Carefully developed over decades as a major revenue stream for the Kremlin, Russia’s gas trade with Europe is unlikely to recover from the ravages of military conflict.
After President Vladimir Putin’s “special military operation” in Ukraine began nearly a year ago, Western sanctions and Russia’s decision to cut supplies to Europe sharply reduced the country’s energy exports.
The latest restrictions, including price caps, are likely to further affect oil trade, but finding new markets for crude and refined products is easier than for gas.
Russia’s gas trade with Europe is based on thousands of miles of pipes starting in Siberia and extending to Germany and beyond. Until last year, they locked Western buyers into long-term supply relationships.
“Of course, the loss of the European market is a very serious test for Russia on the gas side,” Yuri Shafrank, the Russian fuel and energy minister from 1993 to 1996, told Reuters.
A former senior manager at Gazprom ( GAZP.MM ) was more direct.
“The work of hundreds of people, who built the export system for decades, has now been flushed down the toilet,” a former manager told Reuters on condition of anonymity for fear of reprisals.
However, current employees say it’s business as usual.
“Nothing has changed for us. We had salary increases twice last year,” a Gazprom official, who is not authorized to speak to the press, told Reuters in Novy Urengoy. The Arctic city is often called the “gas capital” of Russia because it was built to serve the largest gas fields.
![Putin, Military Industrial, Ukraine](https://arynews.tv/wp-content/uploads/2022/12/Putin-1.jpg)
‘State within a State’
Gazprom, the major state gas exporter, which has offices there, was founded in 1989 in the waning days of the Soviet Union under the Ministry of Gas Industry, headed by Viktor Chernomyrdin.
“Chernomyridan never allowed anyone to poke their noses into the Gaze prom. It was, and to some extent remains, a state within a state,” Shafrank said.
Since the military operation began in February. Last year 24, less information has been available.
Like many Russian companies, Gazprom stopped disclosing details of its financial results.
According to Reuters estimates, based on export fee and export volume data, Gazprom’s revenue from overseas sales was about $3.4 billion in January, down from $6.3 billion in the same period last year.
The data, combined with forecasts for exports and average gas prices, show that Gazprom’s export revenue will nearly halve this year, adding to Russia’s $25 billion budget deficit in January.
Already, the company’s natural gas exports nearly halved last year to a post-Soviet low and are on a downward trend this year.
European Commission President Ursula van der Leyen estimates that Russia has cut gas supplies to the EU by 80 percent in the eight months since the conflict in Ukraine began.
As a result, Russia supplied just 7.5 percent of Western Europe’s gas needs by the end of last year, compared to around 40 percent in 2021.
Before the conflict, Russia believed in selling more to Europe, not less.
The head of Gazprom’s exporting unit, Elena Burmstrova, told an industry event in Vienna in 2019 that the company’s record exports of more than 200 billion cubic meters (bcm) outside the Soviet Union in 2018 were the “new reality”.
Last year, the total was above 100 bcm.
Last year, Russia’s transportation capacity was undermined after mysterious explosions on the Nord Stream pipelines from Russia to Germany in the Baltic Sea. Russia and the West blamed each other for the blasts.
Pulitzer Prize-winning American reporter Seymour Hirsch said in a blog that the US was responsible, which the US says is an outright lie.
Washington has long criticized Germany’s policy of dependence on Russian energy, which until last year Berlin said was a means of improving ties.
Deal of the 20th Century
For his part, Putin has been trying to diversify Russia’s gas markets since last year, but that policy has gained momentum.
In October, he floated the idea of a gas hub in Turkey to divert Russian gas flows from the Baltic Sea and northwestern Europe.
Russia is seeking to increase its pipeline gas sales to China, the world’s largest energy consumer and the largest buyer of crude oil, liquefied natural gas (LNG) and coal.
Supplies through the Power of Siberia pipeline began in late 2019, and Russia aims to increase annual exports to 38 bcm from 2025.
Moscow also has an agreement with Beijing for an additional 10 bcm per year from a yet-to-be-built pipeline from the Pacific island of Sakhalin, while Russia is also developing plans for Power of Siberia 2 from western Siberia, which in theory can supply it. An additional 50 bcm per annum to China.
Whether the relationship can be as profitable as decades of gas supplies to Europe remains to be seen.
Gazprom’s most important assets are located in western Siberia and the vast Arctic Yamal region, where the 100,000-strong city of Novy Urengoy, which celebrates its 50th anniversary in 2025, houses seasonal workers in useful, high-rise blocks.
One of the farms in the tundra region where they work is Urengoy, about 3,500 km (2,175 mi) northeast of Moscow.
After the discovery of the world’s largest field in 1966, the Soviet Politburo began negotiations with West Germany to exchange gas for pipes, as Russia lacked the production technology at the time.
The resulting agreement was renamed the “Contract” in 1970 after then-Soviet Foreign Minister Andrei Gromyko, known as “Mr. Knight” in the West, called “da” for his uncompromising approach. of the Century” was named. This included supplying heavy equipment to Moscow as well as gas to Europe.
The 20-year supply contract is worth about $30 billion at current gas prices.
This meant that for decades, Europe, and Germany in particular, benefited from relatively cheap, long-term contracts, and relied on Russian natural gas, or methane, for heating homes and as feedstock for the petrochemical industry. depended on
Complex negotiations ahead
Industry analysts say negotiations with China over new gas sales are expected to be complicated, not least because China won’t need additional gas until after 2030.
Russia also faces more competition for renewable energy than in the past as the world seeks to limit the effects of climate change as well as rival pipeline gas supplies to China, including Turkmenistan.
LNG, which can be shipped anywhere in the world, has further reduced the need for pipeline gas.
Gazprom and China have kept their agreed gas price secret. Ron Smith, an analyst at Moscow-based BCS brokerage, expects prices to average $270 per 1,000 cubic meters for 2022, well below prices in Europe.
That’s less than Gazprom’s export price of $700 per 1,000 cubic meters, which the Russian Economy Ministry expects this year.
Last year, Russia’s energy finances, which are not publicly broken out into oil and gas, were helped by the market impact of shortage concerns.
In Europe, gas prices hit record highs shortly after the special military operation began and international oil prices neared all-time highs.
Since then, gas and oil prices have eased and Western price caps were introduced in December and earlier this year to further reduce Russia’s revenues.
The Kremlin, meanwhile, has set Gazprom the mammoth task of building 24,000 kilometers of new pipelines to deliver gas to 538,000 homes and apartments in Russia from 2021 to 2025.
Domestic gas prices are controlled by the government and there has been talk of liberalizing the gas market, a sensitive issue for Russian households.
Back in Novy Urengoy, where temperatures drop to around minus 50 Celsius (minus 58 Fahrenheit), Achimgaz is a joint venture between Gazprom and Germany’s Wintershall Dea ( WINT.UL ), which has offices and offices in Austria. It is also the flagship of energy company OMV. (OMVV.VI) Flaps outside an administrative building.
Asked about its presence there, an OMV spokesman said the building only houses the operator’s offices of the Yuzhno-Roskoye field, where the company has a stake.
In March OMV scrapped plans to participate in a Gazprom gas field project, while Wintershall Dea, in which BASF ( BASFn.DE ) owns just under 73%, said last month it was pulling out of Russia. Is.
A Gazprom official, speaking on condition of anonymity, said the company would regret it.
“Instead of using more gas for our domestic households, we have to export it to Europe. China also needs gas,” the official said.