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    From the Editor: The Russia-EU gas divorce picks up pace [Gas In Transition]


European gas prices are again trending upwards and fast, following further disruptions in Russian supply, exacerbated by the explosion at Freeport LNG [Gas in Transition, Volume 2, Issue 6]

by: NGW

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From the Editor: The Russia-EU gas divorce picks up pace [Gas In Transition]

After Gazprom cut off natural gas supply to buyers in Bulgaria, Denmark, Finland, Germany, the Netherlands and Poland for their refusal to comply with its new payment terms, the Kremlin sought to allay concerns about further disruptions to flow on June 9. Its spokesman Dmitry Peskov told reporters that no further cut-offs in deliveries were envisaged, all remaining buyers receiving gas had agreed to set up accounts at Gazprombank, where their Euro and US dollar-denominated payments could be converted into rubles for transfer to Gazprom, in line with the Kremlin’s March 31 decree. 

Between early April and early June, European gas prices also saw a jittery but sustained decline – a normal occurrence in a normal year. Confidence was growing that the EU would meet its target of filling gas storage facilities to 80% capacity by November, helping safeguard against winter shortages in the event of a complete cut-off in supply.

The situation then took a nasty turn for European gas consumers on June 9, however, when an explosion occurred at the 15mn metric ton/year Freeport LNG terminal in Texas, one of the largest liquefaction facilities in the US. It was later confirmed that the plant would not return to full operations for six months.

Then on June 14, Gazprom reported that it was slashing gas supplies to Europe via the Nord Stream 1 pipeline by 40%, blaming Siemens’ failure to return on time key equipment to the Portovaya compressor station that had been sent off for repairs, as well as other technical issues. Siemens told the press that it had been unable to return the parts because of Canadian sanctions on Russia. The following day, Gazprom said it was curtailing supply even further, to just 67mn m3/day, from an original plan of 167mn m3/d, as it said it had had to take offline additional Siemens equipment at Portovaya. Meanwhile, Italy’s Eni reported on June 15 that Gazprom had cut its gas supply by 15%, without providing an explanation. 

European gas prices responded swiftly to news of these outages. The July contract at the Dutch TTF gas hub soared 44% on July 16 to more than 120 ($126)/MWh, building on gains it made earlier during that week.

Political motivations versus technical difficulties

Germany has decried Gazprom’s actions as political in nature. “Russia’s reason [for reducing gas supplies] is just a pretext,” German vice chancellor Robert Habeck told reporters. “Their strategy is obviously to unsettle people.”

Germany’s government has suggested that the disruption may have been connected with the €10bn bailout package it provided to Gazprom’s former subsidiary Gazprom Germania, which German authorities seized in April. The Kremlin retaliated to the seizure by slapping sanctions on the unit.

It is unclear to what extent the Russian outages are politically motivated or due to technical difficulties. Both are perfectly plausible. Analysts at Rystad Energy commented that the problems at Nord Stream 1 were “a significant test of Western government resolve on sanctions, as well as Russia’s technical capacity to operate its sector facing the risk of getting less support from Western technologies and services.”

“While minor pieces of gas infrastructure can be more easily fixed, heavy, technically complex technology will require maintenance and servicing that currently would need cooperation with the West,” the analysts said in a research note.

Renaissance Energy Advisors noted that if the cutbacks at Nord Stream 1 were politically motivated, they could also be the result of the unwinding of various contracts and hedges between Gazprom Germania and its former parent company.

“This would mean that gas flow via Nord Stream 1 are unlikely to return to their higher level even if the technical issues are resolved,” Renaissance said. “We also note that the reduction in export would cost Gazprom more than $100mn in lost revenues and the Russian budget more than $30mn in lost export taxes on a daily basis.”

On the other hand, the Russian and US outages will make it more challenging for the EU to meet its target of filling its gas storage facilities to 80% capacity by November 1, compared with 52% capacity at present. And in the meantime, they spell even more pain for European energy users.

Sanctions start to bite

Meanwhile, there may be problems with the continued operation of Russia’s LNG export plants following the reported withdrawal of Baker Hughes. Moscow-based business daily Kommersant reported on June 16 that the US oil and gas services company had stopped servicing the Sakhalin-2 and Yamal LNG projects, owned by Gazprom and Novatek respectively. It has also recalled project engineers from Novatek’s Arctic LNG-2 project, where construction is still underway, while also halting equipment deliveries to the facility.

Despite years of Russia trying to localise the manufacture of equipment, the country’s LNG sector still remains heavily dependent on imports. As for Arctic LNG-2, Novatek CEO Leonid Mikhelson has already conceded that the 19.8mn metric ton/year plant may not meet its 2023 launch target because of sanctions and the departure of Western contractors, suppliers and financiers. TotalEnergies, which has a 10% stake in Arctic LNG-2, does not seem all that confident that it will reach completion, having booked a $4.1bn impairment charge to reflect risks relating to the project.

There is also reason to expect that Russia’s upstream sector could also start showing the effects of sanctions, with the loss of access to Western equipment and technology translating into delays at new projects and reduced production rates at existing ones.