Low EU Storage Justifies TurkStream, NS2: Miller

Gazprom CEO Alexei Miller told Russian prime minister Dmitry Medvedev March 13 that Europe's storage facilities are down to their last quarter, or even tenth, of their capacity, meaning summer demand for Russian gas will remain high, even without the expected decline in Dutch gas production. This, he said, meant that "new export gas transmission projects aimed at supplying Russian gas to foreign markets are becoming even more important. That includes TurkStream and Nord Stream 2."

Despite very high demand, especially in February and early March, the export monopoly was able to keep domestic and export customers warm, he told Medvedev, according to a transcript published two days later on Gazprom's website.

Miller said there was "no doubt that this winter’s gas supplies have been affected by the very cold February weather both in Russia and in Europe. Gazprom has fully met the demand for gas in the domestic and European markets, supplying 30.7bn m³ to consumers in the Russian Federation." Since January 1 it has sold 5.6% more gas than it did in 2017 to the Russian market. 

February was also a record for export markets, as Gazprom delivered 17.4bn m³, up 6.8% from the record-high amount exported in February 2017. On March 2, it set a "mega-record" by exporting 713.4mn m³ thanks to the capacity of Gazprom and, by extension, Russia to meet peak demand. On an annualised basis, our capacity totals 260bn m³ of gas, in view of the understanding that in 2017 – a record-high year – we supplied 194.4bn m³ to Europe, Miller said.

He continued: "[Our] unique opportunity to meet that peak demand in the market is also a unique opportunity for our European consumers. This winter, Gazprom confirmed its status as a reliable and responsible supplier that honours its obligations in full and on time."

However, its unilateral decision to ignore a gas sales contract with Ukraine, following an adverse ruling by the Stockholm commercial court's arbitration panel, and its long-term failure to maintain pressure in the export pipelines where they cross the border with Ukraine, have led to cries of protest from Kiev, which had to buy gas from elsewhere when expected deliveries failed to materialise March 1.

Medvedev agreed that efforts to optimise gas supplies to Europe such as those pipelines were important, but also probed what the Stockholm rulings would mean for Gazprom.

Miller repeated his claim that the tribunal handed down an asymmetrical ruling that undermined the balance of interests between the parties to the two contracts, leaving Gazprom owing Naftogaz $2.56bn. "Almost instantly, Naftogaz of Ukraine released a statement that, based on the Stockholm court’s ruling, Naftogaz would also fine us for 2018 and 2019, that is, until the expiration of the contracts, and we would be forced to pay several billion dollars more. At this juncture, those contracts have become economically unsound, unviable for us, which is why Gazprom has decided to start the procedure to terminate the contracts through the Stockholm arbitration tribunal. We have already filed an appeal regarding the contract for gas supplies to Ukraine. Before the end of March, an appeal will be filed for the transit contract and proceedings will be initiated to terminate the contracts in accordance with established procedure."

Ending the contracts though will "probably take a year and a half or about two years. However, there are currently no risks for transiting gas to Europe across Ukraine, unless, of course, there is unauthorised withdrawal of gas by Naftogaz of Ukraine. Needless to say, we expect the Stockholm arbitration court to redress the imbalance of interests between the parties during the new proceedings."

Medvedev, himself a former lawyer, said contracts "are bound to change and are eventually either extended or terminated according to procedure. In this case, it is a court procedure. It is a normal legal method of terminating a contractual relationship. I believe that it is critically important for all these proceedings to take place in accordance with the existing regulations, so that the disputing parties themselves are directly involved – I mean Gazprom and Ukraine. This is expressly provided for in the existing agreements. As for other ways of influencing that relationship, I believe that it is absolutely wrong and there is an obvious political connotation – I’m talking about the isolated comments made by European Union (EU) officials and even, paradoxically, by the US Department of State. Neither the EU nor the foreign ministries of other countries have anything to do with the bilateral relations between Gazprom and its Ukrainian counterparty. Those relations should be mediated in the existing legal environment. Naturally, that process should include all of the relevant procedures, such as appeals and contract termination within the existing parameters."

Miller said it was the job of the Ukrainian counterparty to prove the economic efficiency and viability of continuing gas transit through its pipelines but Gazprom was "ready to hear them out and consider proposals, should there be any."

 (This article refers to Russian cubic metres, which contain a little less energy than a standard cubic metre.)