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Russia, EU Differ on Gas Crisis Remedy

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Brussels and Moscow have learned different lessons from the gas crisis in Europe. While the EU tends to see an accelerated energy transition as a long-term remedy, Russia has reaffirmed its faith in traditional fossil fuels.

The gas crisis has shown that hydrocarbons will remain a key part of the energy mix in the future, Russian Deputy Prime Minister Alexander Novak told the Russian Energy Week forum in Moscow last week. The energy transition will be there, but “the estimates of the pace of transition to new sources of energy have changed,” Novak said.

Russia has set a goal of reaching carbon neutrality by 2060, but that doesn’t mean it will give up developing hydrocarbon reserves. “We base our policy in Russia on a balanced approach — we will develop both ‘clean’ energy and ‘traditional’ energy and will make it cleaner,” Novak said.

Long-Term Contracts 

In Europe, Moscow sees the gas crisis as an opportunity to insist on new long-term contracts and promote a greater role for natural gas in the transition than the EU has now allowed for. Moscow realizes that the extremely high prices could be demand destructive for gas, which is not good for producers, but it insists that its long-term contracts are now priced much lower than spot gas. Speaking at the same forum, President Vladimir Putin said that Germany now pays $250-$300 per thousand cubic meters under long-term contracts with Gazprom, compared to spot prices of around $1,000/Mcm. Gazprom expects its full-year average export price in Europe to range between $295/Mcm and $330/Mcm.

Russia argues that the crisis resulted from Europe’s short-sighted planning and overreliance on renewables and the free spot market which failed to provide enough energy when demand was high. Russia is criticized in various parts of Europe for not supplying extra gas to ease the pressure on the tight market, but Moscow insists it has been fulfilling its contracts and if Europe needs more gas it should sign new supply deals, which would justify and secure investments into new upstream projects.

“We need to move towards clearer planning, more accurate forecasting, based on long-term [visions] rather than on the ‘invisible hand’,” Novak said. Amid record-low spot prices last year, Gazprom’s long-term contracts were clearly losing competition and buyers preferred to minimize offtakes from Russia.

Gas Market Regulation

Novak sounded generally supportive of Saudi Arabia’s view expressed by its Energy Minister Prince Abdulaziz bin Salman, who told the Russian Energy Week forum that the gas market needs to be regulated in a similar manner as the oil market is balanced by the Opec-plus production cut alliance. “Unlike gas, the oil market is now more predictable and understandable for market participants,” Novak agreed.

The Doha-based Gas Exporting Countries Forum (GECF), widely dubbed as gas Opec, doesn’t rule out that its member states, including Russia, may discuss a possible regulatory role at a ministerial meeting on Nov. 16 and at the heads of state and government summit in February 2022, GECF Secretary-General Yury Sentyurin told reporters on the forum sidelines.

Saudi Arabia is now considering joining GECF and may probably raise the issue when it has become a member, Sentyurin said. However, he said that GECF currently has no plans to regulate the gas market, because it is different from the oil market and the current crisis is only temporary, reflecting no fundamental factors related to natural gas.

Europe’s “Toolbox”

Europe is not unanimous in its assessment of the price crisis and its implications for gas and the energy transition. Some states, like Hungary, echo Moscow in blaming the EU for poor planning, “confusing politics with energy,” and lacking trust in natural gas and nuclear power. “Regardless of the European developments,” Hungary is “on the safe side” thanks to the timely filling of gas stocks — now 82% full — and the signing of a new 15-year supply deal with Gazprom, Foreign Affairs and Trade Minister Peter Szijjarto said at the same forum.

BP's former CEO Robert Dudley, who now chairs international industry-led organization the Oil and Gas Climate Initiative, told Energy Intelligence on the sidelines of the Russian Energy Week that certain lessons had been learned from the current crisis: "Make sure your gas storage is in place. You can't fully depend on the wind to blow ... Once the pandemic is over, the economic growth will be fast, so countries who haven't planned on that kind of energy growth like China have been short, so they are spending a lot of money on bringing in natural gas, which has distorted prices around the world." Dudley also pointed to the need to develop gas as a backup for renewables and noted that blaming each other won't solve the problem, as this is "a very unusual sort of circumstance." Speaking on a panel at the forum, Dudley mentioned the political factor that prevented the completion of the gas infrastructure two years ago, a clear reference to Nord Stream 2.

The EU, however, tends to see gas as a problem, with Energy Commissioner Kadri Simson saying last week that the best way to break the link between prices for gas and electricity was to replace gas with carbon-free power. Instead of immediately signing new deals with Gazprom, the EU is mulling a voluntary EU-wide program to purchase natural gas to build up a strategic reserve as a buffer against shortages. The idea was part of a “toolbox” of short- and medium-term proposals for member states to protect consumers and industry, unveiled by the European Commission last week. The commission will also investigate “possible anti-competitive behavior in the energy market,” with Gazprom understood to be the main target.

Topics:
Policy and Regulation, Gas Prices, Gas Supply, Conventional Oil and Gas
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