When the breakup between Russia and the European Union began earlier this year, one of the reasons for the severity of the EU’s response to Russia’s invasion of Ukraine was the assumption that Russia could not afford for its gas exports to drop.
The assumption was an enduring one for oil and gas both. A number of analysts toured the media, arguing that if production at an oil or gas field is suspended, this field eventually risks becoming unproductive forever.
While this is a valid argument overall, Gazprom appears to have found a way to avoid permanent loss of gas production, and it’s not flaring, either. In fact, flaring in Russia—a major “flarer”—is down.
This is according to satellite data cited by a Bloomberg report on Gazprom’s production, which has declined substantially since the Ukraine invasion and the EU’s response to it.
Total gas production is down by 473 million cubic meters daily since the start of the year, data showed, to a total of 838 million cubic meters daily, but flaring is also down, at least over the past month, by 28 percent from a year ago. And this, according to the analysts Bloomberg talked to, is because Gazprom is simply producing less. And it has been doing it for years.
Because demand for natural gas is highly seasonal in nature, Gazprom has organized production at its biggest fields in such a way as to be able to increase or reduce it in relatively short order.
“Due to the uneven consumption patterns, Gazprom has to change its production significantly on monthly basis every year,” Vyacheslav Kulagin, a department head at the Energy Research Institute in the Russian Academy of Sciences, told Bloomberg. “Gazprom’s several major upstream projects function like gas cylinders, where the tap is sometimes opened to the full, and sometimes significantly turned down.”
This means that the risk of Gazprom losing production permanently may well be limited. However, it does not change the fact that most supply to Europe is now almost certainly permanently gone after the suspected sabotage of Nord Stream 1 and Nord Stream 2.
This decline in Russian gas imports may be in line with the European Union’s plans to wean itself off Russian gas fully, but it will mean a shortage while the weaning-off process is taking place.
According to a report by Rystad Energy, European countries are in for a gas shortage from next year to 2025 if Russia stops all deliveries of gas to the continent. This would change in the second half of the decade thanks to more LNG imports, but over the short term, LNG would not be able to cover the lost Russian supply.
European decision-makers seem to be aware of this and have started promoting demand reduction as an integral part of energy crisis plans. Earlier this year, the EU agreed on a Commission proposal for a 15-percent reduction in EU-wide gas demand this winter, but that was a voluntary cut. Now, cuts are on their way to being made mandatory, despite higher than usual gas-in-storage levels in most of the EU.
Meanwhile, although exports of natural gas to Europe have been decimated, exports elsewhere made up for the lost market: Gazprom reported earlier this month that total exports outside the Commonwealth of Independent States were down by 37.4 percent in the first eight months of the year and production was down by 14.6 percent.
Production flexibility appears to be a winning demand management tool for a commodity whose demand patterns are highly variable depending on the season. And it seems Gazprom is weathering the blow from losing most of the European market better than Europe would like to see.
By Tsvetana Paraskova for Oilprice.com
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