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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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Why Russia Is Refusing To Send Europe More Natural Gas

Rising commodity prices have strengthened the economic outlook of resource-rich countries. Russia is taking advantage of this in a major way, with a particular focus on crude oil and natural gas. As Europe’s most important supplier of gas, Gazprom is well-positioned to reap major dividends. However, the state-controlled energy behemoth's lukewarm response to sending additional volumes to Europe could be a sign that the company’s strategy has changed.  

In 2020, Gazprom’s exports decreased from 199 bcm in 2019 to 170 bcm. The majority of this gas transits through Soviet-era pipelines from Russia to Belarus and Ukraine. Another 55 bcm capacity was added in 2011 with Nord Stream’s completion and will be double to 110 bcm when the heavily contested Nord Stream 2 pipeline starts pumping gas at some point in the next two years.

The restart of the European economy has increased demand for commodities and led to substantially higher prices. Although LNG imports have increased over the years, the bulk of the natural gas is still transported through pipelines. Of these exporters, Russia is by far the largest and most influential country due to its sizeable energy industry and excess capacity. Although prices are favorable, Gazprom doesn't seem to be in a hurry to send extra volumes on top of the running contracts with European customers. 

After an exceptionally cold heating season, European storages are historically low which further boosts demand to prepare for the coming winter. Also, some parts of Europe are experiencing an unusually warm summer leading to higher demand for electricity to run air-conditioners. Under normal circumstances, coal-fired powerplants would fill the gap, but the price of  CO2 on Europe’s ETS has doubled to €52 since November. Therefore, natural gas-fired powerplants, which emit almost 50 percent less, are in higher demand.

In the past, Gazprom would have quickly ramped up exports to satisfy additional needs with the ultimate goal of increasing market share. However, the Russian company has held off from booking extra transit capacity through Ukraine’s pipeline system. According to Nick Campbell, director at consultancy Inspired Energy, “so far this summer Gazprom has yet to purchase any capacity in the (Ukraine’s) monthly auctions. Therefore, one could see this as a strategy to push Nord Stream 2 to completion.”

Elena Burmistrova, director-general of exports at Gazprom, has denied the change in strategy although she has acknowledged the request from customers for additional volumes. According to critics her statement that more gas would flow with “the commissioning of the Nord Stream 2 pipeline” has confirmed Moscow’s intention regarding the pressing of Europe to finish the pipeline this year.

The project has been delayed by U.S. sanctions. Nevertheless, Gazprom has remained firmly committed to Nord Stream 2's completion. Two Russian pipelaying ships have been working non-stop. One of the two strings is already finished and according to Nord Stream 2’s CEO Matthias Warnig the second string will be completed in August. 

Another theory behind Gazprom’s reluctance to send additional volumes is a new profit-focused strategy from Gazprom. In the past, increasing market share was the main objective which sometimes went at the expense of profitability. Natural gas was, therefore, used as a political weapon in several crises with heavily dependent eastern Europe. State-owned Gazprom could now be prioritizing profitability over political influence. In that sense, the company's role would be more like OPEC’s with the difference that its influence is limited to Europe where it enjoys good connectivity with customers. The EU’s heavy focus on sustainability and decarbonization could have swayed the Russians into maximizing the value of their natural gas while there is a sizeable market.

However, it could also be short-term opportunism. The price of natural gas on the European market has increased from $130 per 1,000 cubic meters in 2020 to $400 currently. The European market will almost certainly be undersupplied in the next few months, which could lead to sustained higher prices and few good options from the EU's perspective. 

By Vanand Meliksetian for Oilprice.com


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Leave a comment
  • Carlos Everett on July 15 2021 said:
    Lets see, last year the United States was offering contracts for the sell of LNG but Germany wanted to buy more LNG from Russia, even though the United States is their major partner in Nato. Every incentive would have been on the table on delivering significant increase in volumes to Europe from the US.

    Who do you want to buy LNG from your partner for over 80 years or Germany's arch enemy, that want's to march into Berlin. Germany's leadership has got there priorities all mixed up. We should cut our funding to Nato by half and see if Germany then understands their overall economics.
  • Mamdouh Salameh on July 16 2021 said:
    This goes to show the very powerful Russia has established itself in the EU’s natural gas market.

    In terms of supplies, Russia has the options of enhancing its market share or going for profit thus enhancing its earning from gas exports to the EU. It goes to show how dependent the EU has become on Russian gas supplies.

    Coming at a time of the last meeting between President Biden and Germany’s Chancellor Angela Merkel, Russia sent messages loud and clear how much the EU needs the Nord Stream 2 gas pipeline and how able Russia can squeeze the Ukraine if the United States and NATO show support to it like the recent joint sea exercises between US-led NATO and Ukraine close to Russia’s territorial waters in the Black Sea.

    Whether Gazprom goes for market share or profits, it is in a win-win situation. The United States and EU can’t win over Russia regarding the Ukraine or Nord Stream 2.

    Furthermore, President Putin has always the option of shifting more gas exports from the EU to China if he wishes.

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

Leave a comment




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