A bleak outlook for Russian gas [Gas in Transition]
Having lost most of its market share in Europe – likely irrevocably – Russia now has to find new places to sell its vast gas resources. But the options are slim, and the country is unlikely to ever export enough gas to other markets to make up for the lost sales in the EU, Adnan Vatansever, senior lecturer at King’s College London and reader at the King’s Russia Institute, tells NGW.
Russia exported around 155bn m3 of gas via pipeline to Europe in 2021, and in previous years has sometimes delivered over 200bn m3 to the market. In contrast, supplies in November this year slumped to a new record low of 2bn m3, or 24bn m3 on an annualised basis, despite falling winter temperatures.
.png)
The EU committed to phasing out Russian gas in the coming years in response to Moscow’s invasion of Ukraine. But in fact, it is Russia that has drastically cut flow, in order to put pressure on the EU to make concessions in the Ukrainian conflict.
First, Russia stopped selling any gas on the spot market in 2021. Then at the end of May this year, the Kremlin passed a decree forcing Gazprom’s customers to pay for supplies in rubles. Those that refused, had their supply cut off. And over the summer, Gazprom progressively cut deliveries via the Nord Stream 1 pipeline, claiming that sanctions had prevented the repair of key equipment – an explanation that was rejected by European leaders, who accused Moscow of using gas as a political weapon.
“For the Russian gas industry, the future looks very bleak,” Vatansever concludes.
In the short-term, the soaring cost of gas in Europe will more than offset the impact of reduced volumes on Gazprom’s revenues. But Vatansever believes the EU will never again trust Russian gas. At least in Western Europe, Gazprom was able to maintain a reputation as a reliable gas supplier, but that reputation is now in tatters.
“I cannot imagine any circumstances under which Europe would seek to move back to the status quo,” Vatansever says. “And the amount of gas that Gazprom was selling there will be very difficult to replicate anywhere else.”
TurkStream expansion “delusional”
With the Nord Stream 1 and 2 pipelines now rendered inoperable as a result of suspected sabotage, the Yamal-Europe pipeline unable to deliver Russian gas westwards because of sanctions and counter-sanctions imposed by Russia and Poland, and there being an obvious risk to transit through Ukraine, Moscow is looking at additional ways to pump supplies in the event that Russia regains some of its lost market share in Europe. Russian president Vladimir Putin has recently been discussing with Turkish counterpart Recep Tayyip Erdogan a proposal to expand Turkey's role as a hub for Russian gas supply to Europe. Russia's government has proposed adding two more strings to the TurkStream pipeline that runs under the Black Sea to Turkey, which would double its capacity to 63bn m3/yr.
Vatansever describes the TurkStream expansion “as one of the most delusional projects that Russia has ever come up with,” however. He believes it may have been offered to Ankara in return for cooperation with Turkey on other issues. Turkey’s government, on the other hand, may be looking to present the project as a major strategic accomplishment ahead of elections next year.
The expert likens TurkStream’s expansion to Moscow’s proposal in the late 2000s to run a major oil pipeline through Turkey.
“Russia had no intention of building the oil pipeline. It had already developed significant capacity to export its oil via the Baltic Sea,” he says. “Nevertheless, talks continued for years.”
Gazprom may even spend significant sums on TurkStream’s expansion before the project is ultimately axed, he says.
Eastern prospects
The company’s gas sales to the Chinese market are rising, as deliveries via the Power of Siberia pipeline ramp up to the full contractual volume of 38bn m3/year agreed in 2014 with China’s CNPC. It is expected that this flow level will be reached around 2025.
Gazprom has suggested a further 6bn m3/yr of gas could be pumped through Power of Siberia if infrastructure is expanded. Gazprom and CNPC have also clinched a deal on sending a further 10bn m3/yr to China via the Far East.
And then there is Power of Siberia 2, Gazprom’s flagship project, which would supply up to 50bn m3/yr of gas to China from the Arctic Yamal Peninsula via Mongolia.
The supplies would come from fields that until recently catered for the European market, reducing how much would need to be invested upstream. And once a supply contract was in place, Russia demonstrated its ability to fund and build a major gas pipeline when it completed Power of Siberia in just over five years at the end of 2019.
Still, Vatansever believes Russia will never send as much gas to China as it once did to Europe. And given China’s clout as a large single buyer, and Russia’s weakened geopolitical position following its invasion of Ukraine, Beijing is likely to drive a hard bargain on price, he says. China may also be reluctant to rely too much on Russian gas as Moscow has demonstrated in Europe that it is willing to use energy as a weapon, he adds.
Meanwhile, there is limited upside for Russian supplies to other countries in the former Soviet Union. Its biggest customer in that market was once Ukraine, but supplies were halted in 2015 – the year after Moscow’s annexation of Crimea. Russia is lobbying for the creation of a gas union with Kazakhstan and Uzbekistan, to coordinate Russian deliveries to those countries. But the proposal has been met with a cool response from authorities in Astana and Tashkent. Both Kazakhstan and Uzbekistan have significant domestic gas supply, and so the volumes they need from Russia are relatively small.
Uphill LNG struggle
The remaining option for Russia is of course LNG. The country arrived at that market late, commissioning its first liquefaction terminal on Sakhalin Island only in 2009. Interest in Russia’s LNG potential peaked in 2017, though, when Novatek successfully launched the Yamal LNG plant in the Arctic, on time and within budget, despite Western sanctions.
However, future LNG projects face much greater obstacles. Much tougher sanctions and other fallout from the war in Ukraine have stripped Russia of Western financing, technology and other support it relied on to realise Yamal LNG, and efforts over recent years to develop more domestic technological and manufacturing expertise have largely not lived up to expectations. These projects are likely to struggle with delays, hindering Russia’s LNG ambitions, Vatansever says.