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Viewpoint: Gazprom Plays With New Rules — and Is Winning

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The recent reduction in Russian natural gas flows through the Nord Stream pipeline coincides neatly with Gazprom’s recently declared new rules on how to deal with an “unfriendly” Europe. The new state of play suggests that its control over supplies gives Gazprom the ability to dictate its own terms to Europe. And Europe must admit that Moscow’s tactic of restricting supplies to a supply-starved continent rather than a full-on volume shutdown is working: Russia has won a sanctions waiver — albeit temporarily — from Canada. Moscow will likely continue to use its leverage to seek more concessions from the West as the war in Ukraine drags on. It’s on Europe whether it will continue to tolerate this precarious situation.

Whether Gazprom will use the end of the Nord Stream maintenance on Jul. 21 to increase flows or stop them altogether is keeping the European gas market on edge. Europeans believe a full stoppage is coming and are preparing for the worst. The return of a Siemens gas turbine to Nord Stream’s compressor station following the Canadian sanctions waiver theoretically removes Gazprom’s technical argument for the reduced flows. But the exporter has warned that more turbines need an overhaul. And a Jul. 13 statement from the company piles on the uncertainty by saying it has not yet seen documents proving that the turbine can be taken out of Canada. Both arguments give Gazprom ample excuses to continue playing with the gas taps.

For Europe, the current situation of minimal Russian flows is dire. The restricted supply hinders its ambition to refill storage facilities ahead of the winter and ensures spot gas prices remain unprecedentedly high for longer. Letting Gazprom get away with playing with its flows is counterproductive, especially as it contributes to increasing Russia’s coffers with every jump in European gas prices it influences. No wonder then that Brussels is seriously considering EU wholesale gas price caps.

Gazprom could still want to try to salvage its prewar reputation as a reliable gas supplier by increasing flows. The Kremlin keeps trying to argue that Russia “consistently fulfills all its obligations” as spokesman Dmitry Peskov said earlier this month. Gazprom also argues it supplies the gas that has been nominated by European buyers. But trusting Russia to do this is a fool’s errand. And recovering its reputation is unlikely at this point. Moscow has made this inevitable following the supply cutoffs after European buyers rejected Russia’s unilateral demands to comply with a two-step ruble gas payment scheme.

Playing with supplies could hurt Russia in the long run. Unless Gazprom increases gas flows in the remaining months of 2022, it is unlikely to meet its minimal contractual obligations, the consequences of which could end up in contract breaches and arbitration cases. Gazprom's contracts allow for rescheduling higher flows to the backend of 2022. Exports to Europe — including Turkey — and China have dropped 33% year on year to 71.9 billion cubic meters, even with supplies to China growing sharply. But in the short term Russia holds the reins of the European gas market. And if Gazprom sticks to the new rules of the game and Moscow continues with its attitude of general dismissal of international courts, then it could live with undersupplying its European customers.

For more of our coverage of the Ukraine crisis — across oil and gas markets, the energy transition, politics and corporate strategies — visit Ukraine Crisis: Energy Impact >

Topics:
Gas Supply, Sanctions, Ukraine Crisis, Gas Prices, Gas Inventories, Gas Spot Markets, Military Conflict, Ukraine Crisis
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