From the Editor: Russia’s Ukrainian power play [Gas in Transition]
Published in Gas in Transition Volume 2, Issue 2 on February 21, 2022.
Russian President Vladimir Putin’s current foreign policy strategy is a huge boon for the LNG market. The more pipeline gas looks susceptible to political fortune, the more attractive the multi-supplier global LNG market becomes.
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Regasification levels in Europe hit record levels in January, owing to relatively low Russian gas import volumes and low domestic storage levels.
For the moment, mild temperatures have reduced the immediate risk of actual supply shortage and gas inventories now look sufficient to see the winter out. This provides the opportunity to restock over the summer, a process which should keep LNG pricing firm, on a seasonal basis, even with new liquefaction capacity coming online.
Unless Russia invades Ukraine, Europe looks likely to weather its current gas crisis, a feat in which LNG imports have played a critical role.
Gas prism
It is simplistic to view Russian foreign policy purely through the prism of gas exports, but at present there is much to add credence to the idea that Moscow is using gas as a weapon, even if Moscow’s actions ultimately seem counter-productive.
The Russia-Ukraine gas crises in the late 2000s had far-reaching impacts. EU countries invested heavily in a more robust and flexible gas system and intensified the search for more diversity in supplies. Reaching new suppliers by pipeline entails huge investment, multiple risks and years of development. LNG, in contrast, provided a much quicker solution, one which opened access to a global supply market rather than tying buyers into a single source.
Construction of LNG regasification terminals in Poland, Lithuania and Croatia were a direct result of concerns over the reliability of Russian gas supplies – not in terms of the physical capacity to supply gas, but the possible use of gas for political leverage.
So too was the expansion of regasification capacity in west European countries. LNG might have appeared a more expensive procurement option, but it was the only way of providing an effective pricing counterweight to growing dependence on Russian gas supplies.
Russian power play
Moscow cannot be blamed for creating the European gas crisis, but it has certainly stoked the flames. The main charge is that it has withheld gas supplies.
According to comments made by International Energy Agency executive director Fatih Birol, Russia reduced its gas exports to Europe by 25% in the fourth quarter of 2021, compared with the same period in 2020, and by 22% compared with 2019. This, Birol said, meant there were “strong elements of artificial tightness in European gas markets … despite exceptionally high market prices for natural gas.”
This has been combined with the massing of Russian troops and weaponry on Ukraine’s borders, posing a real threat of invasion, accompanied by demands that NATO agrees never to expand its alliance to include the central European country.
Russian president Vladimir Putin has also conducted a highly-publicised show of solidarity with Chinese counterpart Xi Jinping, alongside the announcement of a new gas supply deal, the implication of which is that Russia will find new markets for its gas, if Europe does not play ball.
All-in, it is a major power play on the part of Moscow, one in which gas is a means of leverage.
Motivations and over-reach
The motivations ascribed to Moscow are three-fold: first, to reduce its dependence on European markets and consolidate an economic bloc impermeable to US influence and sanctions; second to wrest concessions from NATO with regard to which sphere of influence Ukraine should fall; and, third, to force acceptance of the Nord Stream 2 pipeline and accelerate its coming into operation.
On all counts, Moscow’s strategy looks weak. Ramping up gas exports to China will offset but not end Russia’s dependence on European markets because the western and much larger part of the Russian gas system is physically separate from Russia’s far east. The new 10bn m3/year deal announced with China will be sourced from Sakhalin Island, where expanded LNG capacity would have offered supply flexibility to multiple Asian markets rather than just China.
From the Chinese perspective, Beijing will certainly welcome the additional gas supplies, but China has always been mindful of not creating over-dependence on any one gas supplier. Expanded Russian gas imports are an important but not dominant part of Chinese gas imports. The lessons of Moscow’s gas strategy in Europe will not be lost on China.
To put Russia’s gas pivot towards Asia into perspective, Russia supplied China with just 16.5bn m3 of gas last year, 10.5bn m3 of which was via the Power of Siberia, which at full capacity will deliver 38bn m3 annually to China. Even with the new 10bn m3/yr deal, Russia’s pipeline exports will remain small compared with the 168bn m3/yr it supplied to European markets in 2020.
Russia’s LNG ambitions are also based on new gas field development and will feed into the global LNG market to which Europe has access.
Meanwhile, Putin’s power play in Ukraine appears to be back-firing on Nord Stream 2’s prospects. Not only does Europe look likely to weather the current gas crisis without the pipeline, but putting Ukraine at the centre of Europe-Russian tensions makes it more difficult for European countries to accept it.
Like South Stream, Nord Stream II is specifically designed to undermine Ukraine’s role in Russian gas transportation and thus the country’s importance to European gas supply. The use specifically of Nord Stream II as a weapon against Ukraine was the focus of an agreement between former German chancellor Angela Merkel and US President Joe Biden only last July.
Moreover, Putin’s demand that NATO promises to permanently exclude Ukraine from joining is over-reach. Rejection of the demand leaves Putin with the choice of invasion, troop withdrawals or staying put, none of which are particularly attractive options.
Europe’s reaction
How then will Europe react? Most likely in similar fashion to the Ukraine gas crises, but with one very important difference; today the focus will be less on gas system resilience and more on gas demand destruction.
Moscow may have already taken this into account. The European energy transition gathers pace by the day and the ultimate goal implied by net zero carbon targets is the eradication or hugely-reduced usage of fossil fuels, including natural gas.
This is not driven by fear of Russian dominance in the gas market, but by climate change concerns. Moscow may calculate that as the energy transition appears irreversible, better to use gas as a weapon while it still offers some leverage.
However, uncertainty over Russia’s intentions means it is not a reliable partner and that it is willing to use its gas exports as a means of political and political pressure to achieve irredentist goals, which increasingly appear not so much a product of historic insecurity, but of internal weakness.
LNG to benefit
Within this play of great powers, LNG provides advantages to both sides hoping to escape a marriage turned sour.
Russia will use LNG production as one means of reducing its dependence on European markets and creating access to the growth markets of Asia. Europe will use LNG is a principal means of offsetting its dependence on Russian pipeline gas, even as it pursues accelerated renewable energy expansion.
The degree to which Europe remains dependent on Russian gas remains high and will not improve in the short term as domestic European gas production declines. But, by again bringing gas into the realm of power politics, this time amid the threat of invasion, another wedge has been driven into already fragile Russia and European energy relations, one which will benefit LNG.