A Situation Report on Russian Gas

As Russia’s economy falls deeper into recession, Russian President Vladimir Putin is increasingly finding himself backed into a corner. Putin, known for acting unpredictably and leveraging any and all options available to Russia, has yet to play what some believe to be his trump card – a cutoff of gas supplies to Europe. However, even with few options left and the threat of new sanctions looming, it remains unlikely that Russia will cease natural gas shipments to Europe.

 

Scene-Setter

In contrast to popular belief, Russia does not hold an iron-tight grip over the EU through natural gas exports. In 2012, Norway became the EU’s largest source of liquid natural gas (LNG) imports. In 2013, Norway saw exports increase by 23.8 percent , far more than Russia’s increase of 17.5 percent, which dropped from a 30.9 percent increase the year before. In addition, the EU’s efforts to diversify its energy imports portfolio resulted in the sourcing of 40.7 percent of its extra-imports from small-scale deals with other nations. Meanwhile, an estimated 13 trillion cubic meters of shale gas in EU territory awaits exploitation (although scientists doubt the feasibility of extracting it).

In preparation for the forecasted severe winter and in response to the growing divide between the EU and Russia, European LNG storage supplies are hovering around 80 percent capacity, or 68 billion cubic meters (bcm). Equal to just less than half of all LNG imports from Russia during 2013 (155 bcm), Europe’s stock could hold off any significant economic ramifications for a number of months, giving Europe’s other suppliers ample opportunity to ramp up exports.  Prices will no doubt increase if a cutoff occurs, but China’s slowing economy and Japan’s reopening of some nuclear power plants will increase the availability of LNG on global markets and mitigate price increases to some extent. If all else fails, the EU recently drafted a document that would allow it to ban the sale of LNG to outside countries as well as order the industry to stop using gas.

This is not to say, however, that all EU member nations would avoid the repercussions of a cutoff; Baltic nations currently hold the greatest risk due to their near-100 percent reliance on Russian gas.

 

The Baltics in Focus

Lithuania recently completed the construction of a LNG terminal which will allow for nautical LNG trade. (Commercial deliveries – when they begin on January 1, 2015 – will account for a mere 17 percent of Lithuania’s annual 3.27 bcm LNG needs). At maximum capacity, the terminal could handle 4 bcm per year.

However, the other Baltic countries will remain largely exposed. If left without a sufficient source of gas imports, the Baltic nations will be forced to look towards Latvia’s Incukalns gas storage facility. The facility, which can hold a maximum of 2.32 bcm, was 73 percent filled at last report and could sustain each nation for several months. The only setback for Europe in using Latvia’s facility, however, is that the site is co-managed by Russian gas conglomerate, Gazprom.

 

Looking Forward

Overall, Russia and the ruble – especially considering the ruble’s current freefall – would be the primary victims of a gas cutoff. The Russian government relies on oil and gas exports for half its budget revenue, and the Russian economy is so devoid of diversified industry that energy exports made up 68 percent of its total exports by value in 2013.

What is worse, many Russian oil companies are so vertically integrated that the lost revenue would directly affect gas giants like Gazprom and Rosneft. Because oil and gas prices are kept so low and subsidized within Russia, these companies rely almost entirely on export revenue to fund investment in new infrastructure and projects, compromising Russia’s movements towards oil field exploration and exploitation in the Arctic.