From the Editor: All eyes on Russian supply [Gas In Transition]
Moscow’s invasion of Ukraine may have irrevocably changed European energy policy. But during the first two months of the conflict, Russian gas supply to Europe remained unaffected. That all ended in late April, when Russia cut off supply to first Poland and then Bulgaria. The question is which countries will be next.
European utilities even maxed out on Russian gas purchases during March, as contractual prices had become more competitive than spot rates. And even as bombs were falling on Kyiv, Russsia was actually pumping more gas than usual via Ukraine, and still paying to do so in hard currency.
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However, then came Russian president Vladimir Putin’s March 31 decree, requiring buyers in “unfriendly” countries to start directing their payments to accounts at Gazprombank, so that the euro and dollar-denominated bills could be converted into rubles before transfer to Gazprom. The move was aimed at propping up the Russian currency, avoiding the risk of Gazprom’s receipts getting frozen in European banks, and shielding Gazprombank from future sanctions.
The Kremlin warned that failure to comply with its decree would result in supply getting cut, even though the decree itself violates terms of payment set out in supply contracts. And it followed through on that threat in late April by halting shipments to Poland and Bulgaria.
The cut-off has shown itself in overall Russian export volumes to Europe, which were down by more than a quarter year/year between January 1 and May 15.
Poland has been planning for a future without Russian gas for many years, and had hoped to accomplish that goal at the end of this year, when PGNiG’s long-term supply contract with Gazprom is due to expire.
As such, Warsaw has positioned itself well to cope with the supply cut-off. To the envy of many European states, Poland’s gas storage facilities are now close to 90% full. And in October, the 10bn m3/year Baltic Pipe is expected to be fully operational, providing Poland with Norwegian gas during the heating season. And next year an expansion is due to wrap up at the Swinoujscie regasification terminal, raising its capacity by 2.1bn m3/yr. In 2025, a floating storage and regasification terminal off Gdansk is due to start operations as well.
Bulgaria is in a more precarious position. Not only does natural gas play a greater role in its energy mix than in that of Poland, but until the cut-off it received almost all of its gas from Russia, whereas in Poland, Russian supply only accounted for 40-45%. Bulgaria also has hardly any gas in stock, with its storage facilities only about 20% full.
Sofia is therefore counting heavily on the launch of the Interconnector Greece-Bulgaria (IGB) pipeline this June, which will give it access to gas from Azerbaijan and regasified LNG arriving in Greece. But how quickly the pipeline can deliver sizable volumes is unclear.
Who next?
Despite the EU urging companies to bend to the Kremlin’s demand, news reports claim that 20 or more European buyers have agreed to comply with the decree, including Germany’s Uniper and Italy’s Eni. But a number of countries have declared they will not accept the new terms, including the Baltic states, the Netherlands and Finland.
Which of these countries may have its gas supply cut off next will likely depend on when their gas bills are due. But in the case of Finland, there is the added risk that Moscow might halt supply in retaliation for its decision to seek NATO membership.
Ironically, given that one of Russia’s stated aims for the invasion of Ukraine was to stop the further advancement of NATO to its borders, the war has led to a sea change in Finnish attitudes towards joining the defence alliance. Before Russia’s attack, a majority of Finns long opposed membership, but by February this year, support had grown to 53%, and now it stands at 76%, according to local public broadcaster Yle.
Whether or not Finland’s bid and that of neighbouring Sweden will depend on the outcome of negotiations with NATO member Turkey. For a new country to join, unanimous approval by the alliance’s existing members is required.
Russia has warned of repercussions if Finland enters the alliance, referring to unspecified “military technical” measures. But it has not suggested that gas supply will be affected.
In any case, Finland is resolute that it will not accept Russia’s new payment terms for gas. The country’s state-owned energy company Gasum said on May 17 it planned to take Gazprom to an arbitration court over the matter, stating that the demand was “unacceptable” and that there was a “significant dispute” over other claims in their supply contract.
“In this situation, Gasum had no choice but to take the contract to arbitration,” CEO Mika Wiljanen said. “In this challenging situation, we will do our utmost to be able to supply our Finnish customers with the energy they need.”
Finland gets the bulk of its electricity from nuclear, coal and biofuel plants, and most of its heat from coal and biofuel. Indeed, gas only comprises 6% of the country’s overall energy consumption.
That said, a disruption in Russian supply would still cause problems, as it accounts for 60-70% of the gas that Finland uses, and the country lacks storage capacity.
Finland used to get all its gas from Russia until the launch of the Baltic Connector pipeline that runs from Estonia in January 2020. The pipeline is technically capable of supplying all the gas that Finland needs, but there will be limits on how much non-Russian supply can be sourced from the Klaipeda LNG terminal in Lithuania, and the Swinoujscie facility in Poland.
By cutting off supply to Poland and Bulgaria, Russia certainly has convinced others to comply with its decree. However, the move has only served to further tarnish its reputation as a supplier, strengthening European resolve to sever all energy ties. This said, there is little Russia could do now to salvage that reputation.