Category Archives: Gazprom

25/11/18: Russian South Stream 2.0 Comes Out of the Shadows


Russia and Turkey have announced that the two countries have reached significant progress in reviving the November 2014-shut down South Stream gas pipeline intended to land Russian gas across the Black Sea. The project is the part of the already secured open tender contracts for purchases of gas signed between Gazprom, Bulgaria, Serbia, Hungary, Slovakia and Austria.

Source: Kommersant

The new Black Sea gas pipeline Turkish Stream will run under sea from Krasnodar to a landing hubv just west of Istanbul. On November 19, presidents Vladimir Putin and Recep Tayyip Erdogan met in Istanbul to announce the completion of pipeline's off-shore section.

Pipeline capacity is for 30 bullion cubic meters, bcm, although initial phase capacity will be closer to 17bcm (the first pipe). Currently, Gazprom supplies the above volume (30bcm) to Turkey (ca 16bcm), Bulgaria, Serbia, Slovakia, Hungary and Austria. Turkish market has been supplied via Blue Stream pipeline, and the other countries are supplied via Ukraine.

Based on reports from Russia's Kommersant (https://www.kommersant.ru/doc/3806415), Gazprom has managed to achieve two feats:

  1. Gazprom has completed laying two (not one) pipes for Turkish Stream, one intended to supply Turkey and another, to supply Southern Europe, 
  2. Gazprom secured tenders for purchases of gas from all EU states to be connected to the South Stream project (Bulgaria's open tender closes in December 2018, but all other countries have already signed onto supply agreements).


Significantly, the tenders were secured in compliance with the EU Energy Directives. This means that Gazprom latest venture has addressed the main cause of the EU's original objections to the same pipeline prior to 2014. In the case of open tenders process, Gazprom used exactly the same scheme to secure capacity orders for its Nord Stream 2 pipeline to Germany, Czech Republic and Slovakia back in 2017. According to the experts cited by Kommersant, this makes in impossible for the EU to shut down the project.

Of course, history reminder due, South Stream was primarily killed off not by the EU, but by the U.S. keen on protecting Ukraine's near monopoly on Russian gas transit. The Obama Administration exerted massive pressure on Bulgaria and other South Stream-receiving countries to prevent landing Russian gas in Southern Europe. So far, there has been little indication what Washington's position on the latest iteration of the South Stream might be, but I doubt it will be welcoming.

Kommersant-quoted stats on South Stream are impressive: according to the paper sources, Gazprom signed delivery tenders with Slovakia for seven years from October 2022 for 4.3bcm, of which Austria will get 3.8bcm, 4.7bcm will go to Hungary, 2bcm to Serbia, and 4.8bcm to Bulgaria. So, comes October 2022,  the South Stream (or Turkey Stream, or whatever you want to call this) will be pumping into Southern Europe the equivalent of the current transit through Ukraine.

Between two new pipelines, Gazprom can easily deliver its current supply contracts to Europe by-passing Ukraine, although, if European demand continues to expand at the current rates, it is likely that Gazprom will need to retain some Ukrainian transit capacity into the future. Even in 2021, before South Stream comes fully on stream, Russian gas transit via Ukraine can fall to below 10bcm per annum.

These developments are undoubtedly a major concern for Ukraine - the country already raised criticism of the South Stream on November 19 - as transit of Russian gas via Ukraine is a major revenue earner for Kyiv. Based on the European Council on Foreign Relations data, between 1991 and 2000, Ukraine accounted for 93 percent of Russian gas transit to Europe; by January 2014, this amounted to 49 percent. Naftogaz, Ukrainian State gas company, tried repeatedly to extract monopoly-level revenues from Gazprom. Back in 2008, Naftogaz tried to charge Gazprom $9 per tcm/100km in transit fees - triple the price charged for transit by Slovakia and Poland, and more than double the fee charged by the majority of the Western European states. This pricing came on top of Ukrainian authorities expecting Gazprom to supply gas to Ukraine for domestic consumption at severely subsidised prices. It is, of course, worth noting that Gazprom itself is a monopoly and has, in the past, used its dominant market positions to exercise market power. There are no innocents (other than European buyers of gas) in the long-running disputes between Naftogaz-Ukraine and Gazprom-Russia.

