Russia pumps less natural gas into Europe as North Stream 2 approaches

LONDON – Russia has slowed the delivery of piped natural gas to Europe in recent weeks, according to analysis by ICIS, a commodity intelligence service that raises questions about the potential causes of the crash and its implications for global gas markets.

It comes shortly after German Chancellor Angela Merkel tried to alleviate long-standing concerns about the nearly finished Nord Stream 2 pipeline, saying other sanctions could be imposed if Moscow used gas “as a weapon.”

The controversial project is designed to supply Russian gas directly to Germany via the Baltic Sea, bypassing Ukraine and Poland.

Critics argue that the pipeline is not compatible with European climate targets, increases the region’s dependence on Russian energy exports and is likely to strengthen Russian President Vladimir Putin’s economic and political influence over the region.

Some analysts have suggested that Gazprom, Russia’s state gas giant, could limit its discretionary supply of natural gas to Europe to support its case in initial flows through Nord Stream 2.

“This is because Gazprom is preparing to launch Nord Stream 2 and hopes to exercise a leverage element in terms of making sure that when all regulations are crossed and that they are punctuated, that this process is the fastest. possible, “Tom Marzec-Manser, Europe’s leading gas analyst at ICIS, told CNBC by telephone.

“If there is less gas around normal and the price is high, it can streamline that process,” he added.

When asked for comments, Gazprom referred CNBC to a statement posted to its Telegram account on August 16. The company described August as “another winter month” in the “gas market,” according to a translation.

An increase in the load on the gas supply system had coincided with the traditional season of scheduled preventive maintenance and preparation for the period from autumn to winter, “which cannot be stopped,” Gazprom said.

“The practice of recent years, both in Russia and in Europe, suggests that the winter period has also moved to the spring of March. Therefore, now, in the summer, the priority is to pump gas to the facilities of ‘underground storage,’ the company said. “This is also very well understood by our European colleagues.”

Natural gas flows at the westernmost point of the Yamal pipeline, a strategically important 2,000-kilometer pipeline that crosses four countries: Russia, Belarus, Poland and Germany, fell to 20 million cubic meters a day in mid-August, according to the CIHI. This dropped from 49 mcm daily at the end of July, and fell sharply from the usual rate of 81 mcm daily.

In addition, the European supply of natural gas by pipeline from Russia is expected to fall further in September.

Marzec-Manser said that in order for Russia to move gas through neighboring states in the energy community, such as Ukraine, it must first buy access to a pipeline, “like a toll road.” The Nord Stream 1 route is one of the options, although it is already owned by Gazprom and has maximum capacity. The Yamal gas pipeline is a second major route and, until the end of July, was operating close to capacity as expected.

“Thirdly, you have the Ukrainian route, which obviously includes a lot of political baggage,” he continued. “It’s the only other way to bring gas from Russia to Europe in a significant volume.”

Gazprom typically uses its reserved pipeline capacity in the EU efficiently, Marzec-Manser said, but an unexpected drop in volumes in late July along the Yamal pipeline “immediately indicated that something was wrong.”

Natural gas flows to Europe fell again shortly after a fire at a condensate plant in the Siberian city of Novy Urengoy.

As a result, Gazprom external observers closely monitored interruptible monthly capacity auctions across Ukraine. These auctions are widely regarded as a key signal for the market of upcoming volumes, as they take place two or three weeks before the month in which natural gas flows.

A series of non-submissions at each auction prompted analysts to question whether absent capacity reserves across Ukraine had as much to do with Gazprom’s inability to supply as its unwillingness to deliver.

“If true, this has serious implications for how the global gas and LNG market handles Russian pipeline volumes and the availability (or not) of its discretionary supply,” Marzec-Manser said.

Another theory, though analysts consider it a little less likely, is that because Gazprom believes Nord Stream 2 will soon be fully operational, it may not need to reserve more capacity anywhere else.

Valentina Bonetti, EMEA’s senior gas analyst at S&P Global Platts, told CNBC that the firm sees the recent drop in Russian flows to Europe “as a result of an upstream physical problem” that is taking longer than expected to return to full flows.

“Gazprom has long boasted of being very reliable and fast in restoring supply after accidents,” Bonetti said. However, he argued that the company’s recent pivot towards a “value-for-volume strategy” had tested the company’s ability to restore natural gas flows and put pressure on the EU to allow for a good start-up. of Nord Stream 2.

Although Gazprom currently produces above the five-year range, Bonetti said it needs significant amounts of gas for both internal storage injections and much higher year-on-year exports to Turkey. This “may worsen its value-over-volume strategy for exports to Europe”.

S&P Global Platts believes Russian flows to Europe will gradually recover in the coming weeks and expects North Stream flows to begin in October, saying Gazprom’s recent actions and statements appear to confirm a relatively imminent start.

European gas market prices have soared above 116% since the beginning of the year, and the ICIS TTF benchmark closed at an all-time high of 47.86 euros ($ 56.17) for megawatt-hour on August 16th. It reflects a tight market, with Europe facing incredibly low levels of natural gas storage and repeating Asian and South American demand for LNG.

The contract was last negotiated at around 43.2 euros, following the news, according to Gazprom plans to supply 5.6 billion cubic meters of gas to Europe this year.

“The current fall in gas supplies and rising storage withdrawals, which raise gas prices across Europe and benefit Moscow, is primarily a business tactic to help Russia at a time when demand for Gas around the world is high, “said Kristine Berzina, a senior member of the Alliance for the Security of Democracy, a national security advocacy group. “But it also shows Europe’s dependence on Russia for its gas.”

Berzina said it was “remarkable” that Merkel threatened sanctions in the event that Nord Stream 2 was used as a weapon, but asked how Germany or Europe would determine that it would be so.

“Will a slow rise in gas prices that have a geopolitical basis be considered a ‘weapon’? … Or will only dramatic cuts be considered a ‘weapon’?”

“Europe will be like a frog in boiling water, not realizing it has problems until it’s too late,” Berzina said. “Russia has a lot of room to create painful scenarios for Europe, but they do not cross critical thresholds. If it did, in fact, it would be advantageous for Russia both financially and politically.”