While the whole world was shocked by negative West Texas Intermediate (WTI) oil prices due to the shortage of demand during the Covid-19 lockdown, the gas market hasn’t seen any dramatic changes.
According to Rystad Energy, gas use for industrial consumption is set to decline five per cent, for commercial consumption 20 per cent and for residential consumption just two per cent during the pandemic. Combined, the fall in consumption will be just four billion cubic metres (from a total of 556 billion cubic metres).
The reason is obvious: planes might not be flying but people still have to live and work in warm buildings.
Russia is the world’s largest gas supplier, and accounts for 40 per cent of the EU’s total annual gas imports. Moscow would like to increase that percentage. In 2015, Russia’s Gazprom and a number of European energy companies agreed to construct the Nord Stream 2 gas pipeline on the seabed from Russia to Germany. It may allow Russia to supply additional 55 billion cubic metres to Europe annually and it may change the geopolitical map of Europe.
First of all, it would allow the Kremlin to further destabilise Ukraine without major consequences. Moscow currently exports around 90 billion cubic metres through the Ukrainian land transmission system and if that stops working for any reason, Russia loses tens of billions of US dollars. Should Russia’s president, Vladimir Putin, find another way to export these 90 billion cubic meters of gas, Kyiv will squander a lead against a rapid Russian military invasion. It also endangers the EU’s east. That’s why such countries as Poland have taken a stand against the Nord Stream 2 project.
Secondly, Nord Stream 2 increases Europe’s reliance on imported gas as European countries themselves produce less gas. It means a far bigger role for Russia and for its main gas partner in Europe – Germany. After the United States (the largest natural gas producer in the world) announced that it would impose sanctions on any company or person involved in the Nord Stream 2 construction, Berlin only intensified its attempts to complete the pipeline.
However, American sanctions on Nord Stream 2 have prevented any European company from constructing the pipeline. The only ship able to complete the installation of the final kilometres of pipeline is the Russian Admiral Chersky, which has been specifically redesigned to that end. It has wandered the seas for the past two months, often changing course, leading some analysts to suspect that it is seeking to hide its final destination less the US block its passage through various straits.
Since the successful launch of Nord Stream 1 in 2012, Germany has been trying to become an exclusive Russian gas representative with the biggest amount of natural gas imported and then allocated within the EU. Such a situation may lead to a decreased role for Washington on the European continent and may make Russia a much more influential global and regional player.
Finally, Russia has repeatedly used gas as a political tool towards its neighbours like Ukraine and Belarus. Russia has stopped exporting gas to Ukraine multiple times, notably during the coldest winters of 2006 and 2009, just to improve its negotiating position on political issues. Such a situation forced Kyiv to buy gas from its western neighbours, which import gas from Russia through Ukrainian territory.
Moscow is always trying to link gas supplies with political issues. For instance, the Kremlin has attempted to connect gas transmission through Ukraine with the Normandy Peace Talks regarding the conflict in Ukraine’s east.
Dependence on Russian gas is a major threat for the whole of the EU, which is not planning to lift sanctions on Russia for its annexation of the Crimean Peninsula just yet, but may be forced to do it. The situations in which Moscow may use gas are far beyond expectation.
However, there is some good news. On May 15, Germany’s energy regulator declined to grant an exemption of rules governing the EU’s internal gas market to the operators of the Nord Stream 2 pipeline to carry gas from Russia to Germany under the Baltic Sea. On May 20, the German court reconfirmed its decision but stated that Nord Stream 1 can still operate with a waiver from such regulations. In plain language, 50 per cent of the Nord Stream 2 pipeline must be reserved for alternative suppliers, excluding Russian state company of Gazprom. That means that a pipeline costing 11 billion US dollars becomes far less useful, both through the lens of economics and in a political sense. Moscow has already stated that it will complete the installation of the pipeline, but the future of the project is unclear. Nevertheless, it has won a battle for Nord Stream 1, which remains 100 per cent functional.
It’s worth mentioning that Moscow’s experience of installing pipelines with other countries is very unsuccessful. For instance, the 20 billion US-dollar TurkStream project, which was scheduled to be completely launched on January 1 this year, is regularly closed for repairs and Russia can’t provide the expected supplies.
Russia’s Gazprom is predicted to suffer losses worth 10 billion US dollars this year. Its capital expenditures including gas transportation infrastructure are only growing and revenue is falling every year. If the lockdown continues, the EU will fill its gas storage capacity within the next three months and gas prices will fall. As such, Gazprom will see a huge drop in profit.
It would no longer be a question of merely losing the EU gas market but may even threaten Russia’s largest company with bankruptcy. Remember: Gazprom is a state-owned company which receives billions of dollars from the Russian budget to keep its operations running.
Decision makers should keep in mind that Russia uses all possible means to achieve its political goals. Any dependence on Russia will imminently lead to negative consequences. International leaders should also stop listening to people who lobby for Russian gas expansion, like the Moscow-affiliated ex-chancellor of Germany Gerhard Schröder, head of the shareholders’ committee of Nord Stream AG, a manager of Nord Stream 2 and a director of the board of Russian biggest state-owned oil producer, Rosneft.