Nonetheless, the situation is asymmetric. Russia currently continues to rely on Ukraine for transit of its main traded commodity, while Ukraine continues to rely on Russia for a large share of its economic activity. In a recent note, Bruegel (http://bruegel.org/2018/01/the-clock-is-ticking-ukraines-last-chance-to-prevent-nord-stream-2/) estimated that Nord Stream 2 coming on line can cost Ukrainian economy ca 2-3 percent of GDP in foregone Russian gas transit earnings. South Stream is likely to add another 1.5 percent.  In the longer run, overall cost to Ukraine of losing Russian gas transit routes can cost as much as 5-6 percent of GDP.

Note: the latest developments in the Sea of Azov can put significant political pressure on the South Stream project, if the EU and the U.S. choose to significantly escalate their pressure on Russia in the wake of the Russian blockade of trade routes through Kerch Straits and in response to the naval incidents reported today. Both, the reported blockade and the naval incident, are worrying developments, and the onus is on Russia to rapidly de-escalate the already volatile situation in the Azov Sea. There are no justifiable reason for restricting Ukraine's access to trade routes, and for increasing military tensions in the region.

25/11/18: Russian South Stream 2.0 Comes Out of the Shadows


Russia and Turkey have announced that the two countries have reached significant progress in reviving the November 2014-shut down South Stream gas pipeline intended to land Russian gas across the Black Sea. The project is the part of the already secured open tender contracts for purchases of gas signed between Gazprom, Bulgaria, Serbia, Hungary, Slovakia and Austria.

Source: Kommersant

The new Black Sea gas pipeline Turkish Stream will run under sea from Krasnodar to a landing hubv just west of Istanbul. On November 19, presidents Vladimir Putin and Recep Tayyip Erdogan met in Istanbul to announce the completion of pipeline's off-shore section.

Pipeline capacity is for 30 bullion cubic meters, bcm, although initial phase capacity will be closer to 17bcm (the first pipe). Currently, Gazprom supplies the above volume (30bcm) to Turkey (ca 16bcm), Bulgaria, Serbia, Slovakia, Hungary and Austria. Turkish market has been supplied via Blue Stream pipeline, and the other countries are supplied via Ukraine.

Based on reports from Russia's Kommersant (https://www.kommersant.ru/doc/3806415), Gazprom has managed to achieve two feats:

  1. Gazprom has completed laying two (not one) pipes for Turkish Stream, one intended to supply Turkey and another, to supply Southern Europe, 
  2. Gazprom secured tenders for purchases of gas from all EU states to be connected to the South Stream project (Bulgaria's open tender closes in December 2018, but all other countries have already signed onto supply agreements).


Significantly, the tenders were secured in compliance with the EU Energy Directives. This means that Gazprom latest venture has addressed the main cause of the EU's original objections to the same pipeline prior to 2014. In the case of open tenders process, Gazprom used exactly the same scheme to secure capacity orders for its Nord Stream 2 pipeline to Germany, Czech Republic and Slovakia back in 2017. According to the experts cited by Kommersant, this makes in impossible for the EU to shut down the project.

Of course, history reminder due, South Stream was primarily killed off not by the EU, but by the U.S. keen on protecting Ukraine's near monopoly on Russian gas transit. The Obama Administration exerted massive pressure on Bulgaria and other South Stream-receiving countries to prevent landing Russian gas in Southern Europe. So far, there has been little indication what Washington's position on the latest iteration of the South Stream might be, but I doubt it will be welcoming.

Kommersant-quoted stats on South Stream are impressive: according to the paper sources, Gazprom signed delivery tenders with Slovakia for seven years from October 2022 for 4.3bcm, of which Austria will get 3.8bcm, 4.7bcm will go to Hungary, 2bcm to Serbia, and 4.8bcm to Bulgaria. So, comes October 2022,  the South Stream (or Turkey Stream, or whatever you want to call this) will be pumping into Southern Europe the equivalent of the current transit through Ukraine.

Between two new pipelines, Gazprom can easily deliver its current supply contracts to Europe by-passing Ukraine, although, if European demand continues to expand at the current rates, it is likely that Gazprom will need to retain some Ukrainian transit capacity into the future. Even in 2021, before South Stream comes fully on stream, Russian gas transit via Ukraine can fall to below 10bcm per annum.

