Page 38 - bne magazine February 2022_20220208

38 I Cover story bne February 2022
the infrastructure – the controversial Nord Stream 2 gas pipeline specifically connects the Yamal fields directly to Germany, Gazprom’s biggest customer – but needs long-term contracts to make this business profitable and viable. Taking the long-term view,
the Kremlin is uninterested in making a few extra bucks from the spot market in Holland during the recent soaring price for gas if it can lock in solid profits for the next 30 years.
Despite its history with Ukraine, Gazprom and Putin have repeatedly insisted that Russia is a “reliable energy supplier.” Indeed, during this winter Gazprom has scrupulously stuck to the terms of all its supply contracts. And when it transited less than the 65bcm of gas it signed off on in a new transit deal with Ukraine in December 2019 the Russian state-owned company simply paid the transit fees for 2020.
“Keep in mind that since the start of Soviet-German gas contracts in the early 1970s, the mind-set of the Russian side has been “meet the contract at
all costs.” At one point, experiencing some technical problems, the Soviets reportedly even cut Leningrad off [from] gas for a few days in order to make sure the export contract was fully filled,” says Smith. “Times change, of course, and a couple of hiccups have been experienced over the years, but I think this prioritisation is pretty deeply embedded in Gazprom’s corporate culture (although, obviously, decisions of such magnitude would be taken in the Kremlin, not Gazprom headquarters).”
Smith speculates that if Gazprom were to do the 2009 clash with Ukraine over again it would now choose to keep the gas flowing, as the decision to cut Ukraine off has already done significant damage to its business and continues to cause major problems
in getting those crucial long-term contracts signed now, 13 years later.
“I think Russia is extremely unlikely to purposefully cut Europe off from gas,” says Smith. “I think the Kremlin is fully aware that such an action would have long-term consequences for Russia, the
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cost of which are impossible to calculate but would almost certainly exceed
the value of any short-term gains.”
What if war broke out?
While the Kremlin has repeatedly denied it has any intention of attacking Ukraine, what would happen if
Russia did invade is neighbour?
There is a high chance that the Druzhba (Brotherhood) gas pipeline would be damaged or destroyed in a Russian onslaught. Even if only a smaller flare-up occurred, contained in the already disputed Donbas region, there is a tangle of gas pipelines nearby that could get caught up in the conflict.
Given the Kremlin would try and sell this war as a “local conflict” as both the US and Nato have said clearly they will not send troops in to protect Ukraine, then the Kremlin is likely to keep
the gas flowing to Europe and make the clear distinction between Planet Business and Planet Politics, as bne IntelliNews has reported on many times.
That means ramping up supplies via the Yamal-Europe pipeline across Belarus and Poland from near zero now to 100% to help offset the loss of Ukrainian transit. Smith speculates that Gazprom may even simply turn on Nord Stream
2 without regulatory approval, which has been ready to start operations at short notice for months already, as an emergency measure and just pay the fines later. Europe may even accept this decision simply to keep the lights on.
Could LNG fill the gap? While LNG deliveries provide yet another way to diversify away from Russian piped gas, the LNG business is still too young to make much of a difference. Gazprom sells between 180 bcm and 200 bcm
a year to Europe, which is equivalent to a third of the total LNG production. However, many countries in Asia, such as Japan, are entirely dependent on LNG for their gas. Diverting enough of this gas away to supply Europe – about half the total supply – would send LNG prices skyrocketing and cause a major energy crisis in Asia, says Smith.
Map of the European natural gas pipeline network.
Source: DIW 2018, based on Kai-Olaf Lang and Kirsten Westphal, “Nord Stream 2 – Versuch einer politischen und wirtschaftlichen Einordnung,“ SWP Studie S21 (2016); ENTSO-G, Capacity Map (2017).