[ad_1]
While Moscow’s weaponization of energy flows has stung Europe, Russia will pay the ultimate price for losing its most important market.
In short
- Russia will suffer the most from Nord Stream sabotage
- Europe continues to look for alternatives to Russian gas
- Asia may not be enough to replace Moscow’s loss of the European market
On September 26, 2022, large leaks were discovered in the Nord Stream 1 and 2 gas pipelines, which are located in the exclusive economic zone of Denmark and Sweden. On November 18, the Swedish Security Service confirmed the initial suspicions that the damage was caused intentionally, and the remains of explosives were found.
Two identical pipelines brought Russian gas across the Baltic Sea to Germany. Although the energy infrastructure is no stranger to attacks, the explosions were clearly a sophisticated act of sabotage. To date, no one has claimed responsibility, and the perpetrator has not been identified.
Speculation has focused on various actors. Russian President Vladimir Putin described the incident as an “unprecedented act of international terrorism” and Moscow blamed the British navy, without evidence. Faith Birol, head of the International Energy Agency (IEA), said the culprit was “very obvious”, implicitly pointing to the Kremlin. Others doubted the United States, fueled in part by US President Joe Biden’s assertion in February that “if Russia invades … then there will be no more Nord Stream 2. We will put an end to it.”
Sweden, Germany and Denmark are now undergoing separate investigations. Swedish officials called their investigation “extensive and complex” and said they would find out whether any party could be prosecuted for the attack.
Regardless of the culprit, the effects on energy markets and various stakeholders will be significant in the long term. It is Russia that is likely to face the most damaging consequences.
Facts and figures
- The Nord Stream 2 gas pipeline, 1,234 km long, cost 11 billion dollars
- In August 2022, EU countries agreed to reduce gas consumption by 15% by March 2023, compared to the five-year average
- By early November, gas storage levels had reached 99.5%, 99.96% and 100% in Germany, France and Belgium respectively
- Demand for coal in the EU will grow by 7% this year.
- Almost all EU member states managed to achieve their renewable energy targets in 2020, except for France
Russian reasoning
The Nord Stream pipelines have been controversial since their inception. Nord Stream 1, which was completed in 2012, has caused quite a bit of political friction between the member states of the European Union, as well as between the EU, Russia and Ukraine. Still, the project moved forward, and the economics were simply too enticing for buyers during an era of tight gas markets. Although some in Europe warned of an increasing dependence on Russian gas, others emphasized the greater reliability of the supply it offers, as Europe would be less exposed to disputes between Russia and Ukraine.
Nord Stream 1 has a capacity of 55 billion cubic meters (bcm), or almost 14 percent of EU gas consumption in 2021. Nord Stream 2 has been even more controversial. If the second pipeline ever became fully operational, about 65 percent of total gas shipments from Russia to Europe would travel through a single transportation corridor. More importantly, it would allow Russia to bypass Ukraine and some eastern EU member states almost entirely. Russia has pursued this goal ever since the collapse of the Soviet Union. In 1991, 95 percent of Russian gas exported to Europe was delivered via Ukraine; In 2021, the share was around 42 percent.
Facts and figures
Russia built a network of gas pipelines to diversify its export routes from Ukraine, starting with the Yamal pipeline through Belarus, to Poland and Germany, in the 1990s; the Blue Stream gas pipeline under the Black Sea to Turkey; and Nord Stream 1, which flows under the Baltic Sea to Germany. With Nord Stream 2, Ukraine’s role in the transport of Russian gas would be reduced to 25 billion cubic meters, or only 17 percent of Russian gas exports to Europe in 2021. If the proposed Turkish Stream 3 and 4, which would deliver gas to southern Europe via Turkey, were to be implemented , and that last 25 billion cubic meters could also be shut down – which would evaporate Ukraine’s transit business.
For Russia, this scenario had a strong commercial rationale, in addition to favorable political consequences.
Over the past few years, Russia has reduced shipments to Europe via Ukraine, while other routes have been used at almost full capacity. The Nord Stream 1 and Belarus transport routes are owned and controlled by state-owned Gazprom, Russia’s largest gas producer. Transport costs along those two routes can therefore be internal, unlike the Ukrainian supply line.
Moreover, Nord Stream can provide Gazprom with competitive advantages in terms of costs. The gas giant is moving its key production base from the Nadim-Pur-Taz region – where its fields are in decline – to the Yamal Peninsula, which can access the North Stream more directly. The total distance of the route from the field to the point of delivery in Europe is half the length of the Ukrainian track, which is the most expensive for Gazprom to export. Having alternatives gives Russia greater bargaining power in dealings with Ukraine, including negotiations on transit fees, which are part of Gazprom’s marginal gas costs in Europe. That alone would make Russian gas more competitive, especially as it faces greater competition from American liquefied natural gas (LNG).
That was Russia’s ambition. After the war in Ukraine and the attack on the Nord Stream, Moscow’s plans were changed.
