What the Cold Snap Means for Gazprom and the EU

The freezing weather which recently gripped much of Europe, and the apparent inability of the continent’s biggest gas suppliers to tackle it, has sparked new angst about Europe’s energy security. Although these are perennial concerns, the scale of the recent crisis and existing concerns about the future of European gas means that this year might be different – with implications for (among others) Russia, Turkey and the EU.

The cold snap led to a sharp increase in domestic gas consumption across the continent, forcing governments to redistribute supplies, boost imports and fall back on stored reserves. Prices spiked. Italy was among the hardest-hit, with ministers describing the situation as “critical” and many industries told to switch to alternative fuels or decrease output to prioritise domestic customers.

Much of the blame for the shortage was laid at Gazprom’s door. The European Commission said that the Russian energy giant cut exports to many European states, with Italy’s supplies decreasing by 24%. Gazprom insisted that despite freezing weather in Russia it was fulfilling its obligations: industry sources report that the Blue Stream, Yamal-Europe, and Nord Stream pipelines were all operating at full capacity.

Gazprom has characteristically sought to turn the crisis into an opportunity, hinting that the shortage demonstrates the unreliability of Ukraine as a transit route; The Russian firm, claimed that Ukraine, with which it remains locked in a dispute over transit terms, must be siphoning off more gas than contractually allowed (Ukraine denied the charges).

Head of Gazprom Export Alexander Medvedev claimed that the EU would have suffered even more if the Third Energy Package, intended to rationalise and streamline energy operations in Europe, was fully in place. But a European official told consultancy Energy Intelligence that, in fact, the Package is “needed more than ever” as a result.

CEO Alexei Miller also said that the winter “is another proof that South Stream [across the Black Sea] has to be and will be built”. Despite December’s deal allowing the pipeline to cross Turkey’s territorial waters, South Stream remains a white elephant. Some analysts have said that Gazprom’s emphasis on building grand pipelines to keep Europe dependent on Russian gas, rather than investing in storage, has backfired. The problem was not a lack of transportation routes, but a lack of gas.

The Russian energy giant has also used the shortage to justify its increasingly controversial oil-price indexing of gas supplies. Gazprom said that recent events showed that spot pricing systems “aren't developed enough, aren't liquid, aren't flexible and they are also susceptible to outside shock effects”, and that oil-price indexing would remain, despite significant divergences in the average prices for oil and gas.

Although Gazprom has admitted that the company lacks enough storage space to promise that the shortage will not happen again, it has tried not to frighten the horses. On 17 February it agreed to a price cut for the EU and Turkey of around 10%, largely to bring it closer to spot pricing systems.

The concession is also intended to reduce Europe’s interest in new gas suppliers, but it is unlikely to be successful. Existing concern about dependence on Russian gas will only be exacerbated by the apparent inability (as the Europeans see it) of Gazprom to fulfil its contracts. To be sure, long-term contracts with Russia will remain the norm, but those in Brussels who support reducing dependence on Gazprom will find their position strengthened.

One relatively positive outcome was that the EU was better prepared this time than during previous crises. The newly-established Gas Coordination Committee was put on alert and communication across European gas markets was much smoother. Although the cold snap ended before any European state suffered a crippling shortage, the more efficient storage and transmission system now in place would have helped to alleviate the worst of the problems.

However, this is only part of the story. The failure of Gazprom to meet European demand will spur the search for unconventional gas supplies – shale and LNG. Environmental concerns about shale, and lingering cost uncertainties over LNG, will persist, but the political and commercial motivations to invest in these options will only increase.

European officials have also said that the EU is now more determined than ever to secure access to Caspian gas resources through the Southern Corridor. Although the Nabucco project is growing weaker almost every day, the determination of Azerbaijan and Turkey to begin working on a Trans-Anatolian Pipeline demonstrates that the Southern Corridor will – in one form or another – come to fruition.

Although the Russian government’s decision to prioritise domestic customers rather than export markets made sense from a political angle, with presidential elections just two weeks away, in the longer term it may have backfired. Gazprom’s dominance of European gas markets is starting to look shaky.

Alex Jackson is a political risk analyst at Menas Associates in London, focusing on the Caspian region. He also writes independently on politics, security and energy in the wider Caspian region. This article does not necessarily reflect the views of his employers.