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EU-Russia Dialogue
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European Lockdown Hits Russia's Gas Market
The slump in gas prices will create plenty of
problems, but at the same time it could provide a much-needed purging of an industry that in recent
years has seen increasingly absurd projects unveiled for pipelines and LNG terminals.
March 2020
It's a trying time for the two pillars of
Russia's energy exports: oil and gas. The new coronavirus pandemic has shattered demand on
traditional markets, especially in Europe.
Compared with the same day last year,
electricity generation at gas-powered plants in northern Italy was down by 54 percent on the last
Tuesday of March this year, by 37 percent in the Netherlands, and by 15 percent in western Germany.
This is despite the fact that late March was colder this year in Europe than last year. One of the
consequences of people staying at home rather than driving their cars and working from office
buildings is a steep drop in demand for gas, totaling billions of cubic meters.
The gas
market has seen low prices and an excess of liquefied natural gas (LNG) since the middle of 2019.
According to forecasts by the International Energy Agency, gas production this year will reach a
record of about 4 trillion cubic meters. Against this backdrop, the sharp fall in demand has sent
prices into an uncontrollable tailspin.
On the European market, stock market prices for gas
— i.e., those determined on virtual trading platforms based on supply and demand — are already below
$80 per thousand cubic meters: levels unseen since 1999. For comparison, in central and southern
Russia, Gazprom can get up to $65 at the current exchange rate per thousand cubic meters by selling
gas to industrial enterprises, and a little less if it sells to the public. And that doesn't entail
the expense of transporting the gas to Europe and paying a 30 percent export tax.
The slump in gas prices will create plenty of
problems, but it could also provide a much-needed purging of an industry that in recent years
has seen increasingly absurd projects unveiled for pipelines and LNG terminals
The prices for Gazprom's long-term contracts are
for now up to double those of European stock quotes, and on its own export trading platform, Gazprom
is keeping prices at $110 per thousand cubic meters, using long-term forward contracts for the
autumn and next year, when the company expects gas to be more expensive. For now, this enables the
company to keep supplying gas to Europe with a minimal profit margin.
Yet the Russian
giant, which supplies more than one-third of Europe's gas, is definitely feeling the strain. The
company drew up its 2020 budget based on a price of $200 per thousand cubic meters. In January and
February, it delivered gas at an average price of about $170 per thousand cubic meters, but the
year's average, taking into account the collapse of oil prices in March, will clearly be lower.
It's also obvious that export volumes will be lower than Gazprom's 200 billion cubic meter target.
The volume of gas exported in January and February was already at least 20 percent lower than that
of the previous year, and remained at that level in March. There's no knowing yet how far European
demand will fall over the next few months.
The slump in gas prices will create plenty of
problems, but it could also provide a much-needed purging of an industry that in recent years has
seen increasingly absurd projects unveiled for pipelines and LNG terminals. Many of those projects
clearly fail to take into account that, in the long term, gas should be affordable, and preferably
green, if it is to withstand the growing competition from renewable energy sources.
LNG
supplies to the European market — mainly from the United States — doubled last year and continued to
increase this year. At the current prices, newcomers to the market will be unable to pay back the
multibillion dollar investment in their factories over the next decade at least.
One of the consequences of people staying at home
rather than driving their cars and working from office buildings is a steep drop in demand for
gas, totaling billions of cubic meters
Last month, Shell pulled out of the Lake Charles
LNG project on the shore of the Gulf of Mexico, and the Australian company Woodside has postponed a
range of LNG projects. This is undoubtedly only the beginning of a trend. Europe will also likely
see an impact, including a holdup in developing new offshore gas fields on the Norwegian continental
shelf, and an end to plans by some European countries to produce shale gas.
For Russia,
this supercycle bear market won't pass unnoticed either, but the Russian gas industry has always
been more than simply a sector of the economy, so it's unlikely to bring any radical reassessment of
strategy. It may slow down the launch of production at new deposits and the construction of new
infrastructure projects. But projects with a broad international element such as Gazprom's Nord
Stream 2 and Novatek's Arctic LNG 2 have a greater chance of success because they bring together the
interests of both gas producers and consumers.
Gazprom's European customers risk failing to
meet the take-or-pay clauses in their long-term contracts. This could mean they have to pay fines to
the Russian company. But Gazprom will do well to show goodwill by rolling over the unused volumes to
a later period: refusing to compromise with its customers while the market is overloaded and prices
are falling runs the risk of the long-term loss of their loyalty.
For Russia, this supercycle bear market won't
pass unnoticed either, but the Russian gas industry has always been more than simply a sector of
the economy, so it's unlikely to bring any radical reassessment of strategy