Facts and figures
Russian gas pipelines to Europe
After the explosion
Despite the importance of the pipelines, market reaction to their sabotage has been muted. Neither pipeline was operating at the time of the explosion; Germany canceled the Nord Stream 2 certification process in February, and Russia has been phasing out gas shipments through Nord Stream 1. In that respect, the explosions did not cause a supply shock.
That effect was compounded by a warmer-than-expected autumn, which kept gas demand below average, and strong EU-wide pressure to cut consumption. This also coincided with a rapid increase in gas storage, which exceeded 95 percent in the EU. Meanwhile, since the start of the war in Ukraine, the EU has actively sought alternative gas supplies, with LNG from exporters such as the US playing the biggest role.
As a result, there was a small jump in European gas prices immediately after the attack. But that bump was short-lived and prices returned to their previous downward trajectory.
Facts and figures
European natural gas prices (Dutch TTF)
A few alternatives
However, the long-term consequences of sabotage will be significant.
The extent of the damage to the Nord Stream gas pipelines is not clear. Speaking at the Russian Energy Week conference in Moscow in October, Gazprom chief Alexei Miller said that repairing the pipeline would take at least a year. The following month, Kremlin spokesman Dmitry Peskov said Russia would assess the viability of repairs after final damage assessments are available, adding to more uncertainty over the fate of Nord Stream.
Meanwhile, Putin offered gas to Europe through the untouched part of Nord Stream 2 and proposed an alternative through Turkey, which would become a gas hub. This was probably music to Turkey’s ears, as it had long wanted to realize such an ambition but was rejected by Europe. “The ball is in the court of the EU.” If they want, then they can open the faucets and that’s it,” the Russian president said in October. Germany, however, has publicly rejected the use of Nord Stream 2.
The war in Ukraine and Moscow’s use of gas as a political weapon – not entirely new, but now going one step too far – have provoked Europe to accelerate its exit from Russian gas. In its energy plan REPoverEU, published in May 2022, the EU has already announced a goal to end reliance on Russian fossil fuels before 2030. Germany, Russia’s biggest gas consumer (and long-time “friend”) has decided to replace all Russian energy imports – before only natural gas – from as early as mid-2024.
On November 15, Berlin opened its first floating LNG terminal, which was completed in an impressive 194 days and made possible by allowing exemptions and waiving an environmental impact assessment. Although the terminal has a relatively modest annual capacity of 7.5 billion cubic meters, it is one of five floating units that Germany plans to build, in addition to two permanent terminals on land.
Although this is a great achievement, the main challenge that remains for the EU is to secure the additional supplies necessary to reduce its dependence on Russian gas to zero. While Europe has been able to attract some non-Russian gas, it has so far come at a high price – showing the upward trend in European gas prices, especially when the continent has been busy filling up storage over the summer.
Scenarios
There are several uncertainties after the coming winter. First, existing suppliers, such as North African countries, are likely to have maxed out their export capacity and it will take some time for new capacity to come on stream (assuming investments are made). LNG supply in particular is often described as “wavey” given the scale of investment such projects require. A period of market tightness can be expected until the next wave of new LNG projects enters the market.
Second, the relevant factors are not only the demand for gas in Europe, but also the demand in other major markets – primarily in Asia. When gas prices in Europe started rising noticeably in 2021, well before the war in Ukraine, the primary driver was strong Asian demand, which diverted LNG cargoes from Europe and tightened supply on the continent.
Europe can and will increase the use of alternative energy sources, especially renewable energy sources, but the replacement will be gradual. In its REPoverEU plan, Brussels has pledged to increase the share of renewables in its energy mix to 45 percent by 2030 – just 5 percent more than previous plans.
Despite these challenges, Europe is still in a better place than Russia. Europe has been the most important market for Russia, which has invested heavily in extensive pipeline infrastructure across the region. Even in its riskiest energy scenarios published in recent years – where Russia predicted a reduction in the European market, primarily due to climate policies – it did not foresee a complete loss of that market.
Instead, Russia is turning eastward. But while Asia is hungry for gas, Russia will need to expand its LNG export capacity, as pipeline infrastructure connecting to Asia is very limited. In 2021, LNG accounted for nearly 17 percent of Russia’s total gas exports. Meanwhile, there is only one major gas pipeline (Power of Siberia) connecting Russia’s Far Eastern gas fields to China. That route started operating in 2019, with an annual capacity of 38 billion cubic meters.
In February 2022, Russia announced a 30-year contract to supply gas to China via a new pipeline. Power of Siberia 2, which is expected to be operational only in 2030, has a capacity of 50 billion cubic meters and will supply China from the West Siberian gas fields, via Mongolia. Apart from limited infrastructure, Russia also faces the problem of reputational damage – Asia is unlikely to see it as a reliable gas supplier.
[ad_2]
Source link
