The price of the issue // Research Director of Vygon Consulting Maria Belova on the scenarios for the launch of Nord Stream 2

Gazprom has once again found itself under a flurry of external criticism. However, this time we are not talking about the establishment of monopoly high prices that stifle the economies of Eastern Europe, and not even about the abnormally low prices that are driving American LNG out of the market. The point is the company’s reluctance to increase gas supplies to Europe, which is trying in vain to fill its gas storage facilities.

Indeed, despite the high prices, Gazprom refuses to book Ukraine’s transit capacities in excess of those specified in the contract. Why is the company sacrificing additional revenue and possibly a new export record?

The reason is Nord Stream 2. Gazprom is close to the start of commercial gas supplies via the first string, but the question of technical certification of the gas pipeline under US sanctions remains open. There is also no clarity about the future volume of pumping – the German regulator at one time refused to exempt Nord Stream 2 from the Third Energy Package.

In order to be able to maximize its transport capacity, Nord Stream 2 AG initiated certification as an independent pipe operator in June. However, the procedure can take up to a year. In addition, at the end of September, elections to the German federal parliament will be held, and for sure now we can only say that Angela Merkel will not become the new Chancellor, therefore, the risk of a change in the country’s energy policy for the past 15 years is growing.

In other words, time does not work for Gazprom. But half-empty underground gas storage facilities and high prices in Europe reinforce arguments both for permitting to start fuel supplies along the new route and for speeding up certification procedures.

Let’s see what will happen to the European gas balance in 2021 in various scenarios for the launch of Nord Stream 2. Gas demand in Europe this year will grow by more than 30 billion cubic meters. Even taking into account the increase in pipeline imports from Africa and a slight increase in LNG supplies, according to our calculations, the demand for Russian pipeline gas will amount to 215 billion cubic meters. With such an export indicator, it would have been easy to break the 2018 record, but today the Russian company, fulfilling its contractual obligations, in the conditions of the liberal gas market is free to choose the routes for the supply of its gas. And here we are dealing with some technical limitations.

If the first string of Nord Stream 2 starts working in October without restrictions, then it will be able to pump up to 7 billion cubic meters by the end of the year. Then the export of Russian pipeline gas to Europe (excluding gas sales from European UGS facilities and booking additional capacities in Ukraine) may amount to about 190 billion cubic meters. This is the best scenario. If from October it will be possible to fill only 50% of the line of the new route, the export from the Russian Federation will amount to 186 billion cubic meters.

If Nord Stream 2 does not start working by the end of the year, Europe will miss 33 billion cubic meters of Russian gas it needs. And the further the solution of the issue with the launch and certification of the Nord Stream 2 operator is postponed, the more gas volumes Europe will need in winter. Therefore, the status of Nord Stream 2 for the coming years should be determined and fixed before the new gas year starts in October. For the sake of long-term play, Gazprom may sacrifice its export record.

Maria Belova, Research Director, Vygon Consulting

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