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Gazprom’s very public suicide

The energy crisis initiated before Russia invaded Ukraine may be the last one thanks to Gazprom’s impressive suicide in Europe. Moscow may start using hybrid war tools more frequently considering the growing number of incidents connected to Russian gas with unknown perpetrators.

January 26, 2024 - Wojciech Jakóbik - Articles and Commentary

Photo: Evgenii Mitroshin / Shutterstock

Gazprom earnings after taxes are to reach 2,2 trillion roubles (24,3 bln USD) in comparison to 3,6 trillion in 2022. It is a decrease of around 39 percent.

Western analysts rely on estimates and reports from Gazprom, which after the Russian invasion of Ukraine, along with the entire Russian energy and fuel sector, stopped publishing official data.

The obligation to accumulate gas reserves in Europe was implemented at a record pace. Already in August 2023 storage facilities were full at over 90 per cent, offering a sense of security of supply that will last throughout the heating season until March 2024. For this reason, the price of gas on the Dutch TTF virtual trading point reached in early January the psychological threshold of 30 euros per megawatt-hour. This has not happened since June 2021, when Gazprom had just started to cut supply and ceased filling storage facilities under its management in Austria, Germany and the Netherlands in order to initiate the energy crisis.

The other reason behind this is the fact that European clients dropped gas from Russia despite the lack of real sanctions on this fuel, contrary to the restrictions imposed on oil and LNG. The EU programme “REPowerEU” initially included a (non-binding) declaration about the willingness to move away from fossil fuels from Russia by 2027 at the latest. However, today it only mentions minimizing the dependence by 2030. Despite this, Russian gas sales in Europe are falling both in terms of network gas and LNG – despite the Kremlin’s propaganda about expansion in the liquefied gas market. It will also be limited by sanctions preventing the use of high technologies from the West without analogues in Russia and Asia.

Reuters estimates that Gazprom’s supplies to the European market reached 28.3 billion cubic metres in 2023, which is a drop of 55.6 per cent compared to 2022, when 63.8 billion cubic metres from this company reached Europe. On the basis of data from ENTSO-G and Ukraine’s gas transmission system operator, Reuters estimates that Gazprom’s average supply in 2023 was about 77.6 million cubic metres a day. In 2022 that figure was 174.8. The agency recalls that at its peak in 2018-19 the supply from Gazprom reached between 175 and 180 billion cubic metres. According to LSEG data, LNG supplies from Russia to Europe fell by 1.9 per cent in 2023, dropping to 15.8 metric tons. Shipments to Asia fell 11 per cent to 14.9 million metric tons. Total LNG shipments from Russia went down by six per cent to 31 million tons, out of which 18.7 million tons came from Novatek’s Yamal LNG project and 10.1 million tons from Gazprom’s Sakhalin 2 project. At the same time, Portovaya LNG shipped 1.4 million tons in 2023.

Russian supplies are disappearing from Europe and are being replaced by alternatives that were previously portrayed as unattractive, a conviction shared by some commentators in the West. According to the latest Eurostat data, when it comes to the natural gas transported to the EU via gas pipelines in the third quarter of 2023, as much as 48.6 per cent arrived from Norway, 17.8 per cent from Algeria, 16 per cent from Russia, 10.5 per cent from Great Britain (which imported LNG from Norway) and 5.9 per cent from Azerbaijan. Russia’s share of the energy market in the European Union fell from 14.5 per cent in the third quarter of 2022 to 6.5 per cent in the same period of 2023. The watershed moment witnessed in Poland as early as 2018 is happening again due to the energy crisis fueled by Gazprom throughout Europe, the most recent example of which may be the long-term contract for gas supplies from Norway signed by the Norwegian group Equinor and SEFE from Germany. This was established from the assets of Gazprom Germania that were seized after the Russian invasion of Ukraine, the same ones that the Russians used to trigger the energy crisis. SEFE has signed a 50-billion-euro contract with Equinor, at current market prices, for 40 years for the supply of 129 billion cubic metres until 2039. The volume of annual supplies will be around ten billion cubic metres between the years 2024 and 2034, with the possibility of adding another 29 billion cubic metres over the next five years. This is the same case as in the (Polish) PGNiG-Equinor agreement from 2022, which will last ten years and currently supplies 4.5 billion cubic metres a year.

Europe is no longer looking to the Russians when it comes to gas, as they have fallen into a secondary role in a market protected by security of supply regulations, with storage obligation – transferred from Polish legislation to the EU level – on top of the list. Meanwhile, Gazprom’s return to Asia is still in its infancy. The Russians report several times a week on the daily records of gas supplies to China, but the reality is not so colourful, and these announcements may be intended to distract from less joyful facts. President Vladimir Putin signed a law in November to raise taxes on gas producers with Gazprom being affected the most. The goal is to increase budget revenues impacted by sanctions and the invasion after reinstating the fuel bonus in Russia due to the fuel crisis. Among other things, for this reason Gazprom had to reduce its investment programme for 2024 by about 20 per cent to 1.57 trillion rubles. Despite this, the company has promised to continue its preparations for the construction of a new gas pipeline to China called Power of Siberia 2. However, there have been no decisions made on this issue. Due to the fact that Siberia itself lies between Power of Siberia 1 and Gazprom’s European infrastructure, it is technically impossible to redirect gas from Europe to the pipe. 

In the longer term, Russia will cease to be an important supplier of energy resources to Europe in general. As evidenced by the drop in the Kremlin’s revenue, it will also fail to find a real alternative to Europe in Asia. The share of revenues from the sale of gas and oil in Russia’s budget has been the lowest in 16 years. It even fell by 15 percentage points in the period between January and September 2023. In absolute terms, it dropped by 1.5 times. Russia’s revenues from the sale of hydrocarbons in the period under review amounted to 5.58 trillion rubles after a decrease of 2.9 trillion. Sanctions are slow but fair. If they become even stricter, they will only deepen the problems of Russians. These issues are best seen in Gazprom effectively committing suicide in Europe, as is evident in the data despite attempts to conceal the numbers by the Kremlin. Instead of freezing Europe like in the propaganda videos from 2022, in the past twelve months Gazprom had to dramatically cut back on its lifestyle in Asia.

Gazprom’s decisions will have less and less impact on gas prices in Europe and will only be further shaken by incidents such as the sabotage to both Nord Stream 1 and 2, damage to the “Balticconnector” and the mysterious holes drilled in the pipeline that will evacuate gas from the LNG terminal in Germany’s Brunsbuttel. In this context, it is also worth mentioning the curious downtime at the Freeport LNG terminal in the US in 2022. It may turn out that gas, instead of tanks, used for the purposes of the Kremlin’s foreign policy in accordance with the Falin-Kvitsinsky doctrine, will cease to work. This means the Russians will only have the aforementioned tanks and a hybrid war, which will entail attacks on the West’s windows to the world of non-Russian fuels. This war is probably already underway, although it is difficult to catch the perpetrators red-handed. Nevertheless, it has not yet led to a serious threat to security of supply, which would significantly affect the price of gas. In the case of oil, this is what happened following the recent terrorist attacks in the Red Sea. Adequate protection of critical infrastructure in line with the “Critical Entities Resilience” directive, as well as EU-NATO cooperation priorities, should ensure that there is no sudden increase in prices due to supply problems.

Wojciech Jakóbik is editor in chief at BiznesAlert.pl.

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