From the editor: Russian LNG isn't leaving Europe fast [Gas in Transition]
The European Parliament earlier this month approved a legal option that will allow member states to block Russian companies from booking regasification capacity, marking the first time that the bloc has specifically targeted the country’s lucrative LNG supplies to the continent. On top of this, the European Commission is also discussing EU-level sanctions on Russian LNG, media outlets reported this week. According to Bloomberg, these sanctions would include restrictions on key upcoming Russian LNG projects such as Arctic LNG-2, and a ban on Russia using EU ports to re-export supplies to third countries.
NGW’s view is that these moves are unlikely to impact Russian LNG flow to Europe in the next few years, in light of opposition from the top three importers of Russian LNG in the EU – Belgium, France and Spain. But those countries may become more willing to block the gas within a few years, as global supply grows and conditions in the European energy market improve.
The EU readily banned most Russian oil and petroleum products within a year of Moscow invading Ukraine in February 2022. Over the same period, Russia steeply cut gas supply to Europe to try and force EU leaders to withdraw support for Ukraine. But neither side has targeted Russian LNG trade to the continent – in fact it has flourished.
Flourishing trade
There are varying figures for Russian LNG flow to the EU. But according to Kpler data, Russia delivered over 15.6mn tonnes (21.2bn m3) of LNG to EU ports last year, slightly higher than the level in 2022 and up nearly 40% from the amount in 2021. The Finland-based Institute for Energy Economics and Financial Analysis (IEEFA), meanwhile, estimates that terminals in Europe, including those outside of the EU, received 24.72bn m3 of Russian LNG, including 19.5bn m3 that was imported and 5.22bn m3 transhipped to other markets.
Spain, France and Belgium are by far the main destinations for Russian LNG in Europe, according to IEEFA, receiving four-quarters of the total that the continent received last year.
None of these countries have indicated they will make use of the powers approved in the European Parliament vote. Indeed, the only member state that has said it will block Russian LNG so far is Finland, which does not receive the country’s gas anyway, suggesting that the legal option will only be used symbolically.
Spain, France and Belgium have all pointed to difficulties implementing the policy. They receive Russian LNG mostly under contracts for Russian LNG that were agreed prior to the war that they would need to break in order to block the supplies. By doing this, companies could expose themselves to higher prices for replacement LNG on the spot market. And if they were to declare force majeure to get out of these contracts, this would almost certainly result in legal action from the Russian side.
Spain and Belgium have stressed the bans would need to be agreed with other member states, to avoid Russian LNG simply getting diverted to other EU ports.
In fact, the only country so far to indicate that it will make use of the legal action provided by the European Parliament has been Finland, which does not import Russian LNG anyway, suggesting that it may only be used symbolically.
As for the EU-level sanctions that the European Commission is reportedly proposing, it remains to be seen whether Brussels can get major importers of Russian LNG on board with the plan. It is being explored as part of the 14th sanctions package against Russia over its invasion of Ukraine.
Preventing Russian LNG transshipments in the EU would have a serious impact, given Russia’s lack of specialised ice-breaking ice carriers to carry LNG from Yamal LNG. Those vessels transport their cargoes to EU ports where they are then loaded onto standard carriers for onward delivery to market. If transhipment is not possible in Europe, the ice-class carriers will have to make the entire journey themselves, constraining transport capacity and driving up costs. But while the sanctions only target Russian LNG transshipments and not the EU’s own imports, countries handling significant transshipment may still wish to avoid breaching existing contracts.
As for sanctions on new Russian LNG projects such as Arctic LNG-2, it is unclear how fresh European restrictions could have a significant impact, given that measures introduced by Washington last year have already delayed the launch of Arctic LNG-2’s first train, because of a lack of shipping capacity and difficulties finding buyers.
Limited impact on Kremlin revenues
Even if these measures were to impact Russian LNG flow to Europe, the next question is whether it would impact revenues that the Kremlin is using to fund its war in Ukraine. Whereas Russia extracts a lot of tax from its oil and gas industry, and has even increased this burden over the last two years, this is not the case with its LNG sector, where the government has provided substantial tax breaks to support projects’ development. The Yamal LNG plant, for example, does not pay any mineral extraction tax or export duty – the two main methods Russia uses to tax oil and gas producers.
What is more, whereas state-owned Gazprom has a monopoly over Russian pipeline gas exports, its main LNG exporter is Novatek, which is a privately-owned, save for a 9.4% stake controlled by Gazprom, and therefore does not contribute much to the state in terms of dividends.