The End of Cheap Russian Gas: Turning the Lights Out in Europe

The End of Cheap Russian Gas: Turning the Lights Out in Europe 1

Even though Putin had warned that the Nord Stream 1 gas pipeline had another sick turbine that needed repair, had offered Europe supply through Nord Stream 2, and had also said that Russia would need to test the Canadian-vacationing part when it returned (it still is not back in Russian hands), EU leaders instead obsessed about the one thing Russia repeatedly insisted was not happening: Russia keeping Nord Stream 1 turned off after its long-scheduled annual maintenance in July.

Interfax provided a bland update of what is an attention-focusing event for Europe, that Russia is cutting the Nord Stream 1 gas flow further, to roughly 20% of capacity, because the other sick part is too sick and the globe-trotting part isn’t back in St. Petersburg, much the less put through tests so it can be restored to service. Presumably after that happens, the shipments over Nord Stream 1 can go back to the 40% level. But that is up in the ari.

From Interfax:

The spot price of gas in Europe has topped $2,000/1,000 cubic meter on expectations that another gas compressor unit at Nord Stream will go out of service….

On the previous day, trading closed at $1,852, while the average price since the beginning of the month stands at $1,713.

Gazprom said on Monday that it was shutting down another Siemens gas turbine engine at the Portovaya compressor station as it was reaching the end of its operating period before overhaul (in accordance with Rostekhnadzor regulations and taking into account the technical condition of the engine).

As a result, the daily capacity of the Portovaya station from 07:00 Moscow time on July 27 will be up to 33 million cubic meters per day compared to the current 67 million cubic meters per day (40% of the capacity).

The underlying problem is the unrealistic thinking of the West, and particularly the EU. Whether you think Russia’s response was justified or not, the West had set out to destabilize Russia by turning Ukraine into NATO-lite. If the US reacted badly to the prospect of nuclear missiles in Cuba, just imagine how it would have reacted if Mexico joined a military alliance with Russia and accepted Russian training, funding, and armaments, and funded a civil war on its border, killing 14,000 English-speakers and creating over 1 million refugees.

Despite the aggressive Western sanctions, including seizing hundreds of billions of central bank assets, seizing Gazprom infrastructure, and explicitly trying to break the Russian banking system and even breaking up Russia itself, Russia has been very restrained as far as counter-measures are concerned. So after loudly saying that the EU wants nothing to do with Russian energy or Russian pipelines, the EU should hardly be upset if Russia is tried of laboring not to give them what they asked for, an economic divorce. The problem is Europe is now upset that it’s getting what it acted like it wanted.

Putin complained in at least two speeches about another turbine having a crumbling lining, confirmed by Siemens. He seemed pretty exasperated. Recall that Germany put Nord Stream 2 on hold when Russia recognized the breakaway republics. As you will see, this is proving to be yet another “Punish ourselves to hurt Russia” move. Per Bloomberg in May, Gazrpom indicates that it would start using the pipeline domestically.

From Putin’s Q&A with the press in Iran on July 19. Note I have yet to see anywhere else an unpacking of the various ways Russian gas once got to Europe:

What is happening? I have spoken about this on numerous occasions, and I do not know if we should go into detail regarding the energy policies of European countries, which underrate the importance of traditional sources of energy and have put money on non-traditional energy sources. They are big experts on non-traditional relations, and they have also decided to make a bid for non-traditional energy sources like the sun and wind.

Last winter was long, there wasno wind, and that did it. Investment in the fixed assets of traditional energy producers has decreased because of previous political decisions: banks do not finance them, insurance companies do not insure them, local governments do not allocate land plots for new projects, and pipeline and other forms of transportation are not developing. This is a result of many years, probably a decade of this policy. This is the root cause of price hikes rather than any actions by Russia or Gazprom.

What is going on today? Until recently, we supplied gas to Europe without Turkiye: we supplied around 30 billion cubic metres a year to Turkiye, and 170 billion to Europe, 55 billion via Nord Stream 1, and, if memory serves me, 33 billion were supplied via Yamal-Europe, via the two strings that run through Ukraine. About 12 billion were delivered to Europe through Turkiye via TurkStream.

Ukraine suddenly announced that it was going to close one of the two routes on its territory. Allegedly because the gas pumping station is not under its control but on the territory of the Lugansk People’s Republic. But it found itself under the control of the Lugansk People’s Republic several months before, and they closed it just recently without any grounds. Everything was functioning normally there, no one interfered. In my opinion, they closed it simply for political reasons.

What happened next? Poland imposed sanctions on Yamal-Europe, which supplied 33 billion cubic metres of gas. They used to take 34, I think, 33–34 million cubic metres a day from us. They shut it down completely. But then we saw that they turned on the Yamal-Europe pipeline in reverse mode, and they started taking about 32 million a day from Germany. Where is the gas from Germany coming from? It is our Russian gas. Why from Germany? Because it turned out to be cheaper for the Poles. They used to get it from us at a very high price, closer to the market price, whereas Germany gets it from us 3–4 times cheaper than the market price under long-term contracts.

It is profitable for German companies to sell it to the Poles at a small premium. It is profitable for the Poles to buy it because it is cheaper than to buy it directly from us. But the volume of gas in the European market has decreased, and the total market price has gone up. Who has won? All Europeans only lost. This is the second point: Yamal-Europe.

