Is The EU Finally Breaking Free Of Russia’s Energy Grip?

Gazprom's dominance over European energy supplies may be beginning to slip.

The collapse of oil prices has punished Gazprom's revenues, but in a new development that is further damaging to the Russian state-owned company, the European Union is also beginning to shake itself of Russian gas.

Russian exports of natural gas through the Nord Stream pipeline - which runs from Russia to Germany across the Baltic Sea - have dropped by more than half in February from the same period last year, according to Reuters. Average daily deliveries have declined from 98 million cubic meters to 45 million cubic meters.

For 2014 on the whole, the European Union reduced Russian gas imports by 9 percent, the fourth consecutive year of declines.

There are several reasons for this. First, the European economy is growing slowly, if at all. That keeps a lid on natural gas consumption. Second, the 28-member bloc is actually making substantial progress on energy efficiency. Third, Europe has experienced a mild winter, lessening demand for natural gas supplies. Related: Moscow Slings Insults Following Canadian Sanctions

But the EU is also finding other sources of energy. Last year Lithuania began importing liquefied natural gas (LNG) from Norway, a development that has diminished Gazprom's grip over the small Baltic country. Lithuania has even been willing to pay a 10 percent premium for Norwegian gas - a rate that Lithuanian officials noted was still less than what they paid for Russian gas in the past. "From now until forever, our access to LNG puts a cap on what Gazprom can charge us," Lithuania's energy minister Rokas Masiulis said in a Reuters interview in November 2014.

Moreover, Ukraine slashed imports of Russian gas by 44 percent in 2014 to its lowest level in 15 years. Much of that has to do with the conflict between the two countries, including Russia forcing a sharply higher price for gas than Ukraine had received under former President Viktor Yanukovych. And that figure may be less impressive than it seems at first blush - Ukraine is receiving natural gas in reverse flows from its western neighbors, gas that may have originally been imported from Russia.

Nevertheless, the outlook is not great for Gazprom. Lower export volumes only compound the problem of low oil prices. Russia derives about 12 percent of its export revenues from natural gas shipments. Natural gas prices are linked to the price of oil for much of their sales, an arrangement that worked in Gazprom's favor for many years when oil prices were high. But prices for natural gas exports from Russia are expected to fall by around 35 percent this year, which could lead to at least $6 billion in losses for the Russian government. Related: West, East Give Conflicting Ratings To Gazprom

There are other gloomy problems for Gazprom over the long-term as well. Croatia and Poland are both planning on bringing LNG import terminals into operation in the coming years, allowing them to tap into the wider global market for gas. Not only that, but the two countries hope to construct a north-south pipeline to link up their LNG terminals, providing greater flexibility for the region.

Also, Russia was forced to back away from South Stream in late 2014 after the EU sought to block the project because it ran afoul of antitrust rules. The EU is still preparing an antitrust case against Gazprom. The South Stream pipeline, if constructed, would have delivered gas beneath the Black Sea to Bulgaria and then on to the rest of Western Europe.

In an effort to bypass both Ukraine and tricky EU antitrust laws, Russia has now proposed building a pipeline to Turkey, which is not a member of the 28-member bloc. The pipeline would connect Russia to the only European country with significant opportunity for growing demand. Gazprom's CEO Alexei Miller went even further - he recently suggested that Gazprom may even cease delivering gas to Europe through Ukraine entirely over the next several years. Instead, Gazprom would send its gas to Turkey, and the EU would need to import it from there if it decides it still needs Russian imports.

The comment comes off as a subtle threat, but beneath the bluster is the reality that Gazprom is being beaten back by a combination of factors, weakening its position in Europe.

By Nick Cunningham of Oilprice.com

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