Cold weather allows Gazprom to drive its point home

On 7 February, Russian gas monopoly Gazprom said that there are no shortages of its gas supplies to Europe as a cold front swept across the continent.

“At this very moment, there are no shortages at all. It was stated that last week there was about a 10% shortage because the customers wanted more gas than the pipeline system could carry through,” a Gazprom official told New Europe from Moscow on 7 February.

In a reminder of the events of 2009 events, gas supplies from Russia saw a drop on 3 February that affected several European countries, as acknowledged by the European Commission. 

On 3 February, the Commission said Russian gas deliveries were reduced to Poland, Slovakia, Austria, Hungary, Germany, Bulgaria, Romania, Greece and Italy. But the Gazprom official countered that “together with our partners in Europe we used the underground storages so that our customers wouldn’t feel any shortage”.

He added that now there were also no problems with the transit of Russian gas through Ukraine. The official, who asked not to be named in line with company policy, also noted that the increase of gas consumption in Europe showed that more pipelines to carry Russian gas to Europe are needed.

“It shows that both new routes to Europe - Nord Stream and South Stream - are needed to provide as much gas as the market needs and surely in such severe weather that was last week in many countries of Europe."

It is a unique situation because there is an abnormally cold winter in Europe but also in Russia and Ukraine, Konstantin Simonov, head of Russia's National Energy Security Fund (NESF), told New Europe on 7 February, with his local temperature at -15C. Last week it was -20C in Russia’s capital city, he added.

“Last week the daily consumption of gas in Russia was more than 2 billion cubic metres. It’s more than annual consumption of Serbia,” he said. Simonov recalled that several years ago, when there was a similar situation, Gazprom decreased supplies to Russian consumers, giving priority to the more profitable European market.

“But this year we have presidential elections and after the state Duma elections the situation is not so stable. That is why as a democratic leader [Vladimir] Putin is thinking how to increase the level of support,” he said, adding that the Russian premier gave an order to Gazprom not to reduce supplies to the domestic market.

Simonov said that the cold winter and Gazprom’s struggle to meet high demand in Europe highlights the problematic dialogue between the EU and Russia over gas supplies over the last three years.

He said that European experts and politicians have cited gas-to-gas competition, increasing supply of gas from other resources, the spot market and diversification to make the point that there is no need to increase consumption of Russian gas.

“We see the reality that Gazprom couldn’t fulfil this demand because when you are speaking during several years that there is no need in increasing consumption of Russian gas and you don’t want to sign new contracts, it is also a dilemma for Gazprom: to invest money to new fields or not to do it.”

Simonov added that the EU believed that with the help of spot markets, there was no need to sign long-term contracts. “With the help of this winter, Gazprom can try to show Europe that spot market sometimes cannot help the European Union to survive in cold winter,” he said.

Gazprom Deputy CEO Alexander Medvedev has pointed out that hopes pinned on a free spot market in Europe have failed to be realised. In the absence of a supplier with major gas reserves, prices have skyrocketed to $530 per 1,000 cubic metres, which is higher than the prices fixed in long-term gas contracts between Gazprom and European consumers.

Gas prices shot up in Great Britain where its biggest terminal South Hook, in Wales, relies on LNG from Qatar. In a conversation released to the media, Medvedev told Putin that “it appears that all that talk about a high-liquidity spot market turned out to be, to put it mildly, a considerable exaggeration since the spot market does not have high liquidity. Although spot market prices went up (they are lower than our prices), Europe was unable to meet its long-term needs in the spot market because ultimately it does not work.”

Putin responded: “It is virtual to a considerable extent.”

Simonov agrees that the current gas-supply situation has revealed the drawbacks of the spot market. “If the winter is cold, the spot market cannot solve this problem,” Simonov said.

“I don’t want to say that Gazprom has this gas but doesn’t want to give this gas to Europe just to show the problems of the spot market. Gazprom has no gas, of course, because of the very high consumption in Russia and Ukraine. But with the help of this story, Gazprom can try to show to Europe that spot market is still a problem for consumers in this period of unpredictable high consumption of gas.”

The EU relies on Gazprom for around a quarter of its gas, with as much as 80% of Russian shipments crossing Ukraine. Disputes between Moscow and Kiev over gas prices and transport costs have disrupted winter supplies to Europe twice since 2006. Tensions escalated recently as Ukraine sought to renegotiate its agreements with Russia.

Simonov explained that if Gazprom can prove that Ukraine stole gas from the trunk pipeline to Europe to meet its increased domestic consumption during the cold weather, the Russian company can use this to increase pressure on the EU as Russia pushes the construction of the South Stream gas pipeline bypassing Ukraine. “Let’s wait and see,” Simonov said.

The head of National Energy Security Fund also opined that the Trans-Adriatic Pipeline (TAP) or the Interconnector Turkey-Greece-Italy (ITGI) are “real projects” and one of them will be built to bring Azerbaijani gas from the second phased of the Shah Deniz field to Europe and therefore meet future shortages highlighted by this cold winter.

“I’m absolutely sure that Europe will build TAP or maybe ITGI also but not Nabucco. The question of Nabucco is still the same – the resource base. This winter psychologically may have increased some belief in Nabucco but this winter still has not solved the problem of the resource base,” he said, adding that Nabucco would need gas supplies from Turkmenistan. He explained that Russia would never allow the Trans-Caspian pipeline to be built without the issue of the landlocked Caspian Sea being resolved.

By Kostis Geropoulos

NE, February 8, 2012