Doubts over whether Russia will pump more gas to Europe as promised

LONDON – Winter is not even upon us yet and Europe is already experiencing a crisis in the gas market with exceptional demand and limited supply, causing price compression in the region.

So when Russian President Vladimir Putin intervened on Wednesday, offering to increase gas supplies from Russia to Europe, regional gas prices (up 500% so far this year) plummeted and markets heaved a sigh of relief.

Market analysts quickly suspected that the offer to increase supplies to Europe was likely to pressure Germany to certify the use of the Nord Stream 2 pipeline (which will bring Russian gas supplies to the Germany via the Baltic Sea), as Russia waits Germany’s energy regulator has cleared the $ 11 billion pipeline, a process that could take several months.

Experts also warned that Russia’s offer also demonstrates that Europe is increasingly vulnerable to Moscow’s ability to activate – and most importantly, shut down – gas supplies as and when it chooses.

Moreover, while Russia’s apparent largesse may have provided a breathing space for gas markets, analysts have since noted that Russia may not even be able to deliver on its promises to deliver more.

“Mr Putin’s comments seem to have reassured the market. However, whether or not these additional gas supplies depend on a quick Nord Stream 2 approval may not be the main issue,” Adeline Van Houtte, analyst Europe at The Economist Intelligence Unit, said in a note Thursday.

“Currently, the Russian domestic gas market remains tight, with low stocks, production already nearing peak and looming winter in Russia as well, limiting gas export capacity,” she said.

“There are also few signs that Gazprom – the Russian export pipeline monopoly, which supplies 35% of Europe’s gas needs – is attempting to pump more gas to European spot buyers via existing routes, and overall, given its small room for maneuver, it is unlikely that Gazprom will be able to deliver more than around 190 billion cubic meters (billion cubic meters) to Europe this year, ”she said. said, warning that this meant “European prices are not expected to drop significantly in 2021”.

Mike Fulwood, a senior researcher at the Oxford Institute for Energy Studies, also expressed doubts about Russia’s ability to supply more gas to Europe, noting that production was already at record levels.

“Russia has faced the same demand pressures” as elsewhere, he noted.

“It was [a] very cold winter in Russia last winter and Russian production is actually at record highs, well above last year of course when demand was down, but also above 2019 levels, and they also had to fill their own storage which was severely depleted due to the cold, ”he told CNBC’s“ Squawk Box Europe ”.

“It is therefore extremely doubtful that they will be able to supply more gas, regardless of the route,” he added.

Russia’s reliability as Europe’s energy supplier has been a priority for policymakers, both in the region and in the United States, for several years now.

The last two US administrations have expressed their disapproval of the construction of the Nord Stream 2 project, warning that it will reduce Europe’s energy security and increase its dependence on Russia. For its part, the United States also wishes to increase its own exports of liquefied natural gas to Europe.

The Executive Director of the International Energy Agency, Fatih Birol, however, seemed convinced that Russia could increase gas supplies to Europe, telling the Financial Times on Thursday that the IEA’s analysis suggested that the Russia could increase its exports by about 15% of peak winter supply to the continent.

Calling on Russia to prove it is a “reliable supplier,” Birol said the gas exporter could keep his word if he so wished.

“If Russia does what it said yesterday [Wednesday] and increase the volumes to Europe, that would have a calming effect on the market, “he said.” I’m not saying they will but if they want to, they have the capacity to do it. . “