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Can Russia save Europe from the energy crisis

Salikhov Marcel R. President, Principal Director on Economic Studies, Head of the Economic Department

The Carnegie Moscow Center has published a column by Marcel Salikhov, president of the Institute for Energy and Finance - "Can Russia Save Europe from the Energy Crisis."

Europe does not have many options on how to increase gas supply in the near future. It is clear that Russia will be the main source of additional supplies. However, the current production of "Gazprom" is already close to production capacities, and the concern, most likely, is not able to fully cover the deficit in Europe.

Russia did not stay away from the European problems. Last week, Vladimir Putin offered to consider the possibility of increasing supplies to Europe and was able to calm the markets a little. The Russian president's verbal interventions continued this week when, at the Russian Energy Week, he reaffirmed that Russia is ready to help Europe deal with the energy crisis and called for the acceleration of the Nord Stream 2 gas pipeline launch.

However, after a slight pullback, prices continued to creep upward - in addition to verbal interventions, it is also necessary to physically increase the supply, and there are many questions about the extent, to which Russia is capable of this.

How much gas is required?

Some estimates of the required volumes can be made based on the occupancy of European gas storage facilities. Now the volume of gas in the EU underground storage is 87.2 billion cubic meters (about 78% of the capacity). Over the past five years, the average occupancy rate at this time of year has been around 90%. This means that about 13 billion cubic meters are required to achieve average long-term reserves.

Given possible fluctuations in demand and winter temperatures, Europeans may not have enough about 10-15 billion cubic meters to calmly survive this heating season. This is not so much - about 2-3% of the EU's annual consumption. But the problem is that the entire world market apparently will not be able to provide such volumes in the near future.

The LNG market is global due to the fact that liquefied gas is easy to transport. Therefore, a surge in demand in one region raises prices and reduces the availability of LPG in others. This is exactly what has been happening in recent months. The growing demand for gas in Asia, especially in China, has warmed up the entire world market.

Large suppliers have reoriented their supplies to Asia, which has reduced exports to the EU. Liquefied natural gas plants usually operate at almost full capacity, and therefore cannot dramatically increase supply in the short term.

As for pipeline gas, the main suppliers to Europe are Russia, Norway and Algeria. Norway has promised to increase production and exports by 2 billion cubic meters from October 1, but this increase will be extended over the next 12 months. In recent months, shipments from Norway to the continent and the UK have been declining. Algeria has increased the volume of pumping to Italy since the end of September, but this is too little to affect the European market.

In this situation, Russia as the largest gas supplier to Europe (provides about 35% of consumption) remains the only source that can potentially affect the market situation.

Does Russia have spare capacity?

However, there are many doubts that Gazprom and other Russian gas producers can quickly and significantly increase the volume of supplies. Gazprom's production is based on the large fields in the Nadym-Pur-Taz region (Urengoyskoye, Yamburgskoye, Zapolyarnoye). The concern does not officially disclose production data for individual fields, but it has been steadily declining - by about 20% over the past 10 years.

To offset this decline, the large Bovanenkovskoye field in Yamal was commissioned in 2012. In 2020, production there amounted to 99 billion cubic meters. The start of production at the next large Yamal field - Kharasaveyskoye - is scheduled for 2023.

At the beginning of the year, the head of Gazprom, Alexei Miller, said that the company's excess capacity amounted to about 100 billion cubic meters. That is, if in 2020 the total production of the concern amounted to 452 billion cubic meters, the current capacity can be estimated at 550 billion cubic meters.

In the first nine months of 2021, production has already increased by 60 billion cubic meters compared to the level of 2020. It will not be easy to build up it quickly even further, especially during the winter months, when it is already at its maximum levels to meet seasonal demand.

An indirect confirmation that Gazprom is already facing capacity constraints is the low filling rate of its storage facilities in Europe. For example, the Haidach UGS facility in Austria is filled only by 2.2%, Rehden in Germany - by 9.45%. Of course, Gazprom has room for maneuver, and the concern may try to satisfy European demand with gas from its Russian storage facilities, but such a low level of UGS occupancy in Europe poses a certain risk even for it.

This year, Gazprom's supplies to the domestic market have also grown significantly - by 20% compared to 2020 (and by 7% compared to 2019). The main growth in domestic demand is accounted for by the electric power industry and the population. Electricity consumption in Russia has been growing in recent months by 6-7% and is covered by thermal power plants, which means additional demand for gas.

Gazprom is also obliged to fill Russian UGS facilities. During the 2020/21 heating season, 61 billion cubic meters were taken from Russian storage facilities, which is significantly more than the usual 30-40 billion cubic meters. This also means that before the new heating season, the withdrawn gas had to be compensated.

Most likely, Gazprom can somewhat increase gas supplies to Europe, including by using the reserves of its Russian storage facilities. However, this resource is limited - it is unlikely to be enough to supply additional 10-15 billion cubic meters to Europe by the end of the year.

Is it Gazprom the only one?

Here we can recall that gas in Russia is produced not only by Gazprom, but also by independent producers, which provide about a third of the total production. But they are hindered from quickly entering the European market by the statutory monopoly on pipeline gas exports owned by Gazprom. The changes adopted in 2013 made it possible for other Russian companies to export liquefied gas, but only to those who already had licenses to build an LNG plant, that is, for Novatek.

This scheme is often referred to as the "single export channel" and was established to strengthen the competitive position of Russian gas in the key European market. In recent years, independent gas producers have repeatedly proposed to change this order, but these proposals were never accepted.

The largest independent gas producers in Russia are Novatek and Rosneft. Novatek adheres to a balanced strategy of vertical integration, when new fields under development serve as a resource base for its own LNG plants.

Rosneft has ambitious plans to develop its gas business, but its own production has been steadily declining since 2017. This year, the company launched a large gas project, Rospan, but its deadline for reaching the planned production level (21 billion cubic meters per year) was postponed several times. That is, the short-term opportunities for independent producers to significantly increase production will remain limited, even if Gazprom's export monopoly is lifted.

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