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    [Premium] Russian Gas Has Little Sway over UK Market

Summary

UK-Russia tensions over the poisoning of a former Russian spy and two others on British soil have led to wild media reporting of the UK’s...

by: Mark Smedley

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Infrastructure, Storage, , News By Country, EU, Russia, United Kingdom

[Premium] Russian Gas Has Little Sway over UK Market

UK-Russia tensions over the poisoning of a former Russian spy and two others on British soil have led to wild media reporting of the UK’s so-called 'heavy reliance' on Russian gas. There has been speculation that Russia might cut off gas to Britain.

They overlook that the main source of imported gas to the UK is Norway, followed by Qatari LNG, while about half the UK's roughly 80bn m3/yr gas market is still supplied from domestic production.

Some UK gas imports are sourced via two interconnectors, one from the Netherlands and one from Belgium. That gas can be of any origin. During the cold snap around March 1, Russia stepped up gas supplies to the continent, hitting a record on March 2.

But once gas is mixed up in European transmission or storage infrastructure, the Kremlin loses control over it. Indeed once Russian gas (or any other type) enters the EU, the original exporter has no rights to direct who should ultimately consume it – because of the EU single internal market. For this reason, UK official data does not list Russia among import sources.

Gazprom mostly supplies pipeline gas under long-term contracts to customers such as France’s Engie, Italy’s Eni, Germany’s Uniper and Dutch wholesaler GasTerra, as well as meeting incremental spot demand from the European spot market. In addition, Gazprom in 2015 renewed a contract to supply UK firm Centrica. This covers a relatively modest 4bn m3/yr out to 2021.

Any attempt to constrain flows to these customers would do Gazprom long-term damage, at a point when it is trying to promote its Nord Stream 2 pipeline project as a commercial conduit for reliable gas supplies, rather than as a political tool, as its critics say; and when Denmark has yet to decide whether the pipe should pass through its offshore exclusive economic zone. Denmark’s foreign ministry March 15 declined to indicate to NGW when it will take that decision.

Gazprom statistics for 2017 say it supplied just over 16bn m3 to the UK market, but this figure is an exaggeration. It includes other sales that happened to be contracted by the London office. Also, some of the volumes it sells in the UK may well be bought from UK, Dutch or Norwegian producers – the North Sea being the most convenient location for Gazprom to deliver to its relatively small British industrial customer base.

Some point to the first cargo from Russia’s new Yamal LNG facility, which landed in the UK, as evidence of a rising reliance. But that first cargo was never unloaded and regasified, instead being re-exported to a third market. Yamal LNG moreover is unlikely to acquiesce easily to political directives, in part because France's Total and the other Chinese partner in the venture want it to make money, rather than score political points. Yamal's 60%-owner is Novatek, whose CEO Leonid Mikhelson is close to the Kremlin, but also on a US watchlist – alongside the CEOs of Gazprom, Rosneft and others.

This week a US cargo aboard tanker Gemmata, carrying the debut export cargo from the US Cove Point export facility, switched in mid-Atlantic from its original Asian destination to the UK; the Milford Haven port authority shows it expected to arrive March 20 at the Dragon LNG facility. Some press reports suggested this diversion is in in response to a threat by Russia to constrain gas supply to the UK. The reality is that the UK faces another cold snap this weekend, so shippers expect spot prices there to rise above Asia’s – which explains why the cargo’s owner switched its course. 

To recap why Russia-UK tensions have soured, the UK prime minister, French and US presidents and German chancellor on March 15 jointly issued a statement to “abhor the attack that took place against Sergei and Yulia Skripal in Salisbury, UK, on March 4 2018” noting that a UK policeman also remains seriously ill, and many innocent British citizens were threatened. The four nations added: “This use of a military-grade nerve agent, of a type developed by Russia, constitutes the first offensive use of a nerve agent in Europe since the Second World War.”

Russia has denied responsibility for the Salisbury incident, but ignored a UK ultimatum to divulge information on the nerve poison used, after earlier saying it would co-operate on any investigation. After the expiry of that deadline, UK prime minister Theresa May on March 14 ordered 23 Russian diplomats to leave the UK. An equivalent response from Russia regarding UK diplomats is expected shortly.

Other additional measures were announced by Britain, but none seriously impact energy trade or business. The biggest potential victim of escalating UK-Russia tensions would be BP, which has a 19.75% equity stake in Russian oil and gas giant Rosneft.

Update March 23: The tanker Gemmata unloaded its cargo at the Dragon LNG facility in Milford Haven, UK in the morning of March 21. This was the new US east coast Cove Point LNG export terminal's first shipment.