Russian gas still flows to Austria, despite OMV's loss of supply [Global Gas Perspectives]
Russia’s Gazprom cut off gas flow to Austria’s OMV on November 16 in response to the company seeking to claim damages awarded for past contract violations from its outstanding invoices for supply. This outcome, widely anticipated, draws a line under longstanding commercial relations between Gazprom and what was one of its biggest remaining customers in Europe. And it fuelled expectations of a hastened end to Russian gas in Europe.
As far as the market is concerned, though, this appears largely to be a non-event. So far, Russian gas flow through Ukraine seems unaffected. Austria, it seems, is continuing to receive around the same quantity of supply from Gazprom, which may indicate that third parties have stepped up to serve as middlemen for trade between Gazprom and OMV.
The Paris-based International Chamber of Commerce on November 13 awarded OMV €230mn ($242mn) in damages plus interest and costs for financial losses it suffered in 2022 as a result of Gazprom Export’s “irregular German gas supplies,” which ended completely in September that year. To enforce the award, OMV said it would offset the claims against invoices under its contract with the Russian company. It warned that this might trigger a halt in gas supply. Two days later, OMV’s trading arm reported that it had indeed been informed by Gazprom Export that its supply would be terminated on the morning of November 16.
Muted impact
OMV imported 166 GWh/day of pipeline gas from Russia in the third quarter, according to its financial reporting, which is the equivalent of roughly 20mn m3/d. It accounts for the majority of Russian pipeline gas entering Austria, which in turn typically gets 80-90% of its gas from Russia. OMV’s supply amounts to roughly a quarter of all Russian pipeline gas arriving in the EU.
No surprise then European natural gas prices saw a further rise after the company warned about a potential disruption and following the subsequent halt. The front-month TTF price increased this week to €47/MWh, which is double the low-point seen in February. However, the latest price spike is the result of a number of factors, from low wind power output earlier this month to the onset of colder weather ahead of winter to increased geopolitical risks associated with Ukraine firing Western missiles into Russia after getting approval from US and UK governments to do so.
Meanwhile, actual Russian gas flow to Austria, all of which is transported through Ukraine, so far appears unaffected. Russian flows through the country remained unaffected on November 21, with Gazprom reporting that it would deliver 42.4mn m3, which is about the same level as was seen before the cut-off. Data published by transmission system operator (TSO) Eustream showed that nominations for flow from Slovakia to Austria were down, but only by 12% versus the level prior to the suspension of supply to OMV. Requests to the Czech Republic from Slovakia and to Slovakia from Ukraine meanwhile saw little change, according to Reuters.
As such, the impact of the cut-off appears to have been limited. Even OMV did not anticipate much in terms of negative consequences, either operationally or financially. When announcing its arbitration win, the company said if its pipeline supply was suspended, “small one-time hedging losses could occur, but will be clearly outweighed by the positive effects from the recovered damages.” It also noted its access to alternative sources of supply including Norwegian pipeline gas and LNG, and confirmed it could still provide the full contractual volumes to its customers. It reiterated this when supply was halted.
Yet, it seems that rather than resorting to increased purchases from either Norway or LNG suppliers, Austria maintains the same purchases from Russia, indicating that OMV is receiving Russian-origin volumes via intermediaries. Essentially, any Austrian buyer besides OMV can still buy Russian gas and sell it to OMV, and it appears that is what has happened.
The realities about Gazprom’s reason for cutting supply and the relatively minor impact it has had on the market contrast with the rhetoric that some European politicians used when responding to the event.
“Once again Putin is using energy as a weapon,” European Commission President Ursula von der Leyen said on X on November 16. “He is trying to blackmail Austria & Europe by cutting gas supplies. We are prepared for this and ready for the winter. Gas storage across the EU is full.”
The extent that Gazprom was hurt financially from the turn of events is unclear. On one hand, OMV’s non-payment of invoices gave it justification for halting gas supply that might free the company to sell those volumes on the spot market for potentially a higher price. That would suggest on the other hand that OMV has had to increase its gas purchase costs as a result, especially given that it cannot buy gas on spot directly from Gazprom but must rely on intermediaries.
What next?
Ultimately, the real test for Europe will occur at the end of this year, assuming that Russian gas flow through Ukraine ends completely with the expiry of the transit contract between Moscow and Kyiv. It looks increasingly certain that the contract will not be renewed, as Kyiv has repeatedly insisted it does not want this and the European Commission has said it does not view an extension as necessary. This puts around 15bn m3/year of gas supply to Europe at risk, equal to around 5% of its total gas consumption last year.
According to various media reports, Slovakia’s SPP and other European buyers are negotiating options to keep transit going, with the most likely being an arrangement where buyers take ownership of gas at the Russia-Ukraine border and become responsible for its transit through Ukrainian territory. This would still require Ukraine and Russia to sign a border interconnection agreement, however, which would prove challenging as the war rages on.
A more far-fetched option that was proposed earlier this year was for Azerbaijan to take over gas transit through Ukraine. The gas would still be Russian, as Azerbaijan lacks spare production capacity, and would likely have to pump any gas through Russia first anyway.
While no progress has been made publicly on these efforts, there may be some behind the scenes. Europe would do well not to risk such a disruptive event in the middle of winter, even though the EU is well-stocked with gas. While gas shortages seem very unlikely, the EU would do well to avoid triggering even higher gas prices given the rampant deindustrialisation that soaring energy costs have already caused.
What the cut-off does mean is an end to discussions in Austria’s government about whether or not and how to terminate OMV’s long-term gas contract with Gazprom. Another court case is likely to follow, where OMV claims additional damages from Gazprom for violating supply obligations this year.
It also remains to be seen how gas flow will be affected by the US Treasury Department’s introduction of sanctions on November 21 against Gazprombank, the Russian state bank that manages payments for Russian gas sent to Europe. The sanctions give companies until December 20 to end transactions with the bank, though Washington could well provide exceptions for energy payments, as it has done in the past, or Russia could use another entity to handle them.
Hungary and Slovakia have said they are studying the impact.