Gazprom’s inability to supply or unwillingness to deliver?

By Tom Marzec-Manser, ICIS

illustration: ICIS

Unusually low natural gas flows from Russia to Germany along the Yamal pipe in recent weeks could indicate that earlier absent capacity bookings via Ukraine were as much to do with Gazprom’s inability to supply, as opposed to its unwillingness to deliver.

If true, this has serious implications on how the global gas and LNG market treats Russian pipe volumes and the availability – or not – of its discretionary supply.

Faced with incredibly low natural gas storage levels in Europe and rebounding Asian and South American LNG demand, Gazprom-watchers have spent the summer eagerly waiting in vain on the results of interruptible monthly capacity auctions via Ukraine. In a tight market that is driving the global gas benchmark – the ICIS TTF – to record highs, a booking would have signalled the arrival of much needed discretionary supply from what is currently considered the only major source of spare export volume.

As a result of a string of no-shows at each auction, a narrative (voiced publicly not least by this analyst) gained traction that Gazprom was limiting its delivery of discretionary supply to support its case in starting flows via the new Nord Stream 2 pipeline.

But events in recent weeks have begun to paint a different picture. One which suggest there currently may not be as much discretionary supply as initially assumed.

Yamal pipe drop
Gazprom typically efficiently uses its booked EU pipe capacity, so when an unexpected fall occurred at the very end of July along one of the three main supply routes to northwest Europe, it immediately indicated something was amiss.

Flows along the Yamal pipeline at the Polish-German point of Mallnow dropped from a typical 81 million cubic metres (mcm)/day, to 49 mcm/day on 31 July. Following a fire at a condensate plant in Novy Urengoy flows dropped again to just 34 mcm/day on 5 August.

Mallnow throughput then dropped yet again on 11 August to an even lower 20 mcm/day rate, where they have remained until the time of writing (13 August). Key Gazprom strategic storage assets located within the European market, in particular the Katharina unit, kicked into life to cover the shortfall.

Gazprom has said all firm supply contracts are being honoured.

While the Siberian processing plant fire may well explain the similarly timed drop in flows on 5 August, the earlier fall in supply at the start of the month remains largely unexplained.

As a result, questions over why Mallnow throughput has continued to splutter have grown louder since, particularly given Russian domestic gas production in 2021 has been well above the 5-year average. Given June 2021’s output was 21% higher than the 5-year average at 58.8 billion cubic metres (bcm), surely there would be ample volume to back-fill the flows to northwest European hubs, it was argued.

Tight Russian market
Further analysis of Gazprom’s home market, while difficult given the lack of transparency, does suggest supply to the Dutch TTF and the future German THE is lower down the priority order than many in the European market might had hoped.

The Russian summer storage injection campaign is likely to be absorbing a considerable amount of the additional production. ICIS Analytics predicts that daily injections into storage this summer need to average 316 mcm/day, up 35% on the typical rate in the summers of 2017-2019. This is because, just as in western Europe, stocks were heavily drawn down during the first quarter of 2021.

So much so, that April 2021 opening stocks were just 19% full, rather than the average of 39% as witnessed in the Aprils of 2017-2019, according to ICIS calculations.

Russian domestic gas stocks crumble by end of Q1 2021 (source: Gazprom and ICIS calculations)
Russian domestic gas stocks crumble by end of Q1 2021 (source: Gazprom and ICIS calculations)

Additionally, recent high production rates may also be a poor indicator of current output. Clearly the Novy Urengoy fire caused the loss of some production, but events show that other facilities and fields were already offline under planned, or unplanned outage too.

Inspection of Russia’s annual production curve suggests August output should be broadly in line with July. Yet in August 2020 there was a clear uptick. It is possible, