October 2, 2023

Europe will receive less Russian pipeline gas if Gazprom sanctions Naftogaz

The risk of further cuts to Russian pipeline gas supplies to the European Union has increased since yesterday after Russia’s state-owned gas producer Gazprom warned that Russia could impose sanctions against Ukraine’s Naftogaz.

Such a move would bar Gazprom from paying transit fees to Naftogaz, leading to further supply cuts to the European Union (EU). Gazprom uses Ukraine as a transit route to supply gas to the EU and pays Naftogaz transit fees. Turkey is the only other transit supply route to the EU that Russia uses although more supply routes to the bloc exist.

Russian authorities are considering including Naftogaz on Russia’s list of sanctioned entities in retaliation for Naftogaz’ taking Gazprom to court over non-payments for transit services. This would preclude Gazprom from undertaking any financial transactions with Naftogaz. Gas supply transit through Ukraine would likely stop without payment for transit fees. Gazprom said the Ukrainian firm refused to fulfill its transit obligations at the Ukraine-Russia Sokhranovka border point.

The EU would likely receive Russian pipeline gas only through the 15.75 bn m3 TurkStream pipeline that connects Russia to the EU via Turkey if Russia decides to sanction Naftogaz. Russia is unlikely to use other routes to supply the EU to compensate for lost transit volumes via Ukraine if it stopped using the Ukraine route because such routes have not been used for some time for the reasons explained below.

Earlier this week, no less than three leaks were detected on Russia’s largest supply route to the EU, the Nord Stream 1 and Nord Stream 2 pipelines. The cause of the leaks is still unclear but flows via these pipes are now very unlikely especially this winter.

Russia stopped using the supply route crossing Belarus and Poland since May and has long had disagreements with Poland regarding the use of this route, making a resumption of flows via this route unlikely.

Flows have also stopped earlier this year via the smaller pipelines connecting Russia to the Baltics, which have aimed to end their reliance on Russian gas long before the whole EU started.

Russia cut flows to Finland since May due to Finland not paying for gas using the new procedure Russia imposed earlier this year.

The EU is already facing a severe energy crunch because of Russian supply curtailments and its decision to end its dependency on Russia, which used to be its main gas supplier.

Flows through Sokhranovka in Ukraine stopped since May, according to the European Network of Transmission System Operators of Gas (ENTSOG). Russia now sends gas through Ukraine only via the Sudzha point.

Russia has sent around 16.2 bn m3 to the EU via Ukraine so far this year, compared to 32.7 bn m3 for the same period last year, ENTSOG shows. It sent approximately 41.2 bn m3 via Ukraine between Sep 28 – Dec. 31, last year, although the capacity of the Ukrainian transit system allows for higher volumes.

Further cuts in Russian piped supplies to the EU would likely impact the refilling of EU underground gas stocks. EU legislation mandates that gas stocks be refilled to at least 80% of their capacity by Nov. 1, and preferably to 85%. They were almost 88% full on Sep. 26, according to Gas Infrastructure Europe.

The bloc remains exposed to reductions in Russian piped supplies particularly this coming winter even though it is looking to ramp up its LNG import capacity to compensate for lost Russian piped gas volumes. But, the expectation in the market is that LNG imports may not be enough to see the EU safely through the coming winter.

The prospect of further Russian supply cuts pushed the ICE Dutch TTF gas futures front-month price to an intraday high of €211.2/MWh today before dropping to €194/MWh at 12:22 London time. It had closed at €186.1/MWh on Sep. 27, up from €173.8/MWh a day earlier.

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