Otgazniki – Newspaper Kommersant No. 65 (7510) of 04/14/2023

A year after the breakdown of half a century of gas cooperation between Russia and the EU, Russian pipeline gas has almost been squeezed out of the European energy mix. Although Europe has not found a long-term replacement for it, such attempts are not being taken seriously. The Europeans are determined to cut consumption very quickly, despite huge current costs and future economic losses. At the current pace, Gazprom’s supplies to the EU may almost cease by 2025. “Kommersant” figured out whether Russia has a chance to maintain at least the current volume of exports and what prevents this.

Over the past year, the Russian Federation has turned from the main source of gas for Europe into a third-rate supplier and is located between Algeria and Azerbaijan in terms of pipeline exports. In the first quarter of 2023, Gazprom provided 7.5% of the total gas imports to the EU, while in the first quarter of 2022 its share was 28% (about 260 million cubic meters per day), and the year before – about 40%. In 2022, Gazprom’s exports to the EU countries decreased by about 80 billion cubic meters, to 62 billion cubic meters, and in 2023, based on the current volume of deliveries, it may fall another 2.5 times – to 23-25 ​​billion cubic meters.

On the other hand, Europe paid about $270 billion (according to the IEA) for phasing out Russian gas in 2022 due to higher prices. In addition, the renunciation was incomplete and not entirely sustainable: of the 80 billion cubic meters of Russian volumes dropped in 2022, only 55 billion cubic meters were replaced by spot LNG, and the rest by reduced consumption.

European companies have so far signed only one long-term LNG contract with immediate start of deliveries (RWE and ADNOC), and in total since the beginning of the Ukrainian crisis, only ten contracts have been concluded with a total volume of 13 million tons per year (17 billion cubic meters), of which only 8 million tons are destined directly for Europe. The absence of long-term contracts means that potentially European companies could return to purchasing this or that volume of Russian gas, especially since Gazprom has not yet found another market for it.

Remains of former luxury

Before the start of the conflict in Ukraine, Gazprom’s contract base in Europe was about 200 billion cubic meters per year, of which at least 130 billion cubic meters were guaranteed by take-or-pay obligations. After the outbreak of hostilities, and especially after the transfer of payment for Russian gas into rubles, many European companies refused to supply.

But the only consumer that applied to arbitration to terminate a long-term contract with Gazprom was the Finnish Gasum. About a dozen other companies, including Uniper, RWE, Eni, Engie, CZE, filed claims for damages from short deliveries from Gazprom, but did not try to break the agreements. As a result, de jure, the vast majority of Gazprom’s long-term contracts in the EU remain in force, but de facto are not executed.

As of February, Hungary (14 million cubic meters per day), Italy (13 million), Slovakia (6 million), Austria (4 million) and Greece (1.5 million) received Russian gas in the EU. The total volume of these functioning contracts is about 45 billion cubic meters per year (including 32 billion cubic meters – the minimum take-or-pay level), but the actual withdrawal under them is now about three times less than the contract.

Most of the agreements expire in 2027-2031, with the Italian Eni it is calculated until 2035. It remains unclear to what extent European companies intend to comply with take-or-pay at least under “live” contracts. So, on March 27, the head of the Austrian OMV, Alfred Stern, commenting on the continuation of purchases from Gazprom, said: “Contracts that require us to buy.” On the other hand, Eni CEO Claudio Descalzi has repeatedly stated in the past and this year that the company intends to stop taking gas from its long-term contract with Gazprom by the end of 2024.

What’s left of the pipe

The dates set by Claudio Descalzi are not accidental, since it is quite possible that by 2025 Gazprom will not be able to physically supply gas to Europe, even in the current small volumes. Despite the dramatic drop in exports, the company lacks pipeline capacity in the direction of Europe after the collapse of the Nord Stream.

