“Catch 2022” for Russian gas: plenty of capacity amid disappearing market
In 2022, following the Russia-Ukraine conflict and the unfolding of the de-facto trade war between the EU and Russia, Gazprom’s gas exports to Europe contracted sharply, by a staggering 90 bcm in a single year, raising questions about the prospects for Russia’s ability to balance its gas output in the near term and the risks to its future production potential, but more importantly about how, if at all Russia can re-direct volumes to alternative markets under extreme time pressure. Russia’s gas output is demand-driven, and amid the overall gas output decline in Russia, Gazprom’s own gas production in 2022 was affected disproportionately, while Russian oil companies and independent gas producers launched some of their long-delayed projects and actually increased gas production year-on-year. This has resulted in the re-emergence of very significant spare gas productive capacity for Gazprom, estimated at about 117 bcm for 2022 on an annual basis. It is worth noting that while this amount represents one of the highest for a decade, it is less than the roughly 150 bcm of spare productive capacity that Gazprom had in 2015 and 2016. The abrupt disappearance of the European gas export market and an overhang of spare productive capacity represents a significant problem for Gazprom and for the Kremlin because of a threat to gas export revenues and high opportunity cost of idled investments. Russian gas strategists have formulated several ideas on how to mitigate the problem, including assigning extreme urgency to negotiating a new 50 bcma contract with China with gas deliveries via the recently proposed Power of Siberia-2 pipeline, offering Turkey an opportunity to re-sell Russian gas at a quasi-gas hub, and initiating negotiations on effective gas swaps with Kazakhstan and Uzbekistan for re-exports to China. In none of these plans, however, is Russia in control of the situation but will have to depend on other players. Russia has two, maximum three years to address the weak links in its gas export strategy. If the solutions are not found, the threat of sharply reduced export revenues will become very apparent since the counterbalancing effect from today’s very high gas prices is likely to start dissipating in the next few years. This might potentially force Russia to devalue the ruble and also to hike domestic gas prices to increase the tax base that would then become subject to a higher state tax take, ultimately reducing Russia’s macro-economic stability and shattering the historic social contract around gas supply to the domestic market.