These developments are undoubtedly a major concern for Ukraine - the country already raised criticism of the South Stream on November 19 - as transit of Russian gas via Ukraine is a major revenue earner for Kyiv. Based on the European Council on Foreign Relations data, between 1991 and 2000, Ukraine accounted for 93 percent of Russian gas transit to Europe; by January 2014, this amounted to 49 percent. Naftogaz, Ukrainian State gas company, tried repeatedly to extract monopoly-level revenues from Gazprom. Back in 2008, Naftogaz tried to charge Gazprom $9 per tcm/100km in transit fees - triple the price charged for transit by Slovakia and Poland, and more than double the fee charged by the majority of the Western European states. This pricing came on top of Ukrainian authorities expecting Gazprom to supply gas to Ukraine for domestic consumption at severely subsidised prices. It is, of course, worth noting that Gazprom itself is a monopoly and has, in the past, used its dominant market positions to exercise market power. There are no innocents (other than European buyers of gas) in the long-running disputes between Naftogaz-Ukraine and Gazprom-Russia.

Nonetheless, the situation is asymmetric. Russia currently continues to rely on Ukraine for transit of its main traded commodity, while Ukraine continues to rely on Russia for a large share of its economic activity. In a recent note, Bruegel (http://bruegel.org/2018/01/the-clock-is-ticking-ukraines-last-chance-to-prevent-nord-stream-2/) estimated that Nord Stream 2 coming on line can cost Ukrainian economy ca 2-3 percent of GDP in foregone Russian gas transit earnings. South Stream is likely to add another 1.5 percent.  In the longer run, overall cost to Ukraine of losing Russian gas transit routes can cost as much as 5-6 percent of GDP.

Note: the latest developments in the Sea of Azov can put significant political pressure on the South Stream project, if the EU and the U.S. choose to significantly escalate their pressure on Russia in the wake of the Russian blockade of trade routes through Kerch Straits and in response to the naval incidents reported today. Both, the reported blockade and the naval incident, are worrying developments, and the onus is on Russia to rapidly de-escalate the already volatile situation in the Azov Sea. There are no justifiable reason for restricting Ukraine's access to trade routes, and for increasing military tensions in the region.

5/3/15: Russian Oil & Gas: production and exports


Russian energy exports in the year of economic sanctions -  a nice survey Oil Price (h/t to @RussiaInsider) via http://oilprice.com/Energy/Energy-General/Impotent-Western-Sanctions-Fail-To-Disrupt-Russian-Energy-Exports.html.

Basic summary: volumes are up (coal), holding (uranium). But, tellingly, no discussion of oil and gas exports. Reason: both are under twin pressures of price and sanctions. So a quick add-on:

  • Oil revenues: switching wells off in Siberia in the winter is tricky, risky and hard to do, so the black gold continues to flow even at current prices. But 2014 oil exports revenues were down 11.4% to USD153.8 billion and volume of exports was down 5.6% y/y to 223.4 million tons. 
  • Oil production: OPEC estimates Russian oil production to decline by 70,000 bpd in 2015 with exports declining by 60,000 bpd y/y. Meanwhile some industry players have much more gloomy outlook: Lukoil sees a possible drop in Russian production of 800,000 bpd by the end of 2016: http://www.reuters.com/article/2015/03/03/russia-crisis-lukoil-idUSL5N0W537K20150303. Meanwhile, December 2014 saw a sharp rise in Russian oil exports to 4.4 million bpd as the Government cut export duty from 59% to 42%. New duty covers also 2015, so we can expect some support for production levels. OPEC estimated Russian production volumes to average 10.58 million bpd, with Q1 2015 forecast of 10.6 million bpd and Q2 forecast of 10.54 millions bpd.
  • Gas: full year estimates for Gazprom exports are down 18.6% y/y to USD54.73 billion, volume of exports down 12.1% to 172.6 billion cubic meters. Average contracted price in 2014: USD317 per 1,000 cubic meters, down 7.5% y/y.
  • Gas plans: Russia has been aggressively shifting new contracts for supplies to Asia Pacific and Turkey. By Energy Ministry estimates, Russian gas exports to Asia will rise from 14 bcm in 2014 to 130 bcm in 2035 and oil and coal exports will more than double.
  • Worth noting the increasing switch in favour of refined petroleum products exports, discussed here: http://www.reuters.com/article/2014/12/09/russia-oil-exports-idUSL6N0TS1XV20141209
  • Overall trade impact of the above was to drive down exports revenues to USD782.9 billion or down 7% y/y. Trade surplus was USD210.9 billion in 2014.
  • If imports remain where they were in 2014, and oil price averages of 2015 at USD45 pb, Central Bank of Russia estimates a decline in exports revenues (and trade balance) os around USD 160 billion - painful, but still leaving the country in a trade surplus.

