Russian exports to Europe slump 9% m/m in May

Since April 27, when Russia unilaterally decided to stop gas flow to Poland and Bulgaria, Gazprom has also stopped disclosing information on gas supply to Europe on its website. To continue these analyses, we will therefore use transit data via Ukraine directly from Ukraine’s transmission system operator GTSOU[1]. For transit via Belarus, we are now taking the ENTSOG data for gas entering in Lithuania at Kotlovka and in Poland at Kondratki, Tieterowka and Wysokoje, minus the flows that are exiting EU for the Russian Kaliningrad exclave (Sakiai).  For direct flows, we have added flows from Nord Stream 1 entering at Greifswald (NEL and OPAL), flows to Finland (Imatra) and to the Baltics (Varska et Luhamaa). The only changes in the Gazprom dataset are flows via TurkStream that were accounted directly. This has been updated.

On top of kickstarting the EU transition away from Russian gas, Russian president Vladimir Putin has also allowed Poland and Bulgaria to claim damages against Gazprom for breaching long-term contracts. In mid-May, Gazprom also cut flows to its former German subsidiaries that were nationalised by the German government[2] after the start of the war. This potential arbitration is going to be much more difficult to settle. On May 21, 31 and June 1, Gazprom stopped providing gas to respectively Finland, The Netherlands and Denmark as it had not officially received ruble payments. In just over a month, Gazprom cut around 22bn m3/year of supply to five EU countries. In 2022, Gazprom should provide less than 95bn m3 of gas to the EU versus more than 160bn m3/yr pre-COVID (including spot volumes). Those unilateral Russian cuts reduced Gazprom's exports by more than 40%.

Gazprom's monthly exports to Europe

Source: Gazprom, Entsog, thierrybros.com

The halt in transit via Belarus and to Finland and the reduction of flow via Ukraine by 9.4% translate into a 9% reduction in Russian flows in May versus April. Even with those new cuts, flows in May were above the record low witnessed in January. This proves that European utilities that have not been cut off are maximising their volumes to mitigate any potential cuts late. June export flows should mark a new record low.

Split of Gazprom's monthly exports to Europe via route

Source: Gazprom, GTSOU, Entsog, thierrybros.com

Outside the contractual structure, Putin requested long-term contracts to be paid in rubles instead of the usual currencies (euros and US dollars). Most European utilities finally accepted this diktat. This will not only create a precedent that will weaken European utilities in case they want to turn later to an arbitration procedure[3] against Gazprom, but will reinforce Putin in his view that European unity is extremely difficult to reach.

While Gazprom unilaterally decided to stop flowing gas to Poland and Bulgaria from April 27, LNG send-out reached a record level for the period, but still below the all-time winter record achieved in December 2019. In May 2022, LNG send-out was 44% above last year but the system still has some upside flexibility to attract, if needed, additional cargoes.

EU LNG send-out (excluding Malta)

Source: GIE, thierrybros.com

Even if at the end of May, EU storage is still below the five-year average (47% versus 55%), the recent trend shows that market forces are set to deliver on the bloc’s goal of having 90% storage utilisation by October 1. Even if the winter-summer spread does not incentivise refilling storage, the risk of not meeting this target when states have permanent sovereignty[4] over natural resources and by extension gas storage sites is too high. States could move as far as full nationalization of these sites if the target is not achieved.

EU gas storage utilisation

Source: GIE, thierrybros.com 

Step two of my three-step embargo of Russian energy imports that I suggested back in March, a Russian oil embargo, has now been agreed by the EU, although Hungary has been allowed to continue importing oil via the Druzhba pipeline. On top of this, when unveiling its May 18 RePowerEU plan, instead of the freezing of the EU ETS that I suggested to mitigate the rising cost of energy for citizens, the EU wants now to sell €20bn of allowances (EUAs) from the Market Stability Reserve. This disclosure had a bearish impact on EUA prices and is not very popular in some member states.

Considering all contracts suspended by Gazprom so far, Russian exports to the EU could come to 95bn m3 at a maximum, which marks a 31% decline from 2021 – a year when the company did not refill its storage facilities in Europe either. With curtailed exports, Gazprom’s market share should shrink from 35% in 2021 to 25% in 2022. With the long-term contract of Austria’s OMV with Gazprom running until 2040, some further political interventions (either a full cut from Russia or an embargo from the EU) will be needed to avoid waiting until two decades’ time to fully remove Russian gas from the EU and stop sending Moscow the corresponding revenues, which today amount to $150mn/day.[5]

Gazprom exports to the EU, and EU dependency on Gazprom

Source: Gazprom Export for pre-2020 data, BP Statistical Review, thierrybros.com

To balance this, the regasification load factor for the UK and the EU (excluding Gibraltar, Malta, Portugal and Spain) should jump from 45% in 2021 to 74% in 2022. If we model long-term contracts, we have two linear regressions. The 2040-2030 slope should be steeper than the 2022-2030 one as European companies have not focused on the later period. This means that if the EU does not want to wait until 2040 to fully remove Russian pipe gas from the mix, it needs some political intervention like a phased embargo. But an embargo today is impossible as the EU does not have either the access to the desired LNG or the required regasification capacity.

Russian pipe exports to the EU: historical flows & future long-term contracted volumes

Source: thierrybros.com 

European countries are now seriously working to build up regasification capacity, to be in a position to remove this Russian dependency. The envisaged additional terminals should allow the replacement of all Russian volumes by 2037.

Regas load factor if timely replacement of expired Russian contracts by LNG

Source: GIIGNL, thierrybros.com

  Dr Thierry Bros

Prof Sciences Po & Energy Expert

 June 2, 2022