It has to be said, while Gazprom is facing a number of issues, export volumes are not one of them. 2016 was a very good year for Russian gas exports to Europe, with SO data indicating that they were up at 148 bcm, some 22 bcm higher y/y. Gazprom itself reported exports to all of Europe reached a record high of 180 bcm y/y and accounted for a 34% share of the market.
Gazprom’s annual contract quantity (ACQ), under its long-term contracts with European buyers, is around 118 bcm/y. With 25% tolerances on those numbers, total potential contract supply is some 148 bcm—largely in line with import levels seen in 2016. Adjusting for gas marketed in other ways than long-term contracts, gas drawn under contract is around 130 bcm, suggesting buyers still have some upwards flexibility left to them.
Given this, we feel there is no real battle to come between LNG volumes and Russian volumes. Gazprom, in altering its indexation to hubs, has paved the way for both LNG and Russian volumes to chase the market down, get more gas into power and eventually close the LNG arb window between the US and Northwest European hubs. The low gas prices this dynamic promises will be a problem, and there is little Gazprom can do about it, as the flexibility remains with its customers.
Developments at Bovanenkovo, in the Arctic Russian region of Yamal-Nenets, mean that the field’s productive capacity is expected to go from 80 bcm/y in 2016 to 115 bcm/y by end-2017. With Bovanenkovo gas focused on western markets, the main question is over which export routes to choose. As Bovanenkovo pipelines largely feed into Nord Stream, issues around full use of the onshore Opal pipeline remain. In November and December 2016, following the agreement with the EC on getting access to Opal’s unused capacity, the line handled record Russian imports.
However, in late December, the European Court of Justice suspended the EC approval of that deal. As the suspension took effect at the start of February, Russian gas deliveries to Germany via Opal fell by around 27 mcm/d (30%). The issues around Opal access are likely to be resolved this year, so Gazprom will need to keep gas flowing through Poland and Ukraine until that occurs.
Gazprom’s relationship with Polish and Ukrainian gas companies is fraught. It is locked in arbitration over $44 billion it claims it is owed by Naftogaz, which is counter-claiming and wants to increase transit fees. Poland is also looking to raise transit fees and intends not to extend its supply agreement with Gazprom. Despite these issues, these relationships need to be managed.
And Gazprom’s pipeline projects are facing problems, with investors having had to drop out of Nord Stream 2 and TurkStream far from being a well thought out project.