Russia’s EU gas market share: A battle on four fronts – Part 1

Russia’s European market share may be further reduced if the Ukrainian gas transit contract is not renewed after 2024 and its LNG exports are sanctioned. While most central and western European buyers could replace missing imports, Russia’s ability to retain and even regain some of the lost share will depend on four pivotal decisions that will need to be taken in the upcoming year, as Rob Dalton and Aura Sabadus explain in this five-part series. Each of the four challenges will be analysed in-depth throughout the rest of the week.

LONDON (ICIS)–Russia’s ability to retain its market share in Europe in the longer-term hinges on a sequence of decisions that will have to be made in 2024.

The country lost its role as Europe’s top gas supplier after it cut nearly 90% of the pipeline volumes it was supposed to export as part of contractual obligations.

With multiple changes looming on the horizon, its presence in the European market may decline even further, raising questions about the ability of European buyers to replace the remaining imports.

An ICIS analysis has found that Russian LNG and pipeline gas transiting Ukraine could be phased out without creating major market imbalances in western and central Europe even if suspended in the short-term.

In fact, if the EU were to ban Russian LNG imports immediately, the impact on supplies and storage facilities would be minimal.

In a scenario where Russian LNG is sanctioned and assuming average winter demand and an ongoing 15% demand reduction, ICIS projects the EU-27 bloc would end this heating season with around 53billion cubic metres (bcm) of natural gas in storage, or a 47% storage fullness level. The storage carryout would be 15bcm higher than the five-year average between 2017-2021.

On the other hand, Russian flows to south-east Europe via TurkStream 2 would be difficult to replace in the short term because of constraints related to LNG importing and transmission capacity regionally.

UKRAINE TRANSIT

Ukrainian authorities have already rejected the idea of direct talks with Russia for the renewal of its transit deal but appear to be leaving the door open for European buyers to negotiate themselves the delivery of supplies at the Russian-Ukrainian border after 2024.

The option is plausible but to be viable it needs to muster sufficiently high interest to ensure transit costs and risks in a war-torn country are kept low.

This, in turn, throws a second challenge as many European buyers will need to decide whether they wish to continue importing Russian pipeline gas or seek alternative LNG supplies.

ARBITRATION

Some traders say although large consumers such as Germany’s BASF, EnBW or RWE have signed LNG supply contracts with US producers, many others continue to keep an eye on a handful of large long-term supply agreements with Gazprom which were suspended last year.

The volumes amount to an estimated 80bcm/year but are under arbitration following Gazprom’s decision to cut supplies in 2022.

Even so, since they are due to expire within the next 10 years, some companies may still expect these to be released back to the market and possibly transiting Ukraine since Russia’s preferred Nord Stream transit corridor was sabotaged last year. Assuming companies opt for more LNG instead, the third question that will arise is whether these imports will involve more or less Russian LNG.

LNG SANCTIONS

The EU has received 9m metric tonnes (12.42bcm/year) of Russian LNG this year and if member states continue to import at this rate, the bloc could see imports of 13.1m tonnes (18bcm/year).

This would slightly fall short of the record Russian LNG imports witnessed in 2022 (13.7m tonnes), with upside risk remaining a strong factor as a particularly cold winter can add around 20bcm of European gas demand which could blow this figure out.

However, there are now growing political pressures to ban Russian LNG, with the US Department of Treasury firing the first warning shot earlier in November when it placed the Arctic 2 LNG project under the specially designated nationals list, giving western partners to wind down operations by 31 January 2024.

Shortly afterwards, the European Parliament adopted a resolution calling for a full ban on Russian LNG.

Although the two decisions do not impact the gas market yet – the Arctic 2 LNG project is still being developed by Russian firm Novatek together with western partners and the EU parliament resolution is not binding – they may be a prelude to a ban on Russian LNG which could be adopted in 2024.

TURKEY GAS HUB

Finally, having lost most of its lucrative and largest market, Russia will be racing against the clock to recover some of the European share before international competitors such as the US or Qatar will flood the global market with more LNG as they double their production by the middle of the decade.

The only option left may be Turkey, which Russia may be using to recapture some European market share.

South-east European countries which have been historically dependent on Russian gas will continue to do so for the time being, importing volumes via TurkStream2 as options to diversify away are limited.

However, Russia has also been working to increase exports to the region from Turkey in addition to those contracted and shipped via the TurkStream 2 pipeline.

The question therefore will be to what extent the additional flows will thwart regional countries’ ability to diversify away from Russian gas in the longer-term.