Russian pipeline gas flowing to Europe dipped to a record low in January, down 30% compared with supplies in December, while experts warn that there could be significant further downside risk to the country’s deliveries.
Europe has enjoyed unseasonably high temperatures in recent weeks, and with ample LNG supply and gas volumes in storage, this has resulted in prices dropping to their pre-Ukraine war levels, despite the steep drop in Russian deliveries. This has caused gas hub prices to slide to levels not seen since before Moscow launched its invasion of Ukraine.
According to Reuters, citing its own calculations, Gazprom’s gas exports to Europe fell in January to some 1.8bn cubic metres versus 2.5 bcm in December via Ukraine and the TurkStream pipeline. These are the only routes still used for delivering Russian gas via pipeline to Europe. Gazprom cut supply via both the Yamal-Europe and Nord Stream 1 pipeline last year, and the latter was left inoperable last September as a result of suspected sabotage.
According to European gas transmission group Entsog and Gazprom’s daily reports on transit through Ukraine, the company’s average daily gas deliveries to Europe came to only 58.1mn cubic metres in January, compared with 81.9 mcm in December.
Gazprom has not disclosed its own statistics for exports and production since the start of the year, although it typically does so for each month in the first week of the following one. It reported that its exports in 2022 to non-former Soviet states slumped 45% in 2022 to 100.9 bcm, representing a post-Soviet low.
Russian gas flow to Europe is unlikely to grow significantly this year but further cuts could drive prices higher, the Oxford Institute for Energy Studies (OIES) said on January 30.
“The outlook for Russian pipeline gas supply to Europe has only limited upside potential and there is significant possibility of a further decline, in particular with regard to gas transit via Ukraine,” OIES said in a research note.
The worst has already happened, however, OIES said, noting that Russian gas flow from Russia is now less than 11% of the level it was in January 2019. The “fear premium” generated by concern over how the European market would balance without substantial deliveries of Russian gas has been replaced by soaring prices that have maintained the physical balance in the current tight market.
Trading data shows that the TTF gas price averaged €136 per MWh between the start of Moscow’s invasion of Ukraine and now, versus just above €50 per MWh in the year prior to this.
“The only upside influence on Russian pipeline gas flows to Europe in 2023 could be higher daily nominations by Gazprom counterparties that currently pay in rubles,” OIES said.
One of the reasons why Russian gas supply has shrunk so far over the last year is that the Kremlin issued a decree demanding that buyers in non-friendly countries pay for supplies in rubles instead of euros, as stipulated in their contracts. Some buyers refused, and had their supply cut off.
The good news for gas consumers is that TTF gas prices have now dropped to a level not seen since December 2021. But colder weather over the next month and the Chinese economic recovery could drive prices higher once more, as well as a further reduction in Russian flow.
“Given the tightness of the current market, the loss of volumes currently transiting via Ukraine to central Europe – around 27 mcm per day in January 1-25 – could have an outsized impact on prices relative to the volume lost.”
The institute warned that this would “disproportionately” affect countries without access to alternative supplies such as LNG. Austria and Slovakia are at particular risk, it said.
A specific risk to Ukrainian gas transit, besides the conflict itself, is how the Russian government might react to the arbitration case of Ukraine’s Naftogaz against Gazprom in the coming years. Gazprom has warned that if the case continues, Naftogaz could face Russian sanctions, rendering the Russian supplier unable to meet its contractual obligations.
“The implication is that, in such a situation, Russian gas transit via Ukraine would halt,” the OIES said.
Europe had been relying on Russia for around 40% of its gas supply prior to the war in Ukraine.