Russian natural gas exports: changing priorities

Anna Mikulska,
Ph.D., Fellow for the Center for Energy Studies,
Baker Institute for Public Policy, Rice University,
Houston, USA

There is an increasing concern about potential gas shortage this heating season in Europe. Even with prices at record high the continent has problems with attracting sufficient deliveries of natural gas that would support its demand rebounding from the Covid-19 slump and boost storage levels before winter. Instead, much of the world’s discretional natural gas supply is attracted by Asia, where economic rebound resulted in even more competitive price environment.

Cold, long 2020/2021 winter and high summer gas prices that led to insufficient storage injections are among other, uncontroversial reasons cited as responsible for current situation on the European gas market. Much more contentious is debate about another potential factor: Russian natural gas supply.

While Gazprom has delivered on its contractual commitments vis-à-vis its European customers, it has not heeded all calls for additional deliveries of natural gas that would help with overall gas shortage and alleviate high prices. Instead, Russia has pointed to the need to replenish its own gas storage ahead of the upcoming winter after high demand for Gazprom’s gas in the first half of 2021 and insufficient injections over the summer left it at lower-than-average levels.

But some warn against Russia’s geopolitical play, where limiting of gas supplies to Europe at a time of an unprecedented gas crunch would be a tactical decision directed at pushing Europeans to streamline the certification and startup of the disputed and delayed Nord Stream 2 (NS2) pipeline.

Whatever the actual reasons for limited Russian supplies to Europe, the country-level distribution of those supplies tells a story that goes beyond current gas market conditions, points to Russian natural gas export strategy and has implications for European gas consumers.

Crucially, Russia has not constrained its natural gas deliveries (to contracted volumes) across the board. In fact, in some cases – for example for Turkey and China- it has increased them rather substantially. Germany has also registered higher gas flows from Russia both, year-on-year as well as in comparison to 2019. Each of these countries has been connected to Russian gas supply directly via a recently built pipeline: Nord Stream 1, Turkish Stream, and Power of Siberia, respectively. In contrast, Gazprom booked only a very modest additional capacity for October via the Yamal-Europe pipeline running via Poland and no such capacity via Ukraine.

The immediate optics of such supply distribution could be troubling, at least from the vantage point of Russia’s commitment to security of European gas supply and particularly for countries that have questioned such commitment in the past (e.g., Poland, Ukraine, Lithuania, or the U.S.). And Russia has not shied away in the past from using energy supplies as a tool for applying geopolitical pressure.

At the same time, however, such manipulation strategy would also be quite short sighted, not necessarily effective and even counterproductive as it could provide NS2 opponents with new arguments against Russian gas.

To be sure, Russia’s willingness and/or readiness to use energy as a weapon should not ever be discounted or excluded from the realm of possibilities. But today, such behavior has been quite effectively countered and limited by development of more global and liquid natural gas market. This includes many countries in Europe that used to depend on Russia for majority, if not all, of its gas needs but now have access to other suppliers through new LNG terminals and/or interconnections.

To Russia, the above does not only mean loss of geopolitical influence. It also means loss of a portion of their main export market that is already bound to shrink as the EU pushes for transition away from fossil fuels. Such specter will drive Russia to look for and selectively favor new and/or growing markets where natural gas will play an important role. In Europe, this would be Germany, which not only has a long history of gas-based cooperation with Russia but where transition away from nuclear and coal makes natural gas a critical element in the country’s planned transition to renewable energy. Turkey is another spot where gas demand is rising, not only based on the concerns about CO2 emissions but also on the shoulders of robust economic growth. Same considerations, but at a much larger scale, make China a premium market for natural gas for decades to come, one where Russia is hoping to develop more pipeline connections in the near future. As such, one should not be surprised that Russia wants to make sure these markets are well served, favoring them at the time of limited supply.

In this context, Europe in general and the EU in specific needs to reflect on what it expects from Russia and what it can achieve given both parties’ long-term energy policy planning. Decreasing EU demand for natural gas of any kind and from any source– for either environmental or geopolitical reasons – will likely insulate Europeans from Russia’s ability to use its energy supplies as a weapon but will also decrease the continent’s importance for Russia’s energy policy and increase the latter’s bias in favor of new customers, particularly those in Asia. At the time of a supply crunch akin to the one world is experiencing now, this means that Russia’s priorities when it comes to delivery of their gas will lie elsewhere. After all, Russia’s support Europe’s security of gas supply will only extend as far as it benefits Russia and works with its future energy policy directions. Europe should make sure to account for these new risks as it plans its energy future and sets up Europe-Russia energy relations.


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