Russia decreases gas supplies to Europe despite high demand

Russia decreases gas supplies to Europe despite high demand

Winter weather and closures of European thermal power plants caused an increase in demand for gas in the European Union. However, Russian gas giant Gazprom, which is Europe’s key gas vendor, is not rushing to raise supplies. By forcing European countries to consume gas from their storages, the company aims to keep prices high and accelerate the completion of Nord Stream 2.

Gazprom is drastically reducing its physical deliveries of natural gas to the EU despite soaring natural gas prices in European markets, says Russian gas transit through Ukraine has fallen by a third to 130 million cubic metres per day since the end of December 2020, according to CEO of Gas Transmission System Operator of Ukraine Sergiy Makogon. At the same time, spot prices at the Central European Gas Hub in Austria set a record of 19,4 euro per MWh last week due to higher demand for gas fuelled by the current winter weather in Europe.

The increase in European demand is also the consequence of the coal and nuclear phase-out, as closures of thermal power plants across Europe left a significant capacity gap that is set to be filled by gas. In addition, Gazprom reportedly stopped selling gas through its online Electronic Sales platform, which also contributed to price growth. Buying additional volumes of liquefied natural gas (LNG) is now hardly an option for Europe given that most of LNG is currently directed to Asia, where the demand has inflated prices for February deliveries to $21 per MMBtu. However, analysts expect LNG prices to stabilise soon with cargoes returning to Europe. It may challenge Gazprom’s dominance, as LNG prices are becoming increasingly competitive with pipeline gas.

Pipes for Nord Stream 2 in Port of Mukran, Germany. Photo: Gerd Fahrenhorst

Currently, European countries have to use gas from underground gas storage sites, which are gradually depleting. On 21 January, these reserves stood at 59% of full capacity compared to 73% in December 2020. According to gas analyst Sergey Kapitonov, the current level should be sufficient for another 70 days. By comparison, Europe has only 20% left in its gas storage sites by the end of the winter of 2018.

As for Gazprom, the company aims to rationalise its supply and avoid an excess of natural gas on the markets, consider analysts. The gas producer wants prices to remain high when the time comes to refill European storage facilities. Besides, Gazprom may want to show the indispensable character of Nord Stream 2 pipeline and encourage European countries to rapidly finish the works. More than 90% of the pipeline, which was initially supposed to be launched by 2021, is already built, but recently, Gazprom admitted for the first time a serious impact of Western sanctions on the project.

By Anna Litvina