So, first one of the routes in Ukraine was shut down, then Yamal-Europe was shut down, now Nord Stream 1, which is one of the main routes – we pump 55 billion cubic metres a year through it. There are five Siemens gas compressor stations working there, and one is on standby. One compressor had to be sent out for repairs. A repaired compressor was supposed to come from Canada, from the Siemens plant in Canada, to replace it. But it ended up under sanctions in Canada. So, one pumping station, just one piece of equipment was out of order because of scheduled maintenance work and it has not been returned from Canada.

Now we are being told that the unit will be delivered from Canada soon, but Gazprom does not have any official documents yet. We must certainly obtain them, because this is our property, it is the property of Gazprom. Gazprom should receive not only the hardware, not only the gas pumping unit, but also the accompanying documents, both legal and technical documentation. We must be able to see what Gazprom is taking – the turbine’s current condition as well as its legal status, whether it is under sanctions or not, what we can do with it, or maybe they are taking it back tomorrow. But that is not all.

The problem is that at the end of July, on July 26, I think – we can ask Gazprom – another turbine should be sent for routine maintenance, for repairs. And where will we get a replacement from? We do not know.

One more turbine is actually out of order because of some crumbling of its internal liner. Siemens has confirmed this. That leaves two operational units, which are pumping 60 million per day. So, if one more is delivered, fine, we will have two in operation. But if it is not, only one will be left, and it will pump only 30 million cubic meters per day. You can count how much time it will take to pump the rest. How is this Gazprom’s responsibility? What does Gazprom even have to do with this? They have cut off one route, then another, and sanctioned this gas pumping equipment. Gazprom is ready to pump as much gas as necessary. But they have shut everything down….

As for gas, there is another route we are ready to open, which is Nord Stream 2. It is ready to be launched, but they are not launching it. There are problems here as well, I discussed them with the Chancellor about six or maybe eight weeks ago. I raised this issue; I said that Gazprom had reserved the capacity, and that this capacity needed to be used, and it cannot be suspended in mid-air indefinitely.

The answer was that there were other issues on the agenda, more important things, so it is difficult for them to deal with this right now. But I had to warn them that then we would have to redirect half of the volume intended for Nord Stream for domestic consumption and processing. I raised this issue at the request of Gazprom, and Gazprom has actually already done it. Therefore, even if we launch Nord Stream 2 tomorrow, it will not pump 55 billion cubic meters, but exactly half that amount. And given that we are already halfway through this year, it would be just a quarter. Such is the supply situation.

Putin was basically saying “What are we do to?” Even though Siemens is theoretically on the hook, it appears that all significant repairs are made outside Russia, evoking the specter of yet more parts stranded outside Russia. And after the doubts about when if ever Gazprom would get its peripatetic turbine back, if I were them, I wouldn’t let the other in-need-of-fixing part leave Russia until I had at least gotten the other one back.

RT has a tidbit that is not pretty:

Gazprom said earlier on Monday that the paperwork it had received from Canada and Siemens regarding the shipment of the turbine did not clear up sanctions-related questions.

This is what Gazprom had sought, per Reuters:

Gazprom said on Friday that it still had not obtained necessary documentation from Siemens Energy confirming the exemption from European Union and Canadian sanctions for a key turbine for the pipeline to be returned to Nord Stream’s Portovaya compressor station.

Canada and the EU can’t gin up a short note on official stationery? Without some documentation of a sanctions waiver (after having gone on noisily about how because sanctions the part was held hostage in Canada), what assurance does Russia have that 1. there won’t be some punishment vis a vis the part delivery and 2. it won’t be subject to the same run-around if the second busted Nord Stream 1 part has to go to the EU or Canada, which seems likely?

I also wonder if Russia either chose or was persuaded to choose Siemens to handle maintenance and servicing to make nice to Germany…..and now that’s proven to be a big problem because sanctions.

And as Putin made clear, before you accuse Russia of seeking to choke the EU, recall that Ukraine and Poland effectively cut off the Yamal-Europe pipeline (Ukraine overtly, Poland by refusing to pay under the new gas for roubles scheme). Putin offered to Scholz >8 weeks ago to turn on Nord Stream 2 to assure supply. Scholz didn’t accept.

The Europeans could still get 50% of Nord Stream 2 capacity now if they’d get over themselves. But no, they’d rather suffer and be right about Russia.

Mind you, Germany’s national strategy depends on being a low-cost industrial producer. Germany has strong tenant protections and has kept renting affordable to help keep labor costs down. Cheap energy has also been important to German competitiveness as well as to the well-being of its citizens.

There is simply no way LNG will come even close to making up for the shortfall in Russian gas, assuming the EU does not break down and ask Russia to turn on the Nord Stream 2 tap. And even if over time (and it will be a moderately long time), Europe is able to get enough in the way of LNG supply contracts and terminals and tankers lined up, LNG will never be as cheap as the Russian gas it is giving up.

Europe is about to throw away everything it worked so hard to achieve since the end or World War II out of ego. It scuppered the peace talks between Ukraine and Russia that had made important progress at the end of March because Russia had to suffer. It can’t admit that its shock and awe sanctions failed to prostrate Russia and that the costs to the West keep rising as they become more manageable for Russia. And worse, many will go cold and hungry this winter and some will die unnecessarily. And the Europeans hold themselves out as civilized people. Since when it is civilized to not just inflict unwarranted punishment on the weak and poor, but tear down your own society? Russia is not doing wrecking. The West is doing this to itself over its inability to admit error and cope with the fact that it has failed to crush Russia.

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