Europe’s addiction to Russian gas: How long before withdrawal symptoms set in?

by Leonid Krutakov for Odnako

(translated by: Robin)

In mid-January, EU Energy Commissioner Maroš Šefčovič held talks with Gazprom CEO Alexey Miller and Russian Energy Minister Alexander Novak in Moscow. After the talks, Mr. Šefčovič expressed surprise at three circumstances.

First, Gazprom has no intention of building the South Stream pipeline. Second, in the future natural gas will be delivered to Europe via Turkey. And, third, Russia is not prepared to discuss the terms of its gas deliveries to Ukraine.

To quote Mr. Šefčovič, all three circumstances, were “very surprising,” even though Russia’s decision to cancel South Stream and instead build Turkish Stream was announced in December of last year in Ankara at a joint press conference held by the Presidents of Russia and Turkey.

It’s easy to wax ironic about Mr. Šefčovič’s ignorance of South Stream in Turkey. And most commentators did just that. But his attempt to discuss new conditions for gas supplies to Ukraine with his Russian partners deserves much more attention. And confirmation of that was not long in coming.

Last week, Russian Prime Minister Dmitry Medvedev convened a meeting with Messrs. Miller and Novak. He asked them for the details of their talks with Mr. Šefčovič, Ukraine’s gas debt and the repayment period. The meeting was broadcast live almost in its entirety.

Mr. Miller reiterated to Mr. Medvedev that Europe had only a few years to build its own transmission infrastructure to the Greece-Turkey border, where it will have to connect to the Russo-Turkish pipeline system. If Europe fails to do so, the gas will go to other markets.

And Mr. Novak pointed out that, when last year’s agreement on a $100 discount for gas sold to Ukraine expires on April 1, there will be no new discussions or agreements. The contract is valid and no one has cancelled it.

If we compare these statements, the fact that they were reiterated and broadcast live makes it clear that Russia has given Europe a firm ultimatum, outlined the consequences and set a deadline. So what is the nature of the ultimatum?

It’s a long story. But, like any long story, it offers an advantage. It allows you to assess the Ukrainian events not in terms of the abstract and immediate concepts of a struggle for freedom and democracy, but rather in the concrete terms of profit and loss over the long run.

At first glance, the link between the recent events in the Ukraine (the Maidan protests, the coup and the civil war) and the supply of Russian gas to Europe and the gas contract that Yulia Tymoshenko concluded in 2009 seems improbable. But any event whose workings are hidden from us is bound to seem improbable and inexplicable.

The European Union’s Third Energy Package (TEP) also came into effect in 2009. The gist of this document is that it establishes uniform rules for the gas supply system within the EU. All gas purchases must take place on an “entry-exit” basis at the European border. In other words, it creates a sort of single virtual gas buyer able to dictate terms to the seller.

The document sets other parameters, but they are all generally based on the idea of unbundling gas suppliers from the EU’s internal infrastructure and retail market, where prices are often more than three times the price of the “entry” price.

The stated reason for TEP was the need to enhance competition and reduce costs at the expense of a free flow of gas within Europe. This statement didn’t fool anyone. It was a new instrument that targeted only Gazprom, which is tightly connected to the European system.

In the event that Europe adopted unacceptable conditions, suppliers of liquefied natural gas (LNG) could at any time redirect their deliveries. In fact, that is what happened after TEP was adopted. The main flows of LNG left for the Asian markets. Gazprom, whose gas deposits are far from ports and have to be shipped by pipeline, could not pull off this trick.

As a result of the adoption of TEP, European gas prices did not fall; in fact they went up. From 2009 to 2013, the price of gas in the EU rose by an average of 29% to 30%. At the same time, the average price of Russian gas fell from US$410 per thousand cubic metres in 2008 to US$385 in 2013. And the volume of gas increased.

The paradox of a rising domestic price along with a falling “entry” price is easily explained by the nature of the increase. The increase was due mainly to the higher cost of gas transmission within the EU, which rose about 16%, and internal taxes, which were up 13%.

