Europe holds its breath as Russia cuts gas to 3 nations

Poland and Bulgaria were modest importers of Russian gas, at around 10 Bcm/y and 3 Bcm/y respectively, and their import contracts with Gazprom were about to expire by the end of the year. Yet Gazprom’s cancellation of the contracts, effective as of 27 April, could be seen as a stark warning of things to come. Finland’s recent application for NATO membership, for example, prompted Russia to cut off power supply to the country, about 10% of Finland’s consumption, and Gazprom is expected to terminate gas deliveries as of 21 May equalling around 1.6 Bcm/y.

Although Moscow is heavily reliant on income from gas exports, and currently has few options for piped gas exports other than to Europe, recent developments have sent a strong signal to the West that Gazprom is no longer the reliable supplier some previously believed.

Moscow insisting on gas payments in rubles, for example, is a real threat to security of supply. The early termination of the contracts with PGNiG and Bulgargaz was a direct response to their refusal to pay for gas in rubles. As for Finland, gas company Gasum has said it will not pay in rubles and the company is taking legal action against Gazprom’s demands.

The EU has said that paying for gas in rubles is in breach of sanctions against Russia ostensibly because the exchange process from euros or dollars to the Russian currency would involve the Russian Central Bank, which is sanctioned by the West. But as always there will be loopholes; whether it is possible to pay for gas in rubles and still be compliant with sanctions is open to debate. The European Commission is soon expected to come up with clearer guidelines on how to pay for Russian gas as the guidelines issued in April are by many seen as inadequate.

A number of European companies are opening bank accounts with Gazprombank in order to pay for gas in rubles as the deadline for paying for gas delivered in April looms.

However, at the moment it seems highly unlikely that European gas importers will be able to pay for Russian gas in rubles and still be compliant with sanctions, Orestis Omran, a partner in the Brussels office of law firm DLA Piper, told Gas Outlook.

As long as the conversion to rubles is done by the seller, or Gazprom, post-transaction that should be acceptable, according to Omran.

“However, if the seller unilaterally opens bank accounts in the name of the buyers asking for payments in rubles, that would in principle violate the sanctions,” he said.

Russian gas deliveries decline

Russia’s gas exports to European countries have fallen sharply year-on-year, data recently posted by Gazprom confirms. Gazprom says exports to non-CIS countries in the period from January 1 to May 15, 2022 amounted to 55.9 Bcm, which was 26.5% less than in the same period last year.

At the time of writing, Gazprom still appears to be fulfilling contractual volumes to European buyers, with the exception of the aforementioned nations, but the company is not shipping additional volumes to help relieve a tight supply situation. Moreover, gas deliveries through the Ukrainian transit route are declining after the Ukrainian gas TSO declared force majeure on the Sokhranovka interconnector in Russian-occupied territory. At the same time, Gazprom has imposed sanctions on the company operating the Polish section of the 33 Bcm/y Yamal pipeline, EuRoPol Gaz, which means additional volumes cannot be pumped through this route.

Against this backdrop, a number of EU nations are increasingly turning to LNG as an alternative to Russian gas. Bulgaria will receive US LNG via Greece’s Revithoussa LNG Terminal starting in June this year when the 3 Bcm/y Interconnector Greece Bulgaria is expected to enter operations. Following a meeting with Prime Minister Kiril Petkov and US Vice President Kamala Harris in Washington in May, it was agreed that the LNG would be delivered at prices below those of Gazprom.

Meanwhile, Poland will be able to replace the Russian gas with a combination of LNG imports and Norwegian piped gas via the 10 Bcm Baltic Pipeline which will become fully operational early next year. In addition to the Świnoujście LNG terminal, Poland can now also access LNG from Lithuania’s Klaipeda terminal via the recently commissioned, 2 Bcm/t Gas Interconnection Poland Lithuania (GIPL).

Germany, Italy and Greece – and now also Finland – are among several EU nations that are installing Floating Storage Regasification Units (FSRUs) which can be deployed relatively quickly. Several of these floating import facilities are expected to be operational by next year.

With 2 FSRUs lined up for next year, in addition to the existing Revithoussa onshore LNG terminal, Greece is eyeing an opportunity to become a regional gas hub. But Athens is in a similar situation to many EU countries; it also imports Russian gas and, for this reason, the phase out of coal-fired power plants that was previously planned for 2025 has been postponed for energy security reasons.

“Indeed the FSRUs are expected to result in an increase of the LNG portion in the Greek energy mix but given how dependent Greece still is on Russian imports, it will take a few years until Greece can rely exclusively on alternative sources other than lignite and Russian gas,” says Omran.

With Norwegian supply virtually maxed out and much of the regasification capacity at existing LNG terminals in North West Europe already booked, demand curtailment may be necessary to get through next winter.

“We need to tackle both demand and supply in this crisis and I do not have the impression that we do enough about the demand side,” Anne-Sophie Corbeau, Global Research Scholar at the New York-based Center on Global Energy Policy, told Gas Outlook.

“I think the industry is probably doing whatever it can because for many it’s a question of economic survival. But what about residential end-users?”

Corbeau said governments are terrified of gilets jaunes, or ‘yellow vests’ protests, and therefore turn to subsidized tariffs instead of asking the public to reduce consumption.

“Just look at what happened during the French presidential elections – all candidates pledged to protect the consumer, not one of them said ‘guys, this is going to be a tough ride’.”