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The Russians are signaling they are ready to negotiate on Ukraine and oil and gas deliveries to Europe. The temptation to make deals with the aggressor may be great in the face of the energy crisis, but it threatens to hamper independence from Russia – writes Wojciech Jakóbik, editor-in-chief at BiznesAlert.pl.
Implosion of the petrostate
Russian Deputy Prime Minister Alexander Novak said that gas exports from Russia will fall by about a quarter in 2022. Production is expected to drop by 12 percent. “This is mainly due to the shutdown of export infrastructure,” he admitted. Gazprom said that earlier this year it produced 394.1 billion cubic meters of gas, 19.6 percent less than a year earlier. Extraction in Russia will reach 671 billion cubic meters, 470 billion will go to the domestic market. The export went down because transmission via the Yamal gas pipeline to Poland and Europe and via Nord Stream 1 to Germany was halted, while the supply via Ukraine and Turkey had dropped before the invasion on Ukraine.
The reduction of Russian gas supply to Europe has triggered an energy crisis, which is easing with the accumulation of stocks in storage for the winter and the arrival of a warmer wather. Gas on the TTF exchange costs about 80 euros per megawatt hour, while at the peak of the crisis it reached 350 euros, and just before the Russian attack on Ukraine – 100 euros. The decline in exports forces a reduction in production, because the Russians have no storage room and have to burn surpluses, having no alternative market to Europe. Redirecting to Asia has been going on for almost a decade and is going nowhere. Despite this, LNG exports from Russia will grow by more than 8.7 percent in 2022, according to Novak.
Russia is also losing oil production. The Ministry of Finance estimates that if the price of the Urals remains below USD 70 per barrel due to the West introducing a price cap at USD 60, it will be impossible to replenish the losses of the National Wealth Fund, which is supposed to balance the budget. The Russians also intend to stop deliveries to countries that will introduce the maximum price. The relevant decree of President Vladimir Putin on this issue is expected to be signed on December 26 or 27. Deputy Prime Minister Alexander Novak predicts a decline in oil production in Russia by 500-700 thousand barrels per day, or 5-6 percent compared to about 10 million tons of daily production in the country. However, the decline can reach up to 1.5 million barrels per day, and then the Russian budget will lose 3 out of 9 trillion rubles in revenue from the sale of hydrocarbons. Perhaps for this reason, the Russians suggest resuming supplies through the Yamal pipeline to Europe. In turn, Germany is discussing the launch of oil supplies from Kazakhstan using the Druzhba pipeline. It is worth looking at both ideas from the point of view of the foreign and security policy of the European Union and NATO.
Who will fill the empty highway?
The Yamal pipeline was shut down for gas supplies from Russia after Poland and Germany sanctioned Russian assets on its route: Gazprom Germania in Germany and EuRoPol Gaz in Poland. Both companies manage Yamal’s gas infrastructure in these countries and have been nationalized. The Russians responded with counter-sanctions barring gas supplies through the Yamal pipeline, complementing supply restrictions that had been deepened since the summer of 2021, possibly in preparation for the February 2022 invasion of Ukraine.
The suggestion that the Russians could resume transmission via the Yamal means that they would have to be ready to remove some of the counter-sanctions, but on the other hand, there is also a risk that the West would concede on the assets on the Yamal pipeline route in Poland and Germany. This is a step back on the path to diversification of gas supplies to the region and the plan to abandon Russian gas by 2027 in accordance with the REPowerEU plan. The highway built for gas supplies from Russia, stretching from the exit of the blown-up Nord Stream 1 and 2, is an opening for supplies from LNG terminals in Poland and Germany, as well as the Baltic Pipe gas pipeline from Norway. The EUGAL branch, which runs along the Oder river to the Czech Republic with a reverse connection to the Yamal gas pipeline, allows up to 55 billion cubic meters of gas to be imported from the north annually according to the capacity of Nord Stream 2. Originally, the gas was supposed to come from Russia, but now LNG or Norwegian gas may replace it.
Operators will be obliged to release the capacity reserved for Nord Stream 2. Perhaps Russians are speculating about fixing the infrastructure in order to block this possibility. Resuming deliveries from Russia via the Yamal poses an economic threat for those plans, and an opportunity for Gazprom to keep its shrinking market share, which in 2021 controlled 40 percent of the European market, but in 2022 it owbed only less than 7 percent. If the Russians do not convince the Europeans to step back, this share may reach zero as early as in 2023, while supplies through the growing number of LNG terminals in Poland and Germany and the Baltic Pipe using the infrastructure remaining from Nord Stream 1 and 2 will guarantee a sustainable profitability of this infrastructure until natural gas is phased-out as a fossil fuel, and perhaps replaced by renewable gases such as biomethane or hydrogen.
Deliveries via the Druzhba oil pipeline with Russians as intermediaries, even if the oil was from Kazakhstan, could bring about problems similar to what happened back in 2019 when oil got contaminated, an event which from the perspective of February 2022 is perceived in security circles as preparation for the invasion on Ukraine. Arranging deliveries from Kazakhstan via the Druzhba pipeline creates a risk that Russians will sell their REBCO blend as Kazakhstan’s KEBCO. This would also mean oil supply diversification via the naftoport in Gdańsk could be delayed, and on top of that Poland and Germany could argue over the role the naftoport should play in delivering oil to the Schwedt refinery for economic reasons. Deliveries via the Druzhba bypassing the naftoport would also give Germany independence from Poland, which would allow it to disregard Warsaw’s demand to derussify Schwedt. It would therefore be a step back in energy relations between Poland and Germany, as well as on the path of diversification of oil supplies throughout the region of Central and Eastern Europe.
Temptation in 2023
Russia’s failures at the front in Ukraine and the petrostate implosion threatening the stability of the Kremlin’s rule in 2023 may prompt Moscow to seek ways to delay processes unfavorable from its point of view, such as diversification of hydrocarbon supplies to Europe. As always, Moscow will use its impact on the Yamal gas pipe and the Druzhba pipeline in order to pursue this goal. It is in the interests of the entire West to exclude such influence and use this infrastructure to further make Europe independent of Russia. Any temptations hidden under the guise of short-term economic gains should be rejected due to long-term security and foreign policy priorities whose implementation will in time bring economic benefits, as evidenced by the development of supply from outside Rusia via the naftoport, the Druzhba and the reverse flow on the Yamal gas pipeline.
