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42 I Special focus bne October 2021
Politics obviously play a role in the Kremlin's Nord Stream 2 pipeline, but the dramatic changes in gas demand and Russia's ageing gas fields and infrastructure have been the biggest price drivers.
How a V-shaped market and ageing pipes and fields sent gas prices soaring
Ben Aris in Berlin
With the heating season officially due to start, gas prices have soared and Russia has been blamed for it, accused of cutting supplies to Europe as a way of putting political pressure on the EU and forcing it to rapidly certify Russia’s new Nord Stream 2 gas pipeline that cuts Ukraine out of the supply loop.
The reality is a lot more complicated. Nord Stream 2 does play a role but the main mechanism at work on the prices is a sharp V-shaped market where there was a gas glut in 2020 that depressed prices and led to record-high gas stor- age, exacerbated by the uncertainty of Russia and Ukraine renewing their gas transit deal in December 1999.
However, a long cold winter at the start of 2021, a hot summer (that drives up electricity usage and hence demand
for gas) and various maintenance and
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accident outages in the main pipelines have all conspired to lead to extremely low storage. By the end of the summer when it became obvious that gas storage levels were going to be low going into the heating season prices took off as the scramble to secure supplies began.
The problems of gas supply have been exacerbated by the falling output at some of Europe’s biggest fields in the UK and the Netherlands, which have passed their sell-by date.
With its massive reserves Russia has become the main swing producer of gas for Europe, ramping up or cutting back supply as demand changes. But in Rus- sia too, the main mega-fields that have supplied Europe for decades have passed maturity and are in slow decline, espe- cially the Cenomanian gas fields in West- ern Siberia that feeds the central pipeline network that leads into the Ukrainian
pipeline network. Massive investments have been made into Cenomanian simply to maintain production at current levels.
The falling output at Cenomanian has been replaced by the relatively young fields in Yamal that feed the northern system of pipelines that include Nord Stream 1 & 2 pipelines to Germany, but with Nord Stream 1 already working at full capacity and Nord Stream 2 yet to go into operation, the enormous reserves of gas in Yamal are unavailable during the current crisis.
And it is not possible to divert gas from Yamal and the northern pipeline system to the central pipeline system and on to Europe via Ukraine. There are intercon- nections, but the 40-year-old central pipeline network has already been slated for decommissioning and during the lead-up to the winter season the inter- connectors are already at full capacity as