Gazprom can’t shift its gas – POLITICO

Amy Myers Jaffe is the managing director of the Climate Policy Lab and a research professor at Tufts University’s Fletcher School. Joe Webster is a senior fellow at the Atlantic Council, a contributor at SupChina and editor of the China-Russia Report. This article represents their own personal opinions.

With European energy prices at eye-watering levels, it might seem like Russia is holding all the cards when it comes to natural gas.

But as policymakers forge temporary measures to endure what could be a brutal winter from an energy security perspective, they must also study the broader context. Because while Russia is in a strong position in the short run, the long game for Russia’s state-controlled natural gas champion Gazprom is fraught.

Unlike oil, which has more fungible transport, Gazprom is finding it hard to divert its Siberian gas elsewhere — and the numbers tell a clear story. Russia’s on pace to send 16 billion cubic meters (bcm) a year to China through its one Siberian pipeline, compared to the roughly 200 bcm a year it would normally be selling to Europe, had the conflict not taken place.

The Russia-China pipeline, called Power of Siberia, will eventually be able to ship 38 bcm a year when the pipeline is fully operational in 2025. However, Sino-Russia plans over any additional pipeline connectivity currently appear distant and commercially daunting. And while Mongolia has claimed that a new Russia-to-China gas pipeline will break ground in 2024 and enter service around 2030, this assertion should be regarded skeptically. The existing Russia-to-China pipeline’s terms aren’t public, but the deal may have been a financial loser for both sides.

Moreover, since the original pipeline agreement in 2014, natural gas dynamics have shifted for China: Renewables, and even hydrogen, are increasingly viable alternatives to natural gas. So, Gazprom may ultimately be stuck with a stranded asset.

Even the most optimistic projections take Russian pipeline export capacity to China to 128 bcm per year by 2030 — still considerably lower than historical sales to Europe.

In sum, between now and 2030, Gazprom has few options beyond Europe.

Additionally, even though Russia has sent an additional 3.2 bcm of liquefied natural gas (LNG) to China in the first half of this year as well, China’s revealed preference is to purchase LNG from the United States — not overland pipeline gas from Russia. Indeed, Chinese buyers have already contracted about a third of the approximately 160 bcm of the next wave of current or planned U.S. LNG export capacity.

On the flip side, its immediate vulnerability aside, Europe has now opened the possibility of zeroing out Russian imports by 2030, if not sooner. The future ability to do without Russian gas is in and of itself a form of leverage, and Europe must make its efforts more ambitious and transparent.

Europe’s market for natural gas was already expected to shrink ahead of this year’s worsening conflict with Russia, but now it may do so more rapidly. The latest policies adopted by European Union countries set a renewable energy target at 63 percent of electricity generation by 2030, up from their previous target of 55 percent. Major countries are also pushing to accelerate demand reduction, including through the deployment of heat pumps.

These are strong interventions, especially when combined with the strategic mandatory gas cuts in Europe’s natural gas use this fall, which will come into effect in the event of a crisis. But there are still more ways to increase the pressure on Gazprom.

Europe and the U.S. should look for ways to boost production and deployment of short-cycle floating LNG facilities and modular small nuclear reactors, while accelerating the development of LNG terminals that are under construction — like the U.S. did by enabling rapid development at the Golden Pass terminal.

The U.S. should also consider using its trade agencies to assist with short-term natural gas project finance and accelerated clean energy project finance. Meanwhile, Europe could take a more systematic look at the role that financing energy efficiency technologies and batteries could play in removing demand more permanently.

Gazprom’s current stock price listing seems to be assuming exports to Europe will continue. And for now, high prices have insulated the company from falling export levels. However, if it becomes clearer that Gazprom’s most important export channel is closing for good, the gas giant could be largely decapitalized by investors, making it harder for Gazprom to subsidize the Russian domestic gas market and contribute to Russian GDP.

President Vladimir Putin understands energy markets, so he might well be betting that higher energy prices and economic angst will sufficiently bolster Kremlin-adjacent populists in Western elections, improving his position in his ongoing strategic confrontation with constitutional democracy. His hope may be to reestablish more compliant energy customers in Europe for Gazprom. After all, the company has had to shut-in its production before — as it did during the COVID-19 lockdowns — and with few problems. He might be thinking he’ll only have to wait out Europe for one winter.

But without immediate access to Western LNG expertise and equipment, and in the face of melting permafrost underneath Gazprom’s pipelines, this is a high-risk proposition. And if Europe can succeed in this first round, Gazprom and Putin stand to lose the long game.