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44 I Special focus bne October 2021
Gas storage levels in Europe
quickly respond to a higher call on gas in Europe in 2021,” Yermakov said.
And Russia did, with recent reports showing Russia’s gas exports to Europe (including Turkey) up almost 20% y/y in the first half of this year. “But this has proved to be insufficient to address
a sudden void in Europe’s gas balance. Gas storage levels in Europe are at histori- cal lows at the start of the heating season and gas prices have been testing record levels,” says Yermakov.
LNG could ease the pressure but Russia is still not producing enough to meet the demand. In 2020, Russia became one of the ‘Big Four’ global LNG producers, and production has increased from 10mn tonnes per year after the Sakhalin plant went online to 30mn tpy now. But that is still dwarfed by Qatar, the world’s big- gest producer, with 125mn tpy.
The distribution of Russian LNG exports in 2020 was skewed in favour of Europe (18.35mn tonnes) at the expense of Asia (11.25mn tonnes) due to the disap- pearance of the usual Asian premium. Sakhalin LNG stayed in Asia but deliver- ies from Novatek’s Yamal LNG mostly ended up in Europe.
Overall Europe already has fairly diver- sified gas supplies. Gazprom’s share
of European gas consumption peaked at 36.6% in 2018, and Russia’s over-
all share (for both pipeline and LNG) reached 39% that year. Russian pipeline gas market share returned to its more ‘normal’ 32.4% in 2020 as Gazprom had to accommodate the inflow of global LNG during the first half of 2020 as well.
Exports to the three largest purchasers of Gazprom gas in Western Europe were up in the first six months of 2021 compared to the same period of 2020: an increase of 8.7 bcm in Germany (up 43%), up 1.4 bcm in Italy (up 14%) and an increase of 9.9 bcm in Turkey (up 209%). Russian pipeline gas exports to China continued to ramp up according to plan and are set to amount to 10 bcm for the full year of 2021.
“Total exports to Western Europe and Turkey grew to 77.2 bcm, up 17.1bcm or 29% year-on-year. This was, in fact,
Source: Gazprom: 2Q IFRS Results, 31 August 2021 – presentation for investors.
lands all producing less gas than in the previous year. By the summer the supply problem became so obvious gas prices started setting new records on almost a daily basis.
Stored gas was drawn down but to add
to the pressure Gazprom closed its Nord Stream 1 gas pipeline for annual main- tenance in August, disrupting supplies, which were further disrupted after a fire at Gazprom’s Urengoy Condensate Treatment Plant in August closed part of the line.
“The record-high prices in Europe are driven by increased demand (due to the wider economic recovery and weather- related factors), competition with Asia for LNG, and a limited supply response from Gazprom, Europe’s largest supplier, providing about a third of Europe’s gas. Prices have also risen due to market fears of a gas deficit during the winter heating season due to low European storage utili- sation compared to previous years,” said Vitaly Yermakov, senior research fellow the Oxford Institute for Energy Studies (OIES) in a paper entitled “Big Bounce: Russian gas amid market tightness.”
As bne IntelliNews reported, Gazprom has been exporting record amounts of gas to European clients, but has not taken up all of the capacity on offer from the Gas Transmission System Operator of Ukraine (GTSOU). With the controversial Nord Stream 2 gas pipeline completed but still missing the essential operating permits from Germany, that has led many to accuse Gazprom of artificially manipulat- ing the supplies for both commercial gain and political reasons.
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Yermakov argues that Russian gas production is maxed out and it is unable to supply more gas to Europe even if it wanted to.
“For Russian gas, 2021 has developed into a pivotal year, as the gas market pendulum has swung back from relative gas abundance and extremely low pric- es in 2020 to market tightness and very high gas prices so far in 2021. The past two years, therefore, have represented two slopes in a ‘V-shape’ trend for the gas market at large and for Russian gas in particular,” Yermakov said.
LNG supplies disappear, Gazprom
to the rescue
Normally burgeoning LNG supplies could make up the shortfall, but prices for LNG in Asia have been even higher than those in Europe, sucking that sup- ply away from European markets, lead- ing to a triple whammy in gas supplies.
“With declining indigenous produc- tion in Europe and limited availability of LNG owing to the strong pull from premium markets in Asia, the European gas market is a case in point. Europe now demands greater flexibility from suppliers, in both price and the ability to swing gas deliveries,” says Yermakov, adding that Russia’s ability to add that extra flexibility may have been largely used up.
“Many European analysts and market watchers expected that Russia as the larg- est swing producer and exporter would value an opportunity to expand its market share, at least in the short term, and