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RUSSIA/EUROPE: Gas exports curbed by commercial and geopolitical considerations

Table of Contents

  • Record-high natural gas prices and fears of looming shortages in Europe are raising questions about Russia's reluctance to increase its gas shipments.
  • However, Gazprom's strategy is consistent with the company's established preference for long-term supply contracts over spot supplies of natural gas.
  • Russia is also taking advantage of Europe's gas crisis to speed up the regulatory approval of the Nord Stream 2 (NS2) pipeline.

Natural gas prices in Europe have spiked to all-time highs this week, reflecting supply shortages and trade bottlenecks even as demand remains far below winter peaks. Persistent reluctance by Russia – Europe's single largest gas supplier – to increase gas shipments above the contracted volumes is raising questions at the political level, with some members of the European Parliament (mostly those from Central and Eastern Europe) calling on the European Commission (EC) to launch an investigation into potential market manipulation by Gazprom. In response, Gazprom is pointing to H1 2021 data, which shows that its gas exports to Europe increased by more than 20% year-on- year (y-o-y).

With the gas transit commitments through Ukraine expiring at the end of 2024, Gazprom is seeking to meet only the letter of its gas supply obligations to Europe to highlight the importance of long-term contracts with price controls. Gazprom's reluctance to provide additional spot supplies (even in an environment of highly favorable prices) is consistent with the company's long- standing commercial strategy. For example, during the winter of 2009/10, a period that saw prices drop amidst a deeper demand downturn in Europe, Gazprom was the only major exporter of gas into Europe that refused to trigger price re-opener clauses in its long-term contracts, seeking to preserve its oil- linked price structure while conceding market share to new suppliers. In contrast, Gazprom's rivals, such as Sonatrach of Algeria or Equinor of Norway, were willing to revise pricing terms to preserve the traded volumes into Europe.

By refusing to increase spot supplies to Europe, Gazprom is pushing European importers to commit to new long-term gas purchase agreements (possibly with minimum off-take clauses), presenting essentially a mirror image of the 2009/10 situation. Then, Gazprom traded higher prices for lower volumes in the face of an emerging spot competition. Now, Gazprom is trading higher volumes for lower prices. An example of this strategy coming to fruition is the 15-year gas import contract inked this week between Gazprom and Hungarian group MVM. MVM committed to 4.5 billion cubic meters (bcm) per year, mostly via the Turk Stream pipeline, circumventing Ukraine.

Amid fears of looming gas shortages in Europe, Moscow is putting pressure on Germany's energy regulator to speed up the issuance of an operating license for NS2 ahead of the 8 January 2022 deadline. The launch of the controversial undersea pipeline would likely prompt Gazprom to boost its natural gas supplies to the EU. At the same time, the EU would effectively admit the necessity of maintaining long-term direct gas supply agreements with Russia, which would strengthen Moscow's leverage for not renewing or downsizing its gas transit agreement with Ukraine post-2024. If for any reason the launch of NS2 is delayed, Gazprom would likely supply gas to Europe mostly via non- Ukrainian routes.

In the longer term, NS2 offers another avenue for Russia to preserve its commercial arrangements with major European economies despite ambitious EU climate policies that will eventually reduce demand for gas. NS2 could be adjusted to accommodate hydrogen blending, making it a possible route for exports of Russian hydrogen into Europe. The launch of Russia's first-ever national hydrogen strategy in August confirmed the country's ambition to become the dominant supplier to Europe, targeting a 20% share of total market supply by 2050.

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RUSSIA/EUROPE: Gas exports curbed by commercial and geopolitical considerations

Record-high natural gas prices and fears of looming shortages in Europe are raising questions about Russia’s reluctance to increase its gas shipments. However, Gazprom’s