From the Editor: Russia’s new normal [Gas in Transition]
Russian president Vladimir Putin used his eagerly-anticipated state of the nation address on February 21 to once more blame the West for Moscow’s invasion of Ukraine, and to prepare the Russian population for a new normal. A new normal of continued war and confrontation with the West, as well as, what the Kremlin would not admit, long-term economic stagnation.
In Putin’s speech, which clocked in at around an hour and 40 minutes, little was said directly about the Russian energy industry, which now faces what is likely its biggest-ever crisis. The EU and its allies have banned Russian coal, embargoed most of the country’s oil supplies and cut gas imports to a post-Soviet low. Energy expert Thierry Bros estimates that Gazprom delivered only 1.7bn m3 of pipeline gas to Europe in January, or 20.4bn m3 on an annualised basis.
Putin did speak of “new and promising global markets” in the Asia-Pacific region. Russian exporters have managed to divert most of their oil and coal to those markets, and as a result production has so far been unexpectedly resilient. However, the latest embargo on petroleum products introduced in early February poses a fresh challenge. It is too soon to tell how effective the West’s price caps on Russian crude and petroleum products will be, though analysts have suggested that Asian buyers may secretly be buying Urals blend at a price higher than the $60 per barrel cap. While the free-on-board price of Urals at Russian ports is below this cap, Russian exporters could be adding on various surcharges that drive the price higher.
The situation for Russian gas is more clear-cut – things are looking bad. Even if a ceasefire or peace deal is reached in Ukraine, Russia’s reputation as a reliable supplier is in tatters, and LNG and other rival exporters are seizing upon its former market share. Unlike the oil and coal, this gas cannot so easily be rerouted to Asia. Doing so will require the construction of pipelines stretching thousands and thousands of kilometres, and new LNG infrastructure – a sector where Russia has depended heavily on Western financing, technology and expertise.
Moscow is pushing for the formation of a so-called Gas Union with Central Asian countries that are contending with gas supply shortages. This could provide an outlet for some Russian gas, but only in meagre volumes and at a price far less lucrative that the European market offered. The Russian government has also talked up prospects for expanding the role of Turkey as a hub for its gas supplies to Europe. But the initiative, if it materialises, will be agreed on Ankara’s terms, and will ultimately depend on European buyers being willing to accept Russian gas.
As one former Gazprom manager told Reuters in mid-February, “the work of hundreds of people who spent decades building the export system [to Europe] has now been flushed down the toilet.”
Energy war backfires
Moscow’s war in Ukraine has left it internationally isolated and its economy likely facing a prolonged, painful recession. It has also strengthened rather the weakened NATO, which is more united than it has been in years, and is due to accept Finland and Sweden as new members.
Russia’s war on the European energy system has similarly backfired. It was Russia that was mostly responsible for the drastic cut in its gas supplies to the continent. It did this to put pressure on European policymakers to make concessions in the Ukraine conflict. But while Europe has taken a significant economic hit, it avoided the feared shortages this winter, and is now well-positioned to make it through next winter as well.
Mild weather has been a key factor, but so has ample LNG supply and EU efforts to bolster storage volumes over the summer and autumn. As a result European gas prices – while still very high compared with the historic average – have slide back to the pre-war level.
Moscow has made fresh claims that Washington was behind the sabotage of the Nord Stream 1 and 2, after veteran US journalist Seymour Hersh released an article recently that claimed that the US Navy was responsible for blowing up the pipelines. It is important to note that Hersh bases the claim – which the White House has described as “pure fiction” – on information from a single anonymous source.
In any case, however, Russia may feel emboldened to launch attacks on other critical energy infrastructure in Europe. Authorities in the Netherlands and Norway have warned of the risk of just that. Dutch intelligence services said in a report that Russia was “covertly mapping” key energy infrastructure in the North Sea in preparation for a possible attack. Meanwhile Belgium said on February 22 that it was investigating the presence of a Russian “spy ship” in the North Sea.
“We don’t know the exact motives of this Russian ship, but let’s not be naive,” Belgian North Sea minister Vincent van Quickenborne said. “Especially if it behaves suspiciously close to our wind farms.”
Amid fears that the war in Ukraine could escalate, with Russia understood to be preparing for a fresh offensive and potentially a new mobilisation drive, the threat that this could lead to additional attacks on energy infrastructure in Europe must not be ignored.