The only completely reliable route – the second line of the Turkish Stream (45 million cubic meters per day), through which Hungary, Serbia, Greece, North Macedonia and a number of non-EU Balkan countries receive gas – is almost completely loaded. Of the four lines of Nord Stream, one survived – line B of Nord Stream 2, but the resumption of pumping through it depends on the decision of the German authorities, which itself no longer receives Russian gas. The Yamal-Europe gas pipeline through Poland is quite operational, but Warsaw has imposed sanctions against Gazprom, and Russia has imposed sanctions on the pipeline operator Europolgaz, which excludes the use of this pipeline in the current situation.

The Ukrainian route remains, which has now become the main one for Gazprom when delivering to Europe. The company usually supplies about 40 million cubic meters per day through Ukraine, it is technically possible to at least double the volume.

However, in the medium term, this does not solve the problem: in addition to the fact that the route is a priori unreliable against the background of the military conflict, the transit contract signed in 2019 expires at the end of 2024. A scenario in which the parties would agree to extend it now looks absolutely fantastic. Without transit through Ukraine, Gazprom will have only one line of the Turkish Stream, which automatically cuts off supplies to Slovakia, Austria and Italy.

In theory, a Turkish gas hub, which Vladimir Putin announced his intention to participate in last fall, could become a partial solution. Neither Gazprom nor Russian officials have since clarified what exactly is meant and how this hub will help Russian gas reach Europe. According to a number of Kommersant’s interlocutors in the industry, we can talk about the supply of gas from the Russian Federation through the existing infrastructure to Azerbaijan and, possibly, to Iran (through a swap with Turkmenistan), which will help these countries increase its exports to Turkey and the Balkans.

The countries of South-Eastern Europe are showing great interest in gas from Azerbaijan and the construction of the necessary infrastructure, and the memorandum signed in 2022 between Brussels and Baku provides for an increase in supplies by 10 billion cubic meters by 2027. Kommersant’s sources believe that Azerbaijan alone will be unable to provide such a volume for export within the specified timeframe, given the growth in domestic consumption.

Even if the option of re-exporting Russian gas through Azerbaijan is implemented, we are talking about small volumes – no more than 4-6 billion cubic meters per year, that is, half as much as it goes through Ukraine even now. Since Gazprom in the current situation is unlikely to make any significant investments for supplies to the European market, the prospects for growth in exports to Europe after 2024 can only be associated with the unblocking of the use of the Nord Stream 2 line and the Yamal-Europe gas pipeline, which, obviously, will require political agreements.

dying market

But there are doubts that, in principle, there is a place for Gazprom’s gas, and indeed any other gas, on the European market. In 2022, the EU imported, according to Brugel, about 355 billion cubic meters of gas, even slightly more than in 2021, due to the need to fill underground storage facilities. At the same time, according to the Fit for 55 climate plan adopted by the EU countries back in 2021, by 2030 imports should amount to only 236 billion cubic meters. This means a decrease of one third, or almost 120 billion cubic meters, which corresponds to 85% of Gazprom’s pipeline gas supplies in 2021.

Since then, more ambitious goals have appeared – for example, approved in the spring of 2022, after the start of the Ukrainian conflict, the REPowerEU plan assumes a reduction in imports by 52% by 2030 if all initiatives to build renewable energy sources and reduce gas consumption in industry by 60%. Individual countries have particularly aggressive strategies: Germany, Europe’s largest industrial power, is set to phase out all gas use by 2043.

How realistic such goals are remains a question, but in any case, it is unlikely that EU energy policy will change dramatically (see interview). Under such circumstances, if there are indeed 15-20 years left for gas in Europe, the strategies of market players will inevitably be short-term.

European utilities, which are forced to rely on policy-approved gas consumption targets, are unwilling to enter into long-term contracts and would rather take on price risk by buying spot LNG now at extremely high prices than underwriting volumes that are thought to be worth ten years from now. will not be needed. Such behavior dictates similar strategies to suppliers who are interested in selling gas to Europe at the highest possible price while Europe is still buying it.

From an economic point of view, it would be expedient for Gazprom to increase supplies to Europe right now, taking advantage of the remaining opportunities: the contract base that has not yet completely collapsed and still high prices. The main problem is that the only way to quickly and significantly increase exports without additional investment is to increase transit through Ukraine.

Yuri Barsukov