Viewpoint: Don't Panic Over Russian Gas

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Another winter, another Russia-Ukraine standoff. But with this one still heating up as Russian troops remain massed on Ukraine’s borders, the West — the US and Nato in particular — are trying to head off a military conflict. Russia denies any invasion plans, but has issued Nato with a list of security demands. Talks in Russia last week were inconclusive and with the US warning of a possible "false flag" operation to justify a Russian attack, Sweden and Denmark have stepped up their military presence in the Baltic.

Commercial disputes between Russia and Ukraine have prompted Russia to cut off gas flows to Ukraine and Europe before. But the risk that a military conflict could disrupt supply looks low — although that would of course depend on the intensity and duration of any hostilities. Gazprom reduced flows to Ukraine in January 2006 over a price dispute, but that lasted just a few days. The last major disruption to transit flows to Europe, in winter 2008-09, again stemmed from a price dispute and lasted longer. But Russia’s war with Georgia in 2006 and its seizure of the Crimean Peninsula from Ukraine in 2014 led to no major disruptions.

Russia accounts for about 40% of Europe's gas imports. Should conflict break out, the Ukrainian transit route would be in most danger of disruption, followed by the Yamal-Europe pipe through Belarus and Poland. Direct flows to Europe via the Nord Stream and Turk Stream offshore pipelines would likely be completely unaffected.

Even if the Ukrainian and Polish pipelines were out of action, the impact on Europe would be fairly minimal, especially if LNG and storage volumes were available. Flows through these routes are already low and likely to remain so. Yamal-Europe has operated in reverse mode for almost a month and Gazprom has not booked extra pipeline capacity through Ukraine for February. Prepaid flows through Ukraine are capped at 40 billion cubic meters per year (3.9 billion cubic feet per day) until 2024 under a deal clinched in late 2019, less than half the 90 Bcm/yr transported in 2019.

Economically, any disruption would hurt both Russia and Europe. The 2009 dispute allegedly cost Gazprom $1.5 billion in lost sales plus penalties to European customers. Some question whether Russian gas reservoirs could withstand a shut-in resulting from lower exports, but that would depend on the duration.

The fact Gazprom has met contractual obligations to customers suggests it is unwilling to compromise its reputation as a reliable supplier or offer the West a direct casus belli. Moreover, any aggression would further reduce the Nord Stream 2 pipeline's chances of being approved. German Economics Minister Robert Habeck has said it could suffer “severe consequences” if Russia attacked Ukraine.

Europe is itself in two minds over Nord Stream 2, given its need for more piped gas to avoid another potentially tough winter competing with Asia for LNG. If the project is approved, the EU is effectively admitting it remains under Russia’s gassy thumb. If it doesn't, the continent could be doomed to sustained supply tightness. Consultancy Wood Mackenzie reckons pipeline start-up could be the only option to refill European storage ahead of next winter.

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