Investing Pioneer – 10:05 PM EST – 12/10/2022
Despite the frequently fraught nature of their geopolitical relationship, Europe had long been dependent on Russia for a steady supply of natural gas. This reliance means that any sudden disruption in gas deliveries could have a destabilizing effect on the European economy, potentially undermining its already precarious state. As such, the continuation of gas exports from Russia has remained a crucial factor in ensuring the economic stability of the continent. Or at least, any cessation must be met with sufficient efforts to obtain supply elsewhere, the success of which is dictated by the proactiveness and effectiveness of European efforts and the current state of supply.
Importation from Russia peaked in 2010, at 521 billion cubic meters of natural gas. (7) Prior to the invasion of Ukraine, in 2021 we saw 397 billion cubic meters imported to Europe. Fast-forwarding to 2022, and European consumption fell by 10% fueling inflation, and recession fears.
An IEA report expects it will fall by another 4% for 2023. (8)
After a tumultuous period, Nord Stream-1 was shut down in August, normally responsible for 35% of gas flow from Russia. (9) For further context, under normal circumstances, Russia is responsible for 45% of European gas imports. (10)
Now, Europe has been thrown to the behest of a volatile market, contrary to the years of relatively easy supply from Russia. Therefore, it lends to review supply and demand factors that could affect the gas markets, consequently affecting the future European economic situation, and that of the world. On December 9th it was announced by TASS, a Russian news agency, that Gazprom’s daily contractual obligations stipulated by the sales agreement between China and Russia were exceeded by 16.4% (via the 3000 km long Power of Siberia gas pipeline). (1)
This follows China making a request to increase the daily inflow of gas in December.
Despite the easy mistake of assuming that Russia’s record-high gas pipeline delivery to China signifies a reallocation away from European markets, the gas transported via the Power of Siberia pipeline originates from a newly-developed field with no current capacity to supply Europe (via pipeline at least). While this development may indicate a slight decrease in Russia’s reliance on Europe, the magnitude of the change is relatively minor compared to Russia’s previous levels of gas exports to the western continent.
There can be two key takeaways from this.
1. Sino-Russia energy trade may continue to grow markedly in the long term.
2. The increase in supply to China may help slightly ease Europe’s energy shortage.
China’s growing demand for natural gas from pipelines is offset by a decline in demand for liquified natural gas (LNG), according to researchers at CNOCC. This could result in a 1% drop in overall gas demand for China in 2023, a near-unprecedented development (the fall time in 20 years) (6) amid the country’s ongoing economic recession spurred by COVID-19-related shutdowns.
China’s reduced demand for LNG, which Europe has become increasingly reliant on following cutoffs from pipeline gas, could help alleviate the continent’s energy situation.
At the same time, increased flow of pipeline gas from Russia to China could strengthen Russia’s position by diversifying its revenue streams. It’s worth noting that natural gas accounts for less than 20% of Russia’s energy revenue, with oil being the primary source of income. Unlike pipelines, oil is a more easily transportable commodity, giving Russia greater flexibility in its energy strategy.
Construction of the Power of Siberia pipeline dates back to 2014, the same year that China and Russia signed a 30-year, $400 billion agreement for the supply of natural gas. It completed initial construction in 2019, with expansion plans in motion.
According to a report (5), the gas transported through Power of Siberia is from a previously untapped, highly resource-rich field in east Siberia.
Just as Europe has a reliance on Russia, the same has been said of Russia to Europe. This may explain Russia’s push to diversify its “customers”.
Previously, in 2013, only 7% of Russian gas exports went to Asia. Note: any discussion of Chinese energy can-not be absent of noting the fact that two-thirds of its energy is generated via coal.
Europe’s energy situation going forward remains a sensitive situation. Though significant LNG reserves have been made prior to the coming winter, European nations remain vulnerable if a colder-than-average winter is experienced. The recent surge in Russian gas pipeline flow to China does not necessarily signify a shift away from European markets. While this development may indicate a slight decrease in Russia’s reliance on Europe, the magnitude of the change is relatively minor compared to Russia’s previous levels of gas exports to the continent. At the same time, reduced demand for liquified natural gas (LNG) in China could help alleviate Europe’s energy shortage. Meanwhile, going forward increased flow of pipeline gas from Russia to China could signify the start of Russia strengthening its position by diversifying its revenue streams.
Ultimately, the future of the European natural gas market will depend on a variety of supply and demand factors, including the success of European efforts to obtain gas from alternative sources, and mandatory demand for energy in the winter season.
1. Gazprom sets new record of Russian gas daily supply to China on Dec 9. (n.d.). TASS. Retrieved December 11, 2022, from https://tass.com/economy/1548933
2. “Gazprom Set Two Records for Gas Supplies to China in September.” Bigasia.ru, bigasia.ru/en/content/news/business/gazprom-v-sentyabre-postavil-dva-rekorda-po-postavkam-gaza-v-kitay/. Accessed 11 Dec. 2022.
3. Reuters. “Explainer: Does China Need More Russian Gas via the Power-of-Siberia 2 Pipeline?” Reuters, 16 Sept. 2022, http://www.reuters.com/business/energy/does-china-need-more-russian-gas-via-power-of-siberia-2-pipeline-2022-09-15/. Accessed 11 Dec. 2022.
4. “Power of Siberia 2” Pipeline Could See Europe, China Compete for Russian Gas.” VOA, www.voanews.com/a/power-of-siberia-2-pipeline-could-see-europe-china-compete-for-russian-gas-/6402242.html.
6. Aizhu, Chen. “China’s Gas Consumption May Post First Fall in 20 Years – State Energy Officials.” Reuters, 3 Nov. 2022, www.reuters.com/business/energy/chinas-2022-gas-consumption-likely-post-first-fall-20-years-petrochina-official-2022-11-03/.
7. “EU Natural Gas Consumption 2020.” Statista, www.statista.com/statistics/265406/natural-gas-consumption-in-the-eu-in-cubic-meters/.
10. How Europe can cut natural gas imports from Russia … – IEAhttps://www.iea.org › news › how-europe-can-cut-natur…
11. EU imports of energy products – recent developmentshttps://ec.europa.eu › statistics-explained › index.php