July 28, 2021

Europe: Gazprom on all levels

The European natural gas market is reviving: sales are increasing. Good news for Gazprom, 60% of whose exports are destined for the European market.

Autumn brought its share of surprises: Falling to $ 57-60 per thousand cubic meters in the Netherlands and $ 40 (or even $ 34) in the UK during the spring, spot prices for natural gas are now showing. sustained growth. In mid-October, Dutch TTF contracts rose to $ 186 spot, with November futures contracts rising to $ 187 per thousand cubic meters. According to Russian Customs, at the start of the Covid crisis, Gazprom exported its gas at an average price of $ 125 in March 2020, which is 9% cheaper than in February and 38% cheaper than in March 2019. The group Russian then provisionally set the average price for the year at $ 133 per thousand cubic meters.

We are therefore witnessing a sharp increase, whereas the current economic situation was rather predicting a decline. First, the second wave of the pandemic took hold, slowing economic and industrial activity. Then, European underground gas reserves are 95% full: no shortage threatens at the dawn of winter. Finally, the transit agreement, concluded in December 2019 between Gazprom and Kiev, ruled out the threat of disruptions in the delivery of gas to the Old Continent.

Donald Trump has repeatedly promised to “liberate Europe from the yoke of Gazprom” …

However, the current situation on the gas market is easily explained. The approach of winter is thus always marked by an increase in prices, whatever the state of reserves. Meanwhile, the Norwegian energy sector – Europe’s other supplier – is facing a wave of strikes that could drop national production by 22%. Finally, deliveries of American liquefied natural gas (LNG) are also at half mast.

The United States out of the game

Judging by the frequent publications of LNG in the international press, it is considered the main competitor of Russian gas in the European market. Let us recall in this regard that the President of the United States, Donald Trump, has repeatedly promised to “liberate Europe from the yoke of Gazprom”. In reality, US LNG and gas exported by Gazprom are not in direct competition in Europe.

To begin with, it is worth remembering that the US President and Congress are not gas dealers. LNG from US liquefaction plants is shipped to trading companies who send their LNG carriers to where prices are highest. Their choices are not motivated by geopolitical considerations. It is difficult to imagine that the Oval Office would dictate to the executives of these companies the destination of their gas and its selling price in order to oust Gazprom from its traditional markets. Gas is sold where it earns the most. However, American LNG, the production cost of which amounts to around 100 dollars per thousand cubic meters, comes to 222 dollars after transport to Europe. How would it compete with the product sold for 140 dollars by Gazprom, including transport?

LIQUEFIED NATURAL GAS PLANT IN THE IAMAL PENINSULA. PHOTO: NOVATEK.RU

In reality, it is not with American LNG that the Russian giant must compete in Europe, but with that of Qatar, Norway, Nigeria, Algeria, Trinidad and Tobago and other exporters. gas… including Russia!

Indeed, the gas extracted and liquefied in the Iamal peninsula (Arctic) is starting to play an increasingly important role in Europe. It is not sold by Gazprom, nor by another Russian company, but by the international consortium of the Yamal LNG project, which brings together the Russian Novatek, the French Total, as well as two Chinese companies. With 12 years of tax exemption granted by the Russian government to stimulate the development of the Arctic, the group is already a strong competitor for Gazprom. Novatek, which launched a production line with an annual capacity of 5.5 million tonnes in early December 2017, plans, according to its director Leonid Mikhelson, to produce around 55 million tonnes of LNG by 2030 and up to 70 million tonnes after 2030. The company is expected to invest nearly $ 9 billion in the project.

Many advantages

In this competition, Gazprom has a number of arguments to make. The monopolistic company thus has enormous reserves in known deposits which are already ready for exploitation. It could easily halve its exports, without having to disrupt its production chain or massively increase its investments. Everything will depend on the evolution of European demand.

Gazprom takes full advantage of the support – financial and political – of the Kremlin.

Another advantage of Gazprom: an operational and future-proof gas pipeline network. In 2019, 200 billion cubic meters were exported from Russia to Europe, with an annual capacity of over 280 billion. A particularly comfortable margin when demand drops sharply, such as during the pandemic. Note that European consumption is satisfied despite the discontinuation of the Nord Stream 2 and South Stream projects.

In addition, the large number of long-term contracts and Gazprom’s historic relationships with its European customers work in its favor. It is undesirable to break contracts established over 10 to 20 years, which guarantee a supply that is both stable and adaptable to fluctuating needs, and to replace them with cash operations. In recent years, Gazprom has not hesitated to amend certain contracts, under pressure from buyers: meeting customer demands has enabled it to maintain and even increase its position in the market.

Vessel Pioneering Spirit installs a pipeline in Swedish waters, February 26, 2019. Photo: Axel Schmidt / Nord Stream 2

Finally, Gazprom’s powerful lobby (or more generally the pro-Russian lobby) on the Old Continent is no stranger to the success of the gas giant. The “schröderization” of the elites – the granting of lucrative posts to politicians in different countries of Europe – is a common practice. Society can also benefit from the support – financial and political – of the Kremlin, which countries like Bulgaria, Hungary, Austria and even Germany are aware of. In its place, a strictly commercial company would probably not enjoy the same indulgence on their part.

In other words, Gazprom has nothing to worry about for its future in Europe and can profit from the rise in prices without ulterior motives.