Issue price – Newspaper Kommersant No. 65 (7510) dated 04/14/2023
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The results of the winter campaign in the gas war between Russia and the EU can be described as sobering for both sides. Expectations that Europe would freeze did not materialize, as did expectations that the loss of export earnings to the EU would lead to the collapse of the Russian gas industry.
Europe, as a result of austerity measures, has managed to reduce gas consumption and replace part of Russian volumes with purchases from other suppliers. The warm winter of 2022/23 and record gas reserves in European UGS facilities at the end of the heating season mean that Europeans will be able to avoid physical gas shortages next winter. This “success”, however, came at a heavy price. Gas prices in Europe broke all records in 2022 and even now, in April 2023, they continue to be almost twice as high as before the crisis. The disappearance of cheap energy supplies from Russia threatens the EU industry with loss of competitiveness and loss of jobs.
For Russia, the loss of the European market in 2022 also did not lead to immediate negative consequences. Supply volumes have fallen sharply, but revenues from pipeline gas sales for export in 2022 reached almost $100 billion, almost double the level of 2021.
This “success”, however, is also temporary. Gas production and exports fell sharply in 2022 and continued to decline in the first quarter of 2023. The compensating price effect is on the decline, the Russian Federation has already faced a drop in budget revenues from the gas industry.
As a result, short-term “successes” may soon turn into serious problems for each side. The situation is complicated by the fact that geopolitical considerations prevail over economic ones, and a full-scale restoration of gas trade between Russia and Europe in the pre-crisis format seems completely impossible.
The point of no return has been passed, trust is completely destroyed. New investments in production and infrastructure facilities aimed exclusively at the European market are now excluded for Russia. One can only discuss how civilized the divorce between former partners will be and whether some pragmatic compromises are possible over the next few years.
The Europeans expect that as a result of the construction of new LNG capacities by 2027, there will be a supply surplus in the global gas market, which will lead to a long cycle of low prices. But until then, prices will remain high, and Europe, as a closing market, will have to pay a premium to LNG suppliers. Some increase in supplies from Russia would help Europe ease the passage of the next few winters, but is not seen as necessary after 2027.
Russia, in turn, will face a reduction in gas export revenues over the coming years. The growth in deliveries to China under current contracts is not able to fully compensate for the loss of the European market. Russia hopes to conclude a new giant agreement with China on the supply of up to 50 billion cubic meters of gas per year through the Power of Siberia-2, but even in the most optimistic scenario, they will begin only in the late 2020s.
Thus, for the Russian Federation, a certain increase in supplies to the EU in the next three to four years, based on the existing infrastructure, could become a rational solution during the transition period. Moreover, it would help to avoid undue pressure from China in the negotiations for a new “contract of the century.”
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