Why Russia refuses to send Europe more natural gas?

Rising commodity prices have strengthened the economic prospects of commodity-rich countries. Russia benefits from this on a large scale, with a particular focus on crude oil and natural gas. As Europe’s leading gas supplier, Gazprom is well positioned to reap large dividends. However, the state-controlled energy giant’s lukewarm response to shipping additional volumes to Europe could be a sign that the company’s strategy has changed.

In 2020, Gazprom’s exports dropped from 199 bcm in 2019 to 170 bcm. Most of this gas goes through Soviet-era pipelines from Russia to Belarus and Ukraine. With the completion of Nord Stream, another 55 bcm capacity was added in 2011 and will double to 110 bcm when the highly controversial Nord Stream 2 pipeline starts pumping gas at some point. in the next two years.

Due to the restart of the European economy, the demand for raw materials has increased and prices have risen significantly. Although LNG imports have increased over the years, most of the natural gas is still transported through pipelines. Of these exporters, Russia is by far the largest and most influential country due to its sizeable energy industry and overcapacity. While prices are favorable, Gazprom does not appear to be in any rush to ship additional volumes on top of ongoing contracts with European customers.

After an exceptionally cold heating season, European warehouses are at historically low levels, further boosting demand to prepare for the coming winter. Also, some parts of Europe are experiencing an unusually warm summer, leading to increased demand for electricity for air conditioning. Under normal circumstances, coal-fired power plants would fill the gap, but the price of CO2 on the European ETS is doubled to €52 since Nov. Therefore, there is more demand for natural gas-fired power plants, which emit almost 50 percent less.

In the past, Gazprom would have rapidly ramped up exports to meet additional needs with the ultimate goal of increasing market share. However, the Russian company has refrained from booking additional throughput through the Ukrainian pipeline system. According to Nick Campbell, director of consultancy Inspired Energy, “so far, Gazprom has not yet purchased capacity at the (Ukraine) monthly auctions this summer. Therefore, you could see this as a strategy to bring Nord Stream 2 to a successful conclusion.”

Elena Burmistrova, director-general of exports at Gazprom, has denied the change in strategy, although she has acknowledged customers’ requests for additional volumes. According to critics her statement that more gas would flow with “the commissioning of the Nord Stream 2 pipeline” has confirmed Moscow’s intention regarding pressure on Europe to complete the pipeline this year.

The project has been delayed by US sanctions. Nevertheless, Gazprom has continued to push for the completion of Nord Stream 2. Two Russian pipelayers have been working non-stop. One of the two strings is already finished and according to Nord Stream 2’s CEO Matthias Warnig the second string will be completed in August.

Another theory behind Gazprom’s reluctance to ship additional volumes is Gazprom’s new for-profit strategy. In the past, increasing market share was the main goal, sometimes at the expense of profitability. Natural gas was therefore used as a political weapon in various crises with highly dependent Eastern Europe. State-owned Gazprom could now prioritize profitability over political influence. In that sense, the role of the company would be more like OPECs with the difference that its influence is limited to Europe, where it has good connectivity with customers. The EU’s strong focus on sustainability and decarbonisation could have led Russians to maximize the value of their natural gas while there is a sizeable market.

However, it can also be short-term opportunism. The price of natural gas on the European market has risen from $130 per 1,000 cubic meters in 2020 to $400 currently. The European market will almost certainly be under-supplied in the coming months, which could lead to continued higher prices and few good options from the EU’s perspective.

By Vanand Meliksetian for Oilprice.com

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