Russia’s European Gas Endgame May Hurt Even More than a Total Curtailment
While ending reliance on Russian gas may be difficult for Western allies, failing to do so may allow Russia to inflict more harm in the long term.
Even before its military offensive against Ukraine, Russia was waging war elsewhere – on European natural gas markets.
For more than a year, its state-owned producer, Gazprom, has been reducing supplies to European consumers, helping to lift gas prices to record levels and sparking fears of a looming energy crisis with dire social and political consequences.
Europe may be basking in searing temperatures right now but the hot topic gripping the political agenda is whether Russia will cut the gas completely, leaving consumers to freeze in their homes this winter.
Having seen Gazprom reduce deliveries in June to a fourth of the volumes exported only two years ago, the EU and individual member states are now preparing for the critical scenario where their largest supplier stops flows altogether.
While this may be a possibility, Gazprom’s endgame may be even more harmful than an outright curtailment, which would force European buyers to reduce demand drastically and mobilise alternative resources at very short notice.
Gazprom’s behaviour so far suggests that it is intent on inflicting maximum pain while scoring maximum gain, and the best way to do so is to maintain uncertainty by supplying gas at the lowest possible levels.
This creates the impression that Russia is still abiding by its contractual terms but leaves European buyers unable to form a longer-term strategy.
In contrast, Russia’s gains are manifold.
Firstly, the tactic is geared towards breaking Western unity.
Earlier in June, Russia reduced gas supplies to Germany via the Nord Stream 1 pipeline to 60%, claiming it could not deliver more volumes since one of the turbines required to pump gas via the subsea corridor could not be returned from repairs in Canada because of international sanctions.
Experts said the pipeline could operate without the turbine and that the excuse was just another act of Russian blackmail.
Gazprom’s behaviour so far suggests that it is intent on inflicting maximum pain while scoring maximum gain
At the same time, the Ukrainian diaspora in Canada urged Ottawa not to return the turbine, while the Ukrainian gas transmission system operator, GTSOU, insisted Gazprom could offset the shortfall by ramping up supplies via its own system, whose shipping capacity is bigger than that of Nord Stream 1.
Despite the pressure, Canada’s minister of natural resources said on 10 July that the turbine would be returned to Germany to support ‘Europe’s ability to access reliable and affordable energy’.
Exactly how reliable those supplies are likely to be will become clear later in July, when Nord Stream 1 is expected to complete a 10-day planned maintenance starting on 11 July.
It is unknown what Gazprom’s intentions are once the maintenance period is over, but one thing is certain: the turbine affair helped to sow division between Ukraine and its Western allies.
Reducing gas supplies also brings in handsome profits, because every decrease in gas supply is followed by a rise in prices.
Gazprom has been limiting deliveries to Europe since last year.
At first, it declined to supply more volumes despite rising post-pandemic demand. Then, it decided to keep the storage facilities it operates in Central Europe empty even as the heating season was approaching.
By December, it was sending fewer volumes than those that had been contracted by European buyers, despite claims by some observers that Gazprom was a reliable partner.
The strategy paid off, helping the company to rake in a net profit of 2.09 trillion rubles ($29 billion) in 2021 – enough to make up for the meagre revenue of 2020, which stood at 135 billion rubles.
Gazprom continued in the same vein following the invasion of Ukraine but even more brazenly than before, cutting gas supplies to countries or companies which refused to comply with a Kremlin-dictated ruble payment scheme.
Under the mechanism introduced at the end of March, buyers were expected to switch away from Western banks and open accounts in foreign currencies and rubles with the Russian-owned Gazprombank.
Russia’s tactics have so far paid off, but may backfire in the long term if Europe proves brave enough to pull the plug on its addiction to Russian gas
Just like the turbine excuse, the scheme sowed division among allies because some Western buyers decided to pay despite earlier questions about its legality. It also helped to push up prices, which increased by 5–7% each time Gazprom suspended flows to countries or companies opposing it.
This meant that even though Russian gas supplies were 30% lower year-on-year between the start of the war and the end of June 2022, Gazprom has raked in around €30 billion in gas exports since the end of February.
What is probably more important to Russia is to paralyse Europe’s ability to store gas, in order to deepen its vulnerability to more blackmail later this winter.
Under newly introduced EU rules, storage facilities across member states need to be 80% full by 1 November. At the start of June, injections had ramped up, lifting them above the five-year average.
As prices soared once again when Gazprom reduced supplies to Germany via Nord Stream 1, injections slowed down, sparking concerns that member states may not be able to meet mandated targets.
Only a month earlier, Gazprom had reduced the transit via Ukraine to 40% of contractual volumes, taking advantage of a decision by the country’s grid operator, GTSOU, to declare force majeure at one of the compressor stations in the east of the country.
The operator stopped the transit via the eastern Sokhranivka entry point amid suspicions that Russian occupants were stealing transit gas, offering instead to reroute the inflows via another interconnector under Ukrainian control. Gazprom not only ignored the proposal but also diminished the amount of gas that was supposed to enter via this point.
Russia’s political manoeuvring has helped to create so much volatility on markets that it has been impossible to predict price movements from one day to another, let alone to plan for the weeks and months ahead.
Its tactics have so far paid off, but may backfire in the long term if Europe proves brave enough to pull the plug on its addiction to Russian gas.
The sooner European buyers recognise Russia for what it is – an untrustworthy partner – and make arrangements for alternative supplies, the more harmful it will be to Russia’s upstream gas sector, which will struggle to find a market for its stranded output in the short to medium term.
A production shut-in may also deal a devastating blow as some of Russia’s fields, forced to ramp down, may never recover again.
The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.
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