PETROANALYSIS || ARTICLE
European energy security: Russian gas, a double-edged sword
“I want to assure you that Russia has always been and will always remain the most reliable supplier.” Vladimir Putin
Russian President Vladimir Putin estimates 2018 gas deliveries to Europe to be at 200 billion cubic meters:
“This year, we will have sold 200 billion [cubic meters of gas] to Europe,” Putin said at a joint press conference after talks with Austrian Chancellor Sebastian Kurz, noting that European countries will inevitably consume Russian gas because “other options are more costly and will reduce the overall competitiveness of European economy.”
Putin concluded that both Russia and Europe are interested in implementing the Nord Stream 2 gas pipeline project, asking the question whether Europe would buy gas which was 30% more expensive, including from the United States. He considered that this would not be a smart move and would reduce Europe’s competitiveness in the world. (1)
Russian gas exports to Europe rose to unprecedented highs in 2016 and 2017. According to Gazprom: 192.2 billion cubic metres (bcm) of gas were exported to Europe and Turkey in 2017, compared to 178.3 bcm in 2016 and 158.6 in 2015.This trend seems to be continuing in 2018, as Russian gas exports to the EU reached a new summertime record.
This rise in Russian gas supplies to Europe is due to commercial and contextual factors. The economic recovery in Europe, decreasing gas production in the EU, lower Russian gas prices and the limited availability of non-Russian liquefied natural gas (LNG) in the European market were among the main commercial reasons. Cold winter temperatures and increased coal to gas switching in some European countries also boosted gas demand.
At the same time, the EU-Russia gas relationship has been rendered more predictable by the resolution of long-standing commercial disputes, most notably the European Commission’s antitrust investigation concerning Gazprom, and Russia’s complaint at the World Trade Organisation (WTO) against some key EU market regulations (the third energy package). Moreover, Russia’s main import partners in Western Europe seem happy to continue and even increase their energy purchases from Russia.
Nevertheless, important challenges remain for the EU-Russia gas relationship. The Nord Stream 2 project has ignited heated debates within the EU, where some East-Central member states staunchly oppose the project. The United States has intervened in the debate too by threatening to sanction European companies that are involved in the project and advocating its prospective LNG exports as an alternative.
Moreover, uncertainty persists concerning the future of gas transit in Ukraine after the expiry of the current contract between Moscow and Kiev in December 2019.
Europe’s growing demand for external gas supplies has been satisfied primarily by Russian gas. Following pressure from the European Commission and its customers, Gazprom has partly renegotiated the terms of its supply contracts by adopting market-based pricing in place of oil-linked prices. Together with the rouble’s weakness (which reduces the domestic cost base for Gazprom in US dollar terms), this has made Russian gas more competitive.
The availability of sufficient reserves and spare infrastructural capacity have also played an important role. While Gazprom was able to sustain increased supplies of gas to the EU, other exporters such as Algeria, which is the third largest external supplier of gas to the EU after Russia and Norway, saw a 14% decline in pipeline exports in 2017.
Not only did Gazprom use the Nord Stream and Yamal-Europe (via Poland/Belarus) pipelines at near full capacity, it also increased the gas it exported via Ukraine by 13.7%, reaching a total volume of 93.5 bcm in 2017, the highest figure since 2011.
Nord Stream 2 is the new Gazprom-led infrastructural project that has aroused more controversy in the EU. With a capacity of 55 bcm/year, it will carry gas from the Russian Baltic Sea coast to Germany via an offshore route running parallel to the already existing Nord Stream pipeline. Following its completion, the total capacity of the Nord Stream route will rise to 110 bcm/year, making it the main export corridor for Russian gas to Europe. (2)
On this, the Austrian Chancellor Sebastian Kurz said:
“We agree that Europe is especially interested in cheap and stable gas supply, and such need exists if we want to ensure energy security. We think that in order to guarantee energy security, we need several energy sources.” (3)
Nevertheless, preserving Ukraine’s transit role in the EU-Russia relations is arguably the most politically pressing issue for the EU, in the light of new infrastructural projects. Ukraine has earned $2-3 billion a year from transit revenues, which are important to its economy. The construction of alternative pipelines could deprive Ukraine of this role, weakening it both financially and strategically vis-à-vis Russia. The main question is whether Ukraine will be able to preserve its transit role after the current transit contract with Gazprom expires at the end of 2019, and during this transitional phase, new tensions are to be expected until there is clarity on the volumes of gas that will be channelled through each transit route. (4)
In addition, it seems that Poland has answered Putin’s question on gas supplies from the US… an American company has signed two 20-year contracts to supply US liquefied natural gas to the state-run Polish Oil and Gas Co. Venture Global LNG is building two export terminals in Louisiana: its Calcasieu Pass facility is expected to begin operations in 2022, and its Plaquemines facility is expected to follow in 2023. Under the agreements, each of the facilities will supply the Polish company with 1 million metric tons of LNG a year.
Maciej Woźniak, vice president of the Polish company’s management board for trade, said in a statement that the deal marks Central Europe’s first long-term contracts for the purchase of US LNG. (5)
US officials have recently called for domestic LNG producers to ramp up exports to the continent, long reliant on Russian natural gas transported via pipeline.
(1) “Putin estimates 2018 gas deliveries to Europe at 200 billion cubic meters”. Tass, 4th October 2018. http://tass.com/economy/1024325
(2) and (4) “Russia’s evolving gas relationship with the European Union”. Energy Post, 15th October 2018. https://energypost.eu/russias-gas-relationship-with-europe/
(3) “European partners in Nord Stream 2 project support its implementation – Kurz”. 4th October 2018. http://tass.com/economy/1024331
(5) “Venture Global LNG to supply U.S. natural gas to Poland”. 17th October 2018. https://www.chron.com/business/energy/article/Venture-Global-LNG-to-supply-U-S-natural-gas-to-13314135.php