Last-Minute Compromise Averts Major Russian Supply Cut

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With deadlines for payments for Russian gas supply from big European buyers falling due over the next few days, Eni revealed on May 17 that the sides appear to have come up with a last-minute compromise that — for now, at least — averts the risk of a major supply cut.

Under a new two-step payments system, the Kremlin had ordered companies from "unfriendly" countries to open two Gazprombank accounts, one in euros or dollars, and the other in rubles. Moscow said buyers would have to authorize the bank to convert the foreign currency into rubles to pay Gazprom. The European Commission had said buyers would be allowed to open the so-called "K" accounts, but would have to declare they had met their obligations after paying in euros. Moscow, however, asserted that payments would only be completed when Gazprom received payment in rubles.

But in a move that appears to satisfy Russia without breaching EU sanctions, Eni said that Gazprom Export and the Russian authorities had as of May 17 confirmed that invoicing and payment will continue to take place in euros, as specified in contracts. A clearing agency on the Moscow Stock Exchange will convert the euros into rubles within 48 hours — without the involvement of the Russian central bank, which Brussels feared would breach sanctions. In the event of delays, supply will not be interrupted.

Eni said it has started the process of opening the accounts "without prejudice to its contractual rights, which still envisage payment in euros." It said this would not violate sanctions, but that it might in future take Gazprom Export to arbitration "to resolve the uncertainty regarding the changes introduced by the new payment procedure and the correct allocation of costs and risks."

Ratcheting Up Pressure

Fears of a major supply cut grew after Russia halted shipments to Poland and Bulgaria in late April after they rejected the new payments system. But more recent signs that Brussels was trying to smooth the path eased concerns, with more buyers opening accounts at Gazprombank. Bloomberg said last week that 20 companies had done so and 14 requested paperwork. German firms Verbundnetz Gas and RWE have both opened euro accounts.

Russia retaliated against the EU last week by sanctioning 31 foreign companies, among them former Gazprom trading and distribution units seized by Berlin, including large importer Wingas. Transport capacity has also been restricted. The Russian sanctions prevent Gazprom using the Polish section of the Yamal-Europe pipeline, owned by blacklisted Europol Gaz, while Ukraine last week halted gas transit via one of two interconnection points on the Russian border, cutting transit capacity by 30%.

The Russian sanctions have had little immediate impact on gas flows. Daily shipments via the Nord Stream pipeline to Germany are still around 170 million cubic meters per day, well above nameplate capacity, despite the cutoff of Wingas and other former Gazprom units.

Wingas says it is now buying gas on European hubs — reportedly for more than it paid Gazprom — and term supply to customers remains reliable. Its Gazprom contract is for 22 billion cubic meters per year, but it's unclear how much it was lifting before supply halted. Gazprom won't say whether it has handed the Wingas volumes to other importers to stop German supply declining too much.

Exports Drop

Still, exports to Europe have tumbled year-on-year, largely because of the increase in Gazprom's hub-linked contract prices that followed the spike in European spot prices in the second half of 2021. Although the EU wants to slash gas imports from Russia in response to the war in Ukraine, the lower offtake appears to be linked more to price-related demand destruction.

In the first 15 days of May, Gazprom’s supplies to Europe (including Turkey) and China fell 5% month on month and 24% year on year to 5.8 Bcm, Energy Intelligence calculates based on Gazprom data. Exports since the start of the year have totaled 55.9 Bcm, 26.5% down on year-earlier levels.

Gas Supply, Sanctions, Security Risk
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