Relations between the European Union and Russia tend to see-saw, with neither side able to maintain its dominance for long. Where natural gas is concerned, the past few years have seen Gazprom on its back foot.
The European Commission’s probe into Gazprom’s oil indexed contracts, its insistence on the move from border toward hub trading, and the compulsory unbundling of supply from transportation affecting Gazprom’s joint ventures in Europe were all furiously challenged by the Kremlin, but so far with no effect.
As the new year gets under way, though, the picture is looking very different, with Russia winning on several fronts.
First, what promised to be a major coup for the European Union–wooing Ukraine away from the Kremlin’s sphere of influence–turned sour in the closing days of 2013, as Moscow eased Kiev’s main gripe: high natural gas prices.
While protesters were camping out in Independence Square, calling for closer ties with the EU and ultimately visa-free travel to new labor markets, their president, Victor Yanukovich, was unable to ignore the lure of cut-price gas and the prospect of even bigger riots, such as those in the failed Eurozone states. He signed up to what Moscow was offering instead, and explicitly conceded that his country’s goal of diversification of gas supplies was less important than securing cheap gas.
Russia won a second victory en passant, so to speak, by getting the better of one of its customers, Germany’s RWE.
RWE Supply & Trading had a framework agreement to export gas to Ukraine through two routes, and planned to use a third one from this year. But it can hardly fight back with an even lower offer, since the Russian gas price means Ukraine has the cheapest gas in the region: $9.70/MMBtu, at today’s rates, compared to almost $11/MMBtu in Germany. Thanks to Gazprom’s generosity to Kiev, RWE has for the time being at least lost the market for gas it had contracted to buy and then sell profitably to Ukraine.
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Third, Russia saw its records for exports tumble in 2013. Despite the economic recession, and despite the growth of coal-fired generation at the expense of gas in Germany, continental Europe’s biggest gas market, Russia grabbed market share from its major competitor, Norway, and exported one-sixth more gas in 2013 than it had in 2012, albeit at a slightly lower unit price.
And this was at prices close to the long-term oil indexed price, meaning this figure was not achieved by the destruction of value. Demand was simply running very high and additional supply could only really come from Russia. Uncontracted gas vanished from the hubs in the very early stages; Norway had production problems offshore including at its major Troll field; war in Libya cut its exports to Italy; and of the EU’s other external suppliers, most, such as Qatar and Algeria, had other, more attractive, markets in view thanks to the global reach of liquefied natural gas.
Cargoes of LNG were delivered to Spain and southern France, for example, but then put back on tankers and hauled away to Asia for sale at more attractive prices. In other cases the ship did not even touch the coast, but was diverted east from the outset. Very little LNG came to the UK, where there are no reloading facilities.
Despite the record high prices paid for gas in the UK for summer delivery – almost a fifth higher in June-August 2013 than in the year before – they were not enough to drag trade back to the Atlantic Basin. Pipeline gas substituted for LNG, and much of that pipeline gas came from Russia. New gas fields in Yamal and new transportation routes have more than offset the termination of purchases of cheap gas from Central Asia.
But not much remains stable in the gas industry for long. Gazprom cannot count on the present situation enduring indefinitely as new LNG supplies from Australia and even the US will bring in their wake new opportunities and risks.