Gazprom Plays Ball: The Depoliticization of the European Gas Market
Gazprom’s gas supplies to Europe and Turkey reached an all-time record in 2016. This might suggest Europe is becoming more dependent on Gazprom, but according to Danila Bochkarev, Senior Fellow at the EastWest Institute, the Russian company gained market share by playing by the rules of the market. The European gas market is finally becoming depoliticized.
Despite uneasy relations between Europe and Moscow, Gazprom’s gas supplies to European consumers are projected to set a new record in 2016. In 2015, this Russian energy company delivered 158.6 billion cubic meters (bcm) to Europe and Turkey. In 2016 this number is set to hit almost 180 bcm – a 12% increase. This number includes exports to all European countries minus three Baltic States plus Turkey. Gazprom’s exports to the EU28 in 2016 are estimated at around 153 bcm. (Global natural gas exports of Gazprom went up from 195.7 bcm in 2015 to 210 bcm in 2016.)
As EU-28 gas demand increased by around 6% to 447 bcm last year, according to figures from Eurogas, this means that the share of Russian gas in Europe consumption went up to around a third. Most of the increase in Europe’s gas imports (around 30 bcm in 2016) was covered by Russia (some 20 bcm).
What these figures show is that EU utilities are not afraid of Gazprom and are eager to buy cheap energy from Russia. Gazprom does not disclose the prices it charges its European clients, only an average price charged for its European customers. Gazprom’s average European gas price was $182.50/1,000 cu m in the first half of 2016, Gazprom’s average price for 2016 is estimated at around $165-$170/1,000 cm.
Gazprom apparently accepts the new energy realities of a stagnating European gas market
Gazprom prices were comparable to or even lower than record-low European spot prices. For example, in the second half of May 2016, the German border price (BAFA) which closely reflects the price of Gazprom’s supplies to the EU, since Germany gets most of its gas from Russia, went as low as $145/1000 cm($4/MMbtu) or about 20% less than the spot price at the UK NBP hub, the largest gas trading hub in the EU.
As a matter of comparison, domestic natural gas prices in the U.S (NYMEX) are currently around $3.33/MMBtu (aroud $115-120/1,000 cm). This is lower than European prices, but if you add liquefaction, regasification and transportation costs (around $4/MMBtu or roughly $140/1000 cm), US LNG is currently considerably more expensive than Gazprom pipeline gas.
Gazprom would obviously prefer to ask higher prices for its gas. In January–September 2016 its year-on-year operating profits fell from 1043 billion RUR ($17.6 billion) to 568 billion RUR ($8.31 billion). But the company has no choice if it wants to keep its market share. Gazprom apparently accepts the new energy realities of a stagnating European gas market. Its behaviour shows that it values market share as well as access to the EU more than high profits per se.
Gazprom’s showed flexibility in its market approach. The company reached an agreement with German energy company Uniper (the company split off from Eon) on price adjustment to long-term gas supply contracts. In December 2016 it indicated it was prepared to change its business practices to settle an EU antitrust case initiated by the European Commission.
Europe’s dependence on Russian gas supplies is relative and not critical for Member States economies
The behaviour of buyers has also changed. They no longer seem afraid of supply cuts and the security of supply issue was downgraded to one of secondary importance, at least in the “mature” European markets. An indication of this more relaxed attitude of European consumers is their interest in buying larger quantities of Gazprom’s gas and their lack of appetite for LNG, even though LNG prices were only slightly higher than Gazprom/German border prices. That shows rational commercially-driven behaviour, unaffected by the rather alarmist political discourse around Russian gas.
Consumers in Europe currently have a vast of choice of alternative supplies – both in the form of LNG and pipeline gas and they appear to feel comfortable with this choice. By the end of 2016, total regasification capacity in the EU and Turkey (23 terminals in the EU-28 and 2 in Turkey) stood at 216 bcm, amounting to 40% of EU demand and 55-60% of EU gas imports. In 2016 Norway and Algeria respectively exported 107 bcm and 34 bcm.
These numbers show that Europe’s dependence on Russian gas supplies is relative and not critical for Member States economies. It is worth mentioning that highly publicized LNG exports from the U.S. are still very limited. Out of more than 50 cargoes loaded at the Cheniere-operated Sabine Pass only 3 reached the EU.
Sense of confidence
One reason for the increased flexibility is the increased level of interconnectivity and new reverse flow options that have been created over the last few years, allowing EU countries to source gas from neighbouring countries often situated outside traditional east-west energy supply corridors. The total Central and East European (CEE) east-west reverse flow capacity now stands at about 147 bcm/year, while a further 42 bcm/year of new interconnection capacity has been added within Eastern Europe and between Central and Western Europe over the last five years. This connectivity helps to spread the sense of confidence that exists in the mature markets in Western Europe to the new Member States.
