thriving business. It is impossible to quickly recover from such powerful shocks by reorienting to new markets, to build in the East in a short period of time what was created over decades in the West. Yes, the company has a number of promising areas and projects designed for 7–9 years of implementation. However, it is unclear which of them will ultimately be implemented and how much investment this will require. As for the hypothetical scenario in which Gazprom would return to the European gas market in the foreseeable future with the previous 170–180 billion cubic meters per year, today it looks like an absolute utopia. When almost all the bridges have been burned – both physical (Nord Streams) and geopolitical – there is no point in seriously discussing such a possibility.

“Of course, it is possible to share Mr. Miller’s optimism from a historical perspective, but there are nuances,” says Nikita Maslennikov, a leading expert at the Center for Political Technologies. “Everything will depend on the fate of the Power of Siberia-2 project, but so far a commercial decision has not even been made on it. It is unclear how feasible it will be and in what time frame. Yes, there is a fairly rich range of different ideas, for example, supplying Russian gas to Pakistan, Mongolia, and India. However, these are precisely the ideas whose feasibility raises a lot of questions. It is clear that it is not yet possible to replace the previous European volumes of Russian pipeline gas through exports to China.”

In general, we should not be uncontrollably happy that we have replaced some buyers with others: Western (represented by consumers in the EU countries) – eastern (represented by the PRC). After all, this is only a rearrangement of terms, which in no way changes the raw materials orientation of our economy, does not reduce dependence on certain sales markets that dictate their price conditions to Russia. As Beijing is doing harshly now, seeking ever new discounts on fuel imported from Russia. As for Europe, there are many things preventing us from returning there with the previous volumes of pipeline supplies. First, we need to restore logistics capacity, but the task depends on a political decision. As Maslennikov reminds, both Nord Streams are not functioning, and the old routes (in particular, the Ukrainian transit section) are at technological risk and require modernization.

The result of this gas solitaire today is as follows. Firstly, from the actual severance of ties on the European pipeline gas market (with the exception of continued supplies to Hungary, Serbia and Slovakia), both sides – the European Union and Russia – lost big. Secondly, in the near future Moscow will not be able to fully compensate for these losses through sales to China and any other partners in the eastern direction. Both we and our partners – past, present and future – will have to live with this reality.

Table

Volumes of Russian pipeline gas supplies to Europe (by year, in billion cubic meters)

2023* 25

2022 67

2021 160

2020 175

2019 192.5

2018 200.8

2017 155.9

2016 153

* forecast

Sources: Gazprom, International Energy Agency