Friday, July 6, 2012

European Responses to Gazprom Delivery Cuts

In February 2012 Gazprom reduced its deliveries of natural gas to Southern Europe to meet domestic demand in Russia.  This was the third time in six years that Gazprom cut deliveries to Europe:  2006, 2009 and 2012.  Unlike the first two interruptions which appear to have been politically motivated (aimed at influencing Ukrainian politics), this cutoff was precipitated by high demand--and Gazprom's inability to meet that demand.

Following the first two cutoffs, Europe united in demanding the creation of an alternative natural gas source.  Just as the gas outage was different than the first two, reactions have also differed.  In fact, European countries have diverged wildly as to their reactions.

The first to react was Russia itself.  On February 1, Gazprom acknowledged there had been increased demand, caused by the coldest weather to hit Europe in decades.  They pointed out that even though not everyone was getting all the gas they wanted, that Gazprom was honoring all its contractual obligations--a point acknowledged by the Europeans themselves.  Citigroup analysts in Moscow Ronald Smith and Alexander Bespalov released a note that read, "Gazprom will almost certainly meet its minimum contract requirements."  Gazprom Deputy Chairman Andrei Kruglov informed then-Prime Minister Putin that Gazprom could not increase gas deliveries to Europe.  Putin gave orders for Gazprom to do whatever was needed--but not at the expense of Russia's inhabitants.  "I am asking you to make a real effort to supply the demands of our foreign partners given that the top priority of our energy companies, including Gazprom, is to supply Russian customers," he said.

Gazprom's admission that they had cut back on deliveries was given hesitantly, however.  At first, they blamed Ukraine for the shortage--stating that Ukraine was stealing excess gas from the pipeline that passes through that country (See my blog entry "South Stream Advancing", June 12, 2012.)  When it became apparent that domestic demand was taking all the gas, Gazprom's other deputy chair, Alexander Medvedyev, admitted gas demand exceeded expectations by 50%.  Deputy Kruglov then stated the cuts had lasted several days, and had reached up to ten percent.  Officials in Austria and France reported shortages of 30%, and Italy reported shortages of 24%.  Ukraine itself claimed it was receiving 15% less gas.

IHS regional energy analyst Andrew Neff stated the obvious:  "The cold weather spike in demand raises questions about...Europe's apparent expectation that Gazprom can quickly ramp up export volumes as a "swing supplier,"  reported AFP.  East European Gas Analysis chief Mikhail Korchemkin explained why:  "Turkmenistan and storage gas could have contributed some 240 million cubic meters per day--enough to provide a stable gas flow to Europe," noted the same report.  But that gas was not available, because Gazprom has been building its network instead of storage facilities.  Deputy Chief Medvedyev conceded the problem and said, "We cannot promise that this will not happen again next winter or over the next five years..That is why we have given the green light to a program aimed at doubling the volume of our European storage facilities."

Jonas Gratz of the Center for Security Studies in Zurich, notes the paradox that while Russia can no longer play supplier of last resort, many European countries are rewarding Russia instead of seeking alternatives.  "The premise of stable supplies from Russia is crumbling fast," he wrote.  "Gazprom is not the "reliable supplier" that the Soviets may once have been (in the eyes of Western Europe).  Gazprom's market share in the EU turns out to be already too high for the sort of power play Moscow wants to pull off with the EU.  By exploiting irregularities and crises to display and test the EU's vulnerabilities, Russia strives to derail the EU's market liberalization agenda...Many EU member states and institutions have so far rather rewarded Russia's unreliable behavior...Instead of rewarding Russia, the EU and its gas industry have to focus on diversifying suppliers."

Europe's dependency of Russian energy will continue to grow in the future.  A doctoral student at Old Dominion University, Katerina Oskarsson, compiled an interesting report.  She wrote that the EU's gas imports are projected to accelerate due to a depletion of indigenous gas resources.  The European Commission estimates that the proportion of EU gas consumption met from imports is set to rise from 60% to 73-79% by 2020 and 81-89% by 2030.    These statistics, while alarming, need to be kept in perspective.  Russian gas only accounts for 6.5% of the EU's primary gas consumption.  The issue, however, is regional.  In Central and Eastern Europe, all states reply on Russia for at least 50% of their natural gas, and six countries get over 80% of their supply from Gazprom.

The Cold Snap has brought home the European need for non-Russian sources of natural gas.  As Nabucco is replaced by TANAP, however, the only non-Russian sourced pipeline is reduced to delivering less than 2% of Europe's energy needs.  Europe's dependence on Russia appears destined to continue, unless a combination of LNG, shale gas, and unconventional fuels can break it.