High gas prices are no longer an excuse not to switch to coal
The Czech Republic offers a good example of how connectivity can quickly turn a relatively isolated and illiquid market into a well-functioning hub. In 2015, maximum reverse flow capacity allowing for (potentially) non-Russian gas supplies to the Czech Republic from Germany and Poland reached 61.2 bcm/year or over 850% of the Czech Republic’s annual gas consumption of 7.2 bcm in 2015. Moreover, the Czech pipeline network can now transmit natural gas arriving from Germany to Slovakia (up to 14.6 bcm/year of reverse flow capacity) and Poland (up to 5.7 bcm/year of reverse flow capacity). Most of this reverse flow capacity was created quite recently.
Czech consumers cannot only source non-Russian gas from Germany, they also have the option to choose the route for their gas supplies from Russia. They can import Russian gas either from Ukraine and Slovakia or from Nord Stream and Germany. The Czech Republic has in fact become an important hub for Nord Stream gas.
The increased interconnectivity has led to price alignment everywhere in Europe. The difference between energy prices in ‘mature’ and ‘developing’ markets is no longer visible. Thus, natural gas prices in the Czech Republic have already converged with German gas hub prices and this trend is expected to continue with the development of interconnectors in other (still ‘disconnected’) Member States in Southeast Europe.
For example, in the first half of 2014, the gap between the average wholesale price between the Dutch trading hub TTF (21.58 euro/MWh), the most liquid hub on the European Continent, and the Czech Republic (27.81 euro/MWh) was still quite significant. In the second quarter of 2016 average wholesale prices at the TTF (13.19 euro/MWh) and the Czech Republic (13.13 euro/MWh) converged. In Slovakia prices were even lower at 12.18 euro/MWh.
In short, price convergence, transparent (and affordable) pricing as well as availability of alternative sources and routes has raised consumer confidence and is helping to depoliticize the trade in gas in Europe. This could be good news not just for the economy, but also for the climate, as it will make it easier for countries that are still heavily dependent on coal to switch to gas.
Policymakers need to keep away from unduly influencing markets and determining the behaviour of energy companies
High gas prices are no longer an excuse not to switch to coal. The EU is currently enjoying low prices both for its LNG and pipeline imports. For example, in the last few months LNG and Russian pipeline gas have been trading at around $4-$6/MMBtu, with pipeline gas being occasionally cheaper than LNG sold at spot prices. This means that prices of gas and coal tended to converge, making coal less of an attractive alternative for the natural gas. Last fall coal prices went up to $3.8- $3.9/MMbtu.
The EU’s Paris commitment, to cut greenhouse gas emissions by at least 40 percent by 2030, is extremely sensitive for countries like the Czech Republic which still rely heavily. (Up to 40% of the country’s energy demand in the Czech case.) Obviously, there are renewables – but according to the Czech Pepublic’s National Action Plan for Renewable Energy (updated in 2016) the share of renewables in the country’s energy consumption will reach only 15.9 % by 2020. The country’s energy plans still rely heavily on building new nuclear reactors at the Temelin and Dukovany nuclear plants with a combined capacity up to 2,500 MW, but these are costly undertakings that take a long time to build, while natural gas is ready to offer an immediate solution.
Although market forces seem to be efficient and working for the benefit of customers, gas in the EU is still a heavily politicised issue. Natural gas is often attacked from the viewpoint of security of supply or the environment. This attitude is not always justified and may have damaging effects. Severin Fischer of the Center for Security Studies (CSS), ETH Zurich, has rightfully pointed out that “Over-politicization of natural gas as security problem leads to non-market behaviour (e.g. exclusion of specific sources), higher prices and increases investment costs.”
The trend towards depoliticization is still fragile, but might gain a momentum if both suppliers and consumers are ready to invest in this relationship, respect mutually accepted “rules of the game” and each other’s interests. Policymakers for their part need to keep away from unduly influencing markets and determining the behaviour of energy companies.
Danila Bochkarev is Senior Fellow at the EastWest Institute in Brussels, specialising in Eurasian energy and natural resources issues with a particular focus on natural gas. Before joining EastWest Institute, he was an Inbev visiting scholar for EU-Russia relations at the UCL/KUL universities in Belgium. He also worked on China and Central Asian affairs at the European Parliament and the Energy Charter Secretariat and frequently advises private sector companies and international institutions.
The opinions expressed in this article solely reflect the views of the author, not of his organisation.