In fact, the energy component of the final gas price increased by no more than 2%, and even that was due to LNG. At the same time, the significant increase in the price of LNG was offset by the discounts that the EU obtained from Gazprom, taking advantage of Gazprom’s lack of wiggle room. And this occurred despite long-term contracts linked to the price of oil, which increased four-fold from 2008 to 2011.

In fact, TEP ultimately ended Gazprom’s access to the internal European market and, moreover, obliged it to sell 50% of its gas while still in the pipeline, even before it entered the EU. Under TEP, gas carried by the pipeline system has to come from at least two suppliers.

As for the timing, Gazprom’s long-term contracts with its European customers were renegotiated in 2004, and the following year saw the beginning of the TEP discussions. The peak of the discussions took place in 2008-2009, and precisely at that time the second Ukrainian-Russian gas war broke out.

Kiev, which was behind in its payments for Russian gas deliveries, began to siphon off transit volumes illegally, and in response Russia cut off the flow of gas. The EU had to take urgent action, brokering a gas contract signed by Yulia Tymoshenko almost entirely on Russia’s terms. Six months later, when peace prevailed, TEP was adopted, and so began the systematic effort to squeeze out Gazprom across the board.

South Stream was blocked on the grounds of non-compliance with TEP, even though the contract for its construction was agreed to before TEP was adopted on the government level. In point of fact, TEP was created to prevent individual countries from taking such “initiatives” in the future.

It should be noted that South Stream was blocked immediately after the start of the events in the Ukraine. The structure developed in such a way that the Ukraine retained its status as a major transit country for Russian gas and became a sort of gas reservoir for Europe. With the advent of TEP, under any new contract Gazprom had to halve its gas supplies to the EU or sell half of the volume to the Ukraine on the Russian border.

Simply put, Russia ultimately was expected to pay from its own pocket the cost of the Ukrainian coup and the formation of a Russophobic government in Kiev. That is why the United States initially tried to bail out Naftogaz of Ukraine. The son of U.S. Vice-President Joe Biden even became a member of the Ukrainian gas monopoly’s board.

Vladimir Putin’s visit to Ankara and his agreement with Recep Tayyip Erdoğan on the construction of Turkish Stream has put paid to all that. The role of European transit country has now shifted to Turkey; moreover, in accordance with TEP rules, to fulfill a contract all Gazprom has to do is deliver the gas to the EU border. Moving it any farther is not Gazprom’s responsibility.

It was a calculated, well-aimed blow. Turkey is the only communication corridor offering an alternative route for Russia’s gas. For example, the proposed Nabucco pipeline to supply gas from Central Asia and the Middle East to the EU, bypassing Russia in the process, is based exclusively on Turkey as a transit country. But now there’s no getting around Russia.

The only question without a public response is the deadline attached to Russia’s ultimatum to Europe. Mr. Miller did not specify any period, saying only that Europe has little time left, in fact only a few years. This is understandable because contract terms and conditions are confidential.

But, not being bound by any confidential agreements, we are free to speculate about the deadline. Most of Gazprom’s European contracts, as already stated, were concluded in 2004. Earlier on, in the 1980s, such contracts had a term of 30 years. The term of the last contract was reduced to 15 years. It follows that D-Day – the time for renegotiation of contracts under the terms of TEP – will arrive in 2019, in other words, in only four years.

Four years is a political framework that limits Europe’s decision-making time. The choice is very difficult. In fact, there is no choice. Rejecting Russian gas supplies to Europe is tantamount to suicide. Switching to LNG, which is from one and a half to two times more expensive, would instantly make all European industries uncompetitive.

Europe needs Russian gas. All it can choose is the routes and the means for its delivery. It can negotiate with Russia on clear and transparent conditions, or it can break Russia’s resistance in order to gain access to the gas on its own terms. And the conductor standing behind the EU finds only the second scenario acceptable.

In fact, Europe has even less time (just making a decision is not enough) because it has to build a pipeline to the Turkish border. Otherwise it will have to “surrender” Ukraine. We do not want to play the role of Cassandra, but in four years anything can happen – even attempted assassinations of top politicians, in both Russia and Turkey.

By the way, one curious detail is that the Russian-Ukrainian contract signed in 2009 by Yulia Tymoshenko and Vladimir Putin has a non-standard term of 10 years. And, like most of Gazprom’s European contracts, it ends in 2019. Would that be by coincidence or by design?