Russian Gas: the year of living dangerously
2020 has been a tough year for Russian gas as it introduced a ‘live experiment’, testing the pain threshold levels of both Gazprom and other suppliers of gas to Europe under weak demand and rock-bottom prices. This paper reviews the impact of the crisis on exports of Russian pipeline gas to Europe in 2020 and assesses the economics of these supplies under the wide price range that we have seen occurring in the past months.
The obvious stresses of 2020 have put Gazprom on the defensive. It has given up its market share in Europe to LNG suppliers, primarily from the US, during the first half of 2020. This picture, however, is somewhat misleading as it exaggerates a situation that was relatively short-term and unsustainable under lower prices. As a harbinger of things to come in the second half of 2020, deliveries of LNG to European regasification terminals declined sharply over the summer owing to shut-ins at US LNG facilities and a return of LNG demand in Asia. Despite the heavy toll from extremely low gas prices this year, Gazprom has evidently adopted a strategy of gradual adaptation to a loose market in Europe and hopes to last longer than most of its competitors. This strategy worked in the past and is likely to work in the near-term.
From the longer-term perspective, however, the policy narratives of rapid energy transition towards a decarbonized future are taking centre-stage in Europe, with potential negative implications for Russia-Europe gas trade. Russia and Europe are quickly drifting apart under the pressures of global rivalries and different visions of the energy future. The best-case scenario in these circumstances is to avoid a disruptive and abrupt halt to Russia-Europe gas trade and hope that common sense prevails.