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    From the Editor: West calls time on Russian energy [Gas in Transition]


The war has irrevocably ended trust in Russian energy supplies. [Gas in Transition, Volume 2, Issue 3]

by: Rick Gill

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Natural Gas & LNG News, Europe, Expert Views, Insights, Premium, Editorial, Gas In Transition Articles, Vol 2, Issue 3

From the Editor: West calls time on Russian energy [Gas in Transition]

Moscow’s invasion of Ukraine took many seasoned Russia watchers by surprise. Assumptions that Russian president Vladimir Putin would not take such action so catastrophically damaging to the Russian economy and the country’s international prestige proved incorrect.

Putin’s war has united the West. Even European leaders that until now had maintained comparatively warm ties with Russia, such as Hungarian prime minister Viktor Orban, have now turned their back on Moscow. Germany, which for many years seemed quite comfortable with its significant dependence on Russian energy, is now preparing to finance LNG import terminals to wean itself off Gazprom’s gas.

Berlin often defended the Nord Stream 2 pipeline as strictly a commercial venture, but has now halted the certification process needed for its launch in light of events in Ukraine. This appears to be an admission that the project is and always was part-political in nature. Recent events show the folly of making assumptions, but it looks increasingly likely that the pipeline will remain nothing more than a hunk of metal at the bottom of the ocean for the foreseeable future.

Over the past two decades, the EU has focused on broadening access to alternative sources of gas supply to improve security, rather than actively seeking to reduce Russian imports. That has now changed, with Brussels calling for a drastic cut in Russian purchases, potentially by as much as two thirds within the next year.

The EU fears that Russia could cut off gas supply itself, at a time when the bloc is already coping with record-high energy prices. And Moscow has indeed hinted it is considering such action in response to escalating sanctions. But for now at least, Russian gas flow remains stable. And Gazprom continues to abide by its long-term contracts.

Were the Russian gas supplier to renege on these contracts, its reputation as a reliable and trusted provider of energy to Europe would never recover. But the damage has largely already been done.

For years, Russia has tried to cultivate an image of itself as the guarantor of Europe’s energy security, even while many EU politicians have argued that it poses a great risk to that security. From football sponsorships to hiring former German chancellor Gerhard Schroeder as a lobbyist, Moscow has sought to allay Europe’s concerns about overdependence on Russian oil and gas. In the wake of Moscow’s invasion of Ukraine, all of those efforts are now irrelevant.

Europe’s targets for rapidly phasing out Russian gas may well be over-ambitious. But those targets will be pursued, and Russia’s share of the continent’s energy mix will shrink. That means Russia scrambling to expand its access to alternative markets to offset the revenue loss.

The overwhelming majority of Russian gas production is in Western Siberia. And save for the handful of fields that supply Novatek’s LNG trains in the far north, the region can only send gas to Europe, to the domestic market and to the small and unlucrative markets of Central Asia and the South Caucasus. Russia’s response to Europe cutting its imports will therefore be to accelerate the development of LNG terminals, and push harder for the construction of a pipeline to bring gas from Western Siberia.

Neither option will be easy. Building LNG terminals is a costly undertaking, and the international finance that Novatek has relied on so far to progress its projects is now drying up. The company will also struggle to obtain the necessary technologies and expertise to develop liquefaction trains. So far it has relied on long-time partner and minority shareholder TotalEnergies, but the French company has said it will not invest in new projects in Russia. It has also depended on scores of Western contractors and suppliers, many of which have either withdrawn from the country or are considering doing so.

When relations with the West collapsed in 2014 following Moscow’s annexation of Crimea, Russia launched a sweeping programme to localise the manufacture of equipment and technologies, particularly in the oil and gas industry. This has led to only modest progress. Russia is now building its own LNG carriers and oil tankers in the Far East, but the overwhelming majority of orders are still made at Asian shipyards. Novatek has developed its own liquefaction technology, known as Arctic Cascade, but it is yet to be demonstrated as working effectively. Novatek has trialled its use at a mini-train at Yamal LNG, but its recent decision not to follow through with its earlier plan to deploy Arctic Cascade at the planned Obsk LNG terminal raises questions.

Meanwhile, the construction of thousands of kilometres of pipeline to bring gas from Western Siberian’s Arctic zone to China via Mongolia will first require a supply agreement between Moscow and Beijing. The 2014 deal that underpinned the Power of Siberia pipeline took many years to negotiate. Granted the process is likely to be much faster this time, given the tightness of the global gas market.

If and when an agreement is reached, Russia will have trouble securing financing for building the pipeline and making the necessary upstream investments. China may well provide its support. But Beijing is likely to drive a hard bargain, both in terms of financing and the gas price, as it has done in agreements with Turkmenistan for gas supply. Beijing is aware that, with Russia increasingly becoming a pariah state, Moscow has few other partners it can count on.

Exceptionally this editorial is signed by Rick Gill, managing director of NGW, and represents the views of the publication.