Relations between Gazprom and the European Commission have sunk to an all-time low over the past year as Ukraine breaks up and the civilian and military death toll in the east rises.
Gazprom is too closely related to the government – and the president Vladimir Putin in particular – for it to be seen as a gas production, transport and supply company just like any other. Gazprom inevitably takes some of the heat for the activities in the Kremlin.
The EC has already imposed sanctions on Russian companies. But if an outright ban on Russian gas is too damaging for its own end-users, the EC can also employ other means – directives, anti-trust probes, exemption clauses and all the other weapons in its armoury – to limit Russia’s ability to profit from Europe.
It used to be a platitude that Russian gas supply and European gas demand were perfectly matched: flexible, secure and affordable, it would often form a third of many western European importers’ portfolios. But from the perspective of early 2015, this assertion looks shaky and a combination of poisonous politics and the supply-demand balance suggest that the European Commission has nothing to lose from exerting even more economic pressure on Gazprom, and, indirectly, on Moscow.
In 2013, Gazprom supplied 163 billion cubic meters to countries beyond the former Soviet Union – a record for exceptional reasons. Last year it supplied a tenth less, close to 2012 sales (139 Bcm). and on the basis of today’s data, this year will be lower still. Sales prices are also falling, as the 60% drop in Brent crude feeds through later this year into lower long-term import contract prices for gas.
Another platitude – that gas is a long-term business – is also less certain, now that greater LNG supply contract flexibility means that more gas is arriving at the EU borders at shorter notice from further afield. The collapse in oil prices has hastened the fall in Asian LNG spot prices, making Europe competitive once more.
For its part, Gazprom has crossed a number of Rubicons over the past few months that appear to draw a line beneath its interests in the European Union’s gas markets.
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It has walked away from negotiations that could have given it access to more than half the capacity in the 36 Bcm/year OPAL pipeline; it has bought out its European partners in the planned 63 Bcm/year South Stream project, which is now dead; and it has replaced that project with a highly doubtful plan to deliver 50 Bcm/year of gas to the border between Turkey and Greece, requiring its long-term customers to agree to new contractual delivery terms and to finance new pipelines to collect as much as they might need.
By cutting its capacity use in OPAL, Gazprom is signalling that there will be no further expansion of the Gazprom-led Nord Stream project, for which OPAL was one of the two offtake lines.
Nord Stream’s capacity is now 55 Bcm/year, but only a few years ago, 110 Bcm/year was the target capacity, including a possible 27.5 Bcm/year offshore line to the UK. Russia is looking at other markets such as China, which eventually could replace Europe in volume terms if not price. Pipelines to China, therefore, are one way forward and LNG sales to Europe and Asia are another.
The former incumbent European gas companies have so far played their cards close to their chest, partly because with “free” wind and cut-price coal generation, relatively expensive gas has become less necessary to meet customers’ demand in an industrially depressed region.
The onward march of renewables in Europe is destroying gas demand that might never come back. Last year in Germany, wind and solar accounted for 15% of the electricity mix.
And some of the incumbents also have other irons in the fire, such as global coal and LNG trade with less regulated regions. They also are selling off assets to finance this expansion, as well as to dig themselves out of the financial hole that their oil-indexed gas contracts forced them into.
The story of Russian gas supply and European demand has been a remarkable one and had until recently withstood grave political tensions and shocks over its 50-odd years, bringing prosperity to both buyer and seller. But today’s freer worldwide gas trade – about to become a lot freer when the US joins the fray – and environmental policies could leave Gazprom struggling for a role.
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