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Energy GAS SECURITY 21 February, 2024 7:35 am   

Jakóbik: Gazprom’s great temptation (ANALYSIS)

30-lat-Gazpromu-SKA-Hockey-Club 30 years of Gazprom.. Graphics: SKA Hockey Club.

The energy crisis was caused by Gazprom slashing the supply of Russian gas. The Kremlin can now trigger an anti-crisis in order to break the West’s resolve in a period of uncertainty about the role of Ukraine – writes Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.

  • Gazprom’s strategy in the energy crisis was based on systematic lowering of gas supply that was both legal and illegal.
  • The Russians are once again seeking to increase gas supplies to Europe after tall tales about a shift towards Asia following the start of Russia’s invasion of Ukraine.
  • The Russians may be putting the pieces together to renegotiate the transit contract with Ukraine that will expire at the end of 2024.
  • It makes sense to adopt binding EU regulations that will limit gas supply from Russia, hopefully to zero, which go in line with the REPower EU goal to drop Russian fossil fuels by 2027.

Gazprom’s return to Europe

Gazprom’s strategy in the energy crisis was based on systematic lowering of gas supply to Europe that was both legal and illegal. This caused record breaking gas prices, which hiked energy prices as of the second half of 2021. The Russians have used gas as a weapon once again in history, possibly also preparing the invasion on Ukraine in order to weaken Europe’s support for Kyiv. Today we know that Gazprom’s efforts failed because Europe survived the energy crisis, which is now waning, reducing the role of Russian gas in the economy.

However, the next stage of using Gazprom may have already started. Since late autumn 2023, the Russians have been increasing gas supplies through Ukraine and the level of supplies to the European market. Gazprom’s deliveries through Ukraine in early February 2024 increased to 29.4 million cubic meters per day, or 20 percent. Some Europeans are responding with larger purchases. Gazprom’s share in the Austrian market increased from 76 percent in January to 98 percent in February 2024. Meanwhile, the president of Russia Vladimir Putin argued at Gazprom’s 31st anniversary that the second line of the Nord Stream 2 gas pipeline is intact despite sabotage and could resume deliveries.

Spain and Belgium bought 70% of LNG from Russia in 2023. They can re-export it to other European countries. However, the volume is 5.24 and 3.82 billion cubic meters, which is less than in the historic Yamal contract for gas supplies from Russia to Poland.

Why are the Russians sending more gas to Europe?

This is another pivot in the history of Russia’s gas policy. The Russians are once again seeking to increase gas supplies to Europe after tall tales of a shift towards Asia following the start of the invasion on Ukraine. This is a pivot analogous to the one observed after the illegal occupation of Crimea, when they also said that they were only interested in the Asian market. Following the easing of tensions between the West and Russia caused by the seizure of Crimea, Russian Gazprom once again claimed that Europe was its key market. It may turn out that the Russians are repeating this course change in 2024.

There are a number of reasons why the Russians can send more gas to Europe again.

First, their return to Asia is limited by existing and new Western sanctions. The injunctions hinder the possibility to bankroll mega projects in China with the Power of Siberia 2 and Actic LNG 2 on top of the list.

Second, China is experiencing an economic slowdown and has alternative gas suppliers, improving its negotiating position with the Russians, as even the Kremlin-friendly Russian media report.

Third, Nord Stream 2 may be declared bankrupt by the relevant institutions in Switzerland, but so far the procedure has been extended until July 2025. The Russians still have time to promote supplies along this route. One thread has a capacity of 27.5 billion cubic meters a year. The Russians may want to increase the sales of deliveries via Nord Stream 2 in order to protect the daughter company from bankruptcy.

Fourth, the Russians can play for the renegotiation of the transmission contract in Ukraine, which expires at the end of 2024, because they need it to maintain supplies to the European market, but Europe and the Ukrainians – no more, as reported by the European Commission. The Russians are not able to transfer the entire volume from Ukraine to Turkey and Turkish Stream, and even a partial redirection will raise their costs and reduce the margin.

Fifth, the Russians may be trying to weaken Western resistance in the hope that an increase in Russian gas supply will tempt European business, which will pressure Western governments to return to the status quo, especially in the face of the problems of the Western establishment with economic stagnation and the implementation of the green agenda. These actions may support Russia’s efforts to weaken the support for Ukraine that is visible after the security conference in Munich.

The Russian media are already speculating about possible scenarios. RBK estimates that it is possible to extend the current transmission contract in Ukraine, which in itself is evidence that the Russians are considering an attempt to establish contact with the Ukrainian Naftogaz. Ukraine’s lack of willingness to cooperate, which the Russians clearly care about, could lead to talks involving Gazprom’s customers in Central and Eastern Europe. RBK also talks about the participation of clients from the European Union and the European Commission. But Brussels is not as interested and Kyiv isn’t either. The Russians are still returning to the concept once proposed by the Ukrainians, that is, the establishment of Russian gas collection points on the eastern borders of the country and the transfer of responsibility for deliveries through Ukrainian territory to the recipients. This risky and costly solution can be considered only in the event of the cessation of hostilities over the Dnieper. However, the Russians argue in RBK that the solution is attractive to all parties, and therefore it can be assumed that this is the goal of the new temptation strategy.

Time to turn declarations into a pledge to cut gas from Russia

Several measures can be recommended to prevent Gazprom from using the energy crisis as a great temptation for the West. There are still no sanctions on gas supplies from Russia to Europe. Increasing supplies under existing contracts by Gazprom must be linked to the fulfilment of these commitments. Europeans may have a formal problem with limiting the new wave of gas supplies to Europe without additional legal solutions. It is for this reason that Austria has announced the adoption of a solution in the form of the Polish diversification regulation, which limits the possibility of supplies from one dominant direction. It makes sense to adopt binding EU regulations that will limit gas supply from Russia, hopefully to zero, which go in line with the REPower EU goal to drop Russian fossil fuels by 2027. It is reasonable to introduce targets for reducing the share of gas from Russia, similar to CO2 emissions reductions in the European Union. Sanctions should be introduced against companies supplying gas to Europe: Gazprom and Novatek, with an appropriate transition period for countries that hesitate for reasons of security of supply. In the end, only 12 billion cubic meters of gas reached Ukraine in 2023 from Russia. This is not much more than the Yamal contract violated by the Russians in 2022.