Putin’s recent gas-Godfather-like statements that Nord Stream 2 could alleviate the current European natural gas price and supply crisis is an obvious attempt to pressure the EU to rush Nord Stream 2 approval in ways violating the EU’s own rule of law.As a Polish expert wrote in 2019,: “The amendment to the [European Union’s] gas directive explicitly confirms that EU law applies in the case of Nord Stream 2 (that is, to the section running through German territorial sea), including the rules on unbundling, third-party access, independent operators et al.: (Agata Łoskot-Strachota, “The gas directive revision: EU law poses problems for Nord Stream 2,” OSW, Warsaw, 21.02.2-19.).
However, Putin’s hubris should be taken with a grain of salt. In reality, his options in this regard are subject to current technical-economic constraints of the Russia gas sector, as my research had indicated in recent weeks.
Russian domestic storage was announced to be at 97% full mid-last-week due to its continuing all-out Gazprom filling campaign, reportedly at the high rate of about 300 million cubic meters/day (mcm/d). The plan had been to finish by 1 November.. Thereafter, this maxed-out production has to immediately be choked off or be sent somewhere else – and indeed there is only one option; but it is not Nord Stream 2…
One caveat: a recently announced 7 November Gazprom export start date did not made sense. Where would the maxed out production flows go from 1 to 7 November? However, an article yesterday by Bloomburg [possible paywall] clarifies “Gazprom said Wednesday that the Russian re-injection campaign would be a week longer than the original Nov. 1 conclusion.” This is quite plausible – it is simply taking an extra six days to top off Russian domestic storage.
So to reiterate points I have stressed over the past few weeks (e.g., at Naftogaz’ Ukraine Gas investment Congress closing panel in Kyiv last Thursday-I’ll put a video of this here soon- and in various interviews):
First, while Putin has relished playing the gas-mafia Godfather (e.g., at the St Petersburg gas conference two weeks ago), asserting that, if Nord Stream 2 is rapidly approved, Gazprom exports could save Europe this winter, he has been merely posturing as the strongman decider. He wanted to appear to be craftily withholding extra, non-contracted gas supplies needed to fill the company’s storage facilities in Germany and throughout the EU, all still now at worryingly low levels long after the traditional filling season ended at the start of October.
However, the more mundane reality is that Russia’s domestic gas storage was just as greatly depleted after the previous harsh winter as was that of the EU, and there simply has been no spare Russian gas to export until Russia finishes filling its own domestic storage for winter. The Godfather was bluffing.
An unusually cold winter and hot summer this year had drawn down what were previously record-level storage stocks accumulated during the previous, 2020-21 year’s Covid lockdowns. As I wrote here earlier, in the EU, this depletion was exacerbated also by low winds and insufficient gas-storage backup or other grid-scale electrical storage installations to support Europe’s increasing reliance on windfarms.
Meanwhile, Covid complications (and a surge in misguided anti-gas climate activism) had diminished 2020-21 global investments in gas production as well as the sector’s labor availability, On the other hand, economic activity began rebounding from Covid, especially in Asia, sharply increasing gas demand. This low-supply and high-demand double hit made it very difficult everywhere to rebuild depleted gas storage before the onset of this winter. Thus has generated the proverbial “perfect storm” global gas crisis – but one which had hit Russian storage like it had hit Europe’s.
Gazprom production was further hampered by a late-summer fire at a major gas treatment facility in West Siberia, while under orders to go all out to maximize production for domestic storage injection. Only after completing this task can and will Gazprom be free to turn to exporting its excess, non-long-term-contracted production into Europe.
All the profit it could have from April to October by filling its storage facilities inside the EU, and by selling to European firms, have been lost .Domestic storage had to come first.
So, here is the current situation as I see it:
1. The anticipation of Russian flows west from 7 November is already easing EU prices a bit (ibid, Bloomberg)
2. My expectation is that Russian export pipelines, including Turkstream, Blue Stream, Nord Stream 1, are already full with contracted flows, and non-contracted partially full Yamal Pipeline (via the Russia-Belarus-Poland-Germany route) will now be rapidly full. Meanwhile, this western Siberian and Yamal region gas has no pipeline connections to eastern Siberia and on into Ch00ina.
3. Unless Gazprom wants to sacrifice all its investments and efforts made in order to max-out its production, it has to now export and it has no option to wait for NS2. If, instead, it throttles back production, it will lose the big production investments and the profits that are possible from filling EU storage (oh, and EU prices will again continue to rise). I believe the Kremlin will order Gazprom to exports rather than choking off its present record level production.
4. So, the only possibility for exports, in light of No. 2 above, is to contract Ukraine transit (No?). Note that last week Ukraine offered Russia a 50% cut in transit tariffs. Here is (one last?) opportunity for Putin to make a big profit off Ukraine transit. We shall shortly see whether Mr Putin can be market-rational Mr. Putin can be, for his own profit, during a period of the next several weeks.
Moscow choosing exports via Ukraine is the only path:
(a) to plausibly begin to avert a EU gas crisis if there’s an unusually cold and low-wind winter, and
(b) for Gazprom not to waste its investments and efforts this year to accomplish the huge gas production flor it now has.
(c) Note: Rushing to start Nord Stream 2 is not a solution/option here. It simply will not and cannot be ready to serve both the (a) and (b) objectives above.
5. Gazprom and Putin are now being wise/realistic to announce they want to and can cut EU gas prices by up to 60% (see ibid) by delivering a surge of pipeline gas flows. Objectively, whatever one thinks of Mr. Putin, this would fortify the place of gas as reliable in the EU transition and its Green Finance Taxonomy and boost Gazprom’s future business (by whatever future route it comes into Europe — best would be via Ukraine).
Are Putin and Gazprom really serious? If so, Moscow must call Kiev and book Ukraine’s 50%-off transit now (i.e., starting from 7 November).
— Analysis by: Tom O’Donnell twod@umich.edu // GlovalBarrel.com // 28.10.21 15:0O CET
The mentioned Bloomburg link
NOTE: Some grammer and typos, especially referring to the wrong years (e.g., 2020-21 and 2021-22), have been corrected within about an hour of publication
The Global Barrel 