Russia has slowed the delivery of piped fossil fuel to Europe in recent weeks, in line with analysis from ICIS, a commodity administrative body, raising questions about the potential causes behind the drop and its implications for global gas markets.
It comes shortly after German Chancellor Angela Merkel sought to ease long-running concerns about the nearly completed Nord Stream 2 pipeline, saying further sanctions is also imposed if Moscow used gas “as a weapon.”
The controversial project is intended to deliver Russian gas on to Germany via the Baltic Sea, bypassing Ukraine and Poland.
Critics argue the pipeline isn’t compatible with European climate goals, increases the region’s dependence on Russian energy exports and can possibly strengthen Russian President Vladimir Putin’s economic and political influence over the region.
Some analysts have suggested Gazprom, Russia’s state-owned Jovian planet, could also be limiting its delivery of discretionary gas supply to Europe to support its case in starting flows via Nord Stream 2.
“That’s because Gazprom is readying itself for starting Nord Stream 2 and it’s hoping to exert a part of leverage in terms of trying to create sure that when all the regulatory t’s get crossed and i’s get dotted, that that process is as swift as possible,” Tom Marzec-Manser, lead European gas analyst at ICIS, told CNBC via telephone.
“If there’s less gas around than normal and also the price is high then it should streamline that process,” he added.
When approached for comment, Gazprom referred CNBC to an announcement published on its Telegram account on Aug. 16. the corporate described August as “another ‘winter’ month on the gas market,” in keeping with a translation.
An increased load on the gas supply system had coincided with the standard season of scheduled preventive maintenance and preparation for the autumn to winter period, “which can not be paused,” Gazprom said.
“The practice of the previous few years both in Russia and in Europe suggests that the winter period has also shifted to the spring month of March. Therefore, now, within the summer, the priority is to pump gas into underground storage facilities,” the corporate said. “This is additionally all right understood by our European colleagues.”
Natural gas flows at the westernmost point of the Yamal pipeline — a strategically important 2,000-kilometer pipeline that runs across four countries: Russia, Belarus, Poland and Germany — dropped to twenty million cubic meters per day in mid-August, per ICIS. This was down from 49 mcm per day at the tip of July, and a pointy fall from its typical rate of 81 mcm per day.
What’s more, European piped fossil fuel supply from Russia is anticipated to slide even further in September.
Marzec-Manser said that for Russia to maneuver gas through neighboring energy community states, like Ukraine, it must first purchase access to a pipeline, “like a road.” The Nord Stream 1 route is one option, although this is often already owned by Gazprom, and is flowing at capacity. The Yamal pipeline could be a second major route and, until the tip of July, was running at near capacity obviously.
“Thirdly, you have got the Ukrainian route which obviously comes with lots of political baggage,” he continued. “It is that the only other way you’re visiting get gas from Russia to Europe in any significant volume.”
Gazprom typically efficiently uses its booked EU pipe capacity, Marzec-Manser said, but an unexpected visit volumes at the top of July along the Yamal pipeline “immediately indicated something was amiss.”
Natural gas flows to Europe dropped again shortly thereafter following a hearth at a condensate plant within the Siberian city of Novy Urengoy.
As a result, external observers of Gazprom closely monitored interruptible monthly capacity auctions via Ukraine. These auctions are widely seen as a key signal to the market of upcoming volumes because they happen two to a few weeks before the month during which fossil fuel flows.
A string of no-shows at each auction prompted analysts to question whether absent capacity bookings via Ukraine were the maximum amount to try and do with Gazprom’s inability to produce as opposition its unwillingness to deliver.
“If true, this has serious implications on how the worldwide gas and LNG market treats Russian pipe volumes and therefore the availability — or not — of its discretionary supply,” Marzec-Manser said.
Another theory, although analysts consider it somewhat less likely, is that because Gazprom believes Nord Stream 2 will soon be fully operational, it should not have to book further capacity elsewhere.
Valentina Bonetti, senior gas analyst of EMEA at S&P Global Platts, told CNBC that the firm regards the recent call in Russian flows to Europe “as a consequence caused by a physical upstream issue” that’s taking longer than expected to return to full flows.
“Gazprom has long prided itself on being very reliable and prompt in restoring supply after accidents,” Bonetti said. However, she argued the company’s recent pivot to a “value-over-volume strategy” had tested the company’s ability to revive fossil fuel flows and put pressure on the EU to permit a smooth start-up of Nord Stream 2.
While Gazprom is currently producing above the five-year range, Bonetti said it needs significant amounts of gas for both domestic storage injections in addition the maximum amount higher year-on-year exports to Turkey. This “may exacerbate their value-over-volume strategy for exports to Europe.”
S&P Global Platts believes Russian flows to Europe will recover gradually within the coming weeks and expects Nord Stream flows to begin in October, saying Gazprom’s recent actions and statements seem to verify a comparatively imminent start.
Record high gas prices
European gas market prices have skyrocketed over 116% since the beginning of the year, with the ICIS TTF benchmark closing at an all-time high of 47.86 euros ($56.17) per megawatt-hour on Aug. 16. it’s reflective of a good market, with Europe facing incredibly low gas storage levels and rebounding Asian and South American LNG demand.
The contract was last seen trading at around 43.2 euros, following news Gazprom reportedly plans to provide 5.6 billion cubic meters of gas to Europe this year.
“The current visit gas deliveries and increase withdrawals from storage, which is elevating gas prices across Europe and benefitting Moscow, is firstly a billboard tactic to assist Russia at a time when gas demand round the globe is high,” said Kristine Berzina, a senior fellow at the Alliance for Securing Democracy, a national security advocacy group. “But it also shows Europe just how dependent it’s on Russia for its gas.”
Berzina said it absolutely was “notable” for Merkel to threaten sanctions just in case Nord Stream 2 was used as a weapon but questioned how Germany or Europe would determine that to be the case.
“Will a slow rise in gas prices that have a geopolitical underpinning be considered a ‘weapon’? … Or will only dramatic cut-offs be considered a ‘weapon’?”
“Europe is going to be a sort of frog in boiling water, not noticing that it’s in trouble until it’s too late,” Berzina said. “Russia has plenty of room to form scenarios that are painful for Europe but don’t cross critical thresholds. Doing so, in fact, would be advantageous to Russia both financially and politically.”