Gazprom opts against booking extra transit via Ukraine, Poland
Russia's Gazprom opted against booking additional export capacity for the gas years 2021 through 2025 via Ukraine and Poland in auctions held on July 5, sending a signal it is confident that its Nord Stream 2 pipeline will be available to carry the gas instead.
Russian authorities have expressed hope that the 55bn m3/year Nord Stream 2 pipeline will be up and running within the coming months, after Gazprom finished laying the first of its two strings in early June.
Ukrainian transmission system operator GTSOU offered up 9.8mn m3/day of extra firm transit capacity for the gas year starting October on July 5 at the Sudzha border point with Russia, on top of the 40bn m3 of annual capacity that Gazprom already reserves on a take-or-pay basis, data from the RBP auction platform showed. It also offered 15mn m3/d of capacity in the 2022-23, 2023-24 and 2024-25 gas years.
Gazprom refused all the offers, however.
Similarly, the Russian company did not take up the offer of 78mn m3/d of entry capacity to Poland for the 2021-2022 gas year via the Yamal-Europe pipeline, or the 55mn m3/yr of Polish capacity offered in the 2022-25 years, according to the GSA auctioning platform.
Citing market participants, the Financial Times (FT) and other media outlets have recently reported that Gazprom, while sticking to its contractual obligations, is intentionally withholding additional spot volumes to keep prices high in Europe. Besides supporting its revenues, the company is also using this tactic to convince the EU to let Nord Stream 2 go ahead, the FT has claimed. Still, other observers have noted that GTSOU has been offering interruptible transit capacity on unfavourable terms, restricting how much gas Gazprom can send.
IHS Markit analyst Laurent Ruseckas explained in a thread on social media last month that "interruptible capacity is usually offered when a pipeline operator cannot guarantee capacity is available, and therefore it is sold at a discount." However, GTSOU is instead charging Gazprom the same for interruptible capacity as for firm capacity.
“An inferior product at a premium price! And without any operational basis I can see for doing so,” the analyst said, noting that Gazprom might not trust GTSOU not to disrupt the capacity.
Gazprom has been refusing this interruptible capacity for several months. On June 28, it once again refused to book 63.7mn m3/d of interruptible capacity on offer by GTSOU for July.
Commercial rationale
Gazprom covers roughly a third of European gas supply, and over 60% of its gas supply is now indexed to gas hub prices or comprises spot sales, as the company has steadily shifted away from longer-term, oil price-indexed contracts. This has made the European gas prices ever more sensitive to changes in supply and demand.
As a major market player, Gazprom gains more in revenue terms by withholding supply beyond its contractual obligations and keeping prices high, rather than easing the taps and selling its gas for less, Ronald Smith, analyst at BCS Global Markets, tells NGW.
"In numbers, a 10% increase in Gazprom's full-year exports would likely cause a fall in gas prices by substantially more than 10%, leading to a net revenue loss," Smith says. "This would not have been the case in 2008, for example, as practically all of Gazprom's gas was priced on oil-links, so a 10% increase in exports would have resulted in a 10% increase in revenues."
Smith also suspects Gazprom is looking to bolster the commercial case for Nord Stream 2 through this strategy.
"The conditions for actually starting shipments through the line are vastly better than anticipated six months ago," he explains. "I expect - but have no confirmation - that Gazprom is urging customers wanting more gas this fall to sign long-term offtake contracts that designate Nord Stream 2 as the delivery route."
Ironically, it is the EU that has put pressure on Gazprom over the years to phase out its long-term, oil-indexed contracts and sell more volumes at hub-based prices and on the spot market.
"Now that gas markets are tight, the downside to that strategy is becoming apparent," Smith says. " The largest supplier to Europe is dis-incentivised from adding supply, and LNG is going to Asia where it commands a premium. For Europe, LNG is very much a fair-weather friend."