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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian has extended experience working in the energy sector. His involvement with the fossil fuel industry as well as renewables makes him an allrounder…

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Russia Tightens Its Grip On Europe's Natural Gas Markets

A much-used proverb says: a good neighbor is better than a distant friend. Nowhere is it more suitable than the EU’s position vis-a-vis its largest and most important neighbor: the Russian Federation. Current relations are the worst since the end of the Cold War. Despite the often rocky interaction, the European and Russian economies are highly complementary. This has led to a level of dependence that has become a problem for certain countries.

The complementarity of the economies has been mutually advantageous for decades: Russia exports vast volumes of raw materials and imports finished, often high-tech, machines. These exports primarily include energy products such as oil and natural gas. Also, after the annexation of Crimea sanctions were introduced that reduced Russia’s access to Europe's financial sector. Energy imports, however, have remained stable, except for the pandemic period, which is worrying to many European countries.

The level of dependence differs for each country. Due to historic reasons, Gazprom’s market share is the highest in Eastern Europe. The west and north, in contrast, have a far lower level of dependency where domestic production is higher (North Sea region) or nuclear is used in more abundance (France). Eastern Europe is, therefore, usually more vocal in its opposition to Russian energy deals.

Therefore, the EU has set out to strengthen the resilience of the market and reduce dependence on a single producer. First, new rules and legislation have been introduced to lessen the influence of energy companies and protect customers. Second, physical measures have been taken such as reverse flow capabilities and additional cross-border infrastructure between member states. Third, diversification has been another important tool to strengthen Europe’s position concerning producers. Despite these intentions, Russia will remain the most important exporter to Europe for decades. Related: Saudi Oil Minister: OPEC+ Strategy Is Not Set In Stone

According to S&P Global Platts Analytics, Russia's exports to the continent will remain growing and its market share will rise even further. Currently, 30 percent of the gas consumed in Europe can be traced to production locations in Siberia. The report predicts that this could rise to 40 percent by 2040.

The most important reason behind this rise is Europe’s rapidly decreasing domestic production that needs to be substituted. Also, Norway, the no. 2 exporter, will gradually reduce exports due to the natural decline of its fields. The country currently exports 110 bcm annually that will reduce to 100 bcm in 2025, and even 60 bcm by 2040.

Meanwhile, Russia's resource base is expanding partly due to global warming. The Arctic region, which is thought to contain $35 trillion of untapped oil and gas reserves, is increasingly accessible for exploration and production. Currently, an average of 650 bcm/year is produced that could rise to 750 bcm in 2025 and an astonishing 850 bcm by 2040. Of this amount 390 bcm, more than half could be destined for exports.

However, the path to energy dominance is not a certainty for Russia. There are several threats to its current position and future outlook that cannot be controlled by Moscow. First, Europe’s diversification policy has fostered some results notably in southeast Europe where gas from the Caspian is being pumped through the Southern Gas Corridor. Russia has been quick to respond with the construction of the Turk Stream pipeline.

Also, energy transition and decarbonization initiatives are rapidly gaining traction which could lessen demand for fossil fuels and hurt Russian exports to the continent. Despite the inauguration of the Power of Siberia pipeline to China, Europe remains Russia’s largest and most important customer by far. Therefore, Moscow is negotiating a second pipeline to China, this time from the Yamal region as insurance against dropping demand from Europe.

Nevertheless, Russia will do everything in its power to maintain its position as the income from energy is too important. Already its gas is the most competitive in Europe which means that in a race to the bottom Gazprom always wins. Furthermore, Moscow is not sitting idle as its looking for new export opportunities for products such as hydrogen. Therefore, Russia will remain an important exporter of energy for quite some time despite Europe’s best intentions.

By Vanand Meliksetian for Oilprice.com

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Leave a comment
  • Hugh Williams on April 12 2021 said:
    One thing is sure, Europe´s treatment of Russia is driven by the USA and is insulting to Russia.
    Sanctions against Russia because of the Crimea are unjust because after the US managed and EU supported the bloody regime change in the Ukraine, some of the new forces in the Ukraine started a "drive the Russian dogs out" against the Russian speaking Ukrainians and started killing them including burning some alive in Odessa. The EU found nothing about this worth mentioning. As NATO was preparing to move to the Crimea, Russia acted first to support the citizens of the Crimea in their desire to leave the Ukraine.
  • Mamdouh Salameh on April 12 2021 said:
    Russia’s grip on the EU gas market will tighten further in coming years with its market share expanding from 35% currently to more than 45% in the next 4-5 years when adding rising Novatek’s LNG exports.

    Three factors will strengthen Russia’s position. The first is the eventual completion of the Nord Stream 2 gas pipeline this year. The second is that the EU’s energy transition wouldn’t succeed without major contributions of both natural gas and nuclear energy with the bulk of natural gas supplied by Russia.

    The third factor is that the EU’s domestic gas production is declining fast with the eventual end of Dutch gas production and Norway gradually reducing its exports to the EU due to natural decline of its fields.

    The fourth factor is the Arctic Northern Sea Route (NSR) which will enable Novatek’s LNG to reach the EU faster and in bigger volumes.

    Russia enjoys huge economic and geopolitical advantages over the EU. It can easily switch its exports from the EU to the world’s biggest energy market, China leaving the EU to shiver in winter or alternatively expand its market share in the world’s two fastest-expanding gas markets, the EU and China.

    Russia is the world’s energy supermarket and will continue in this position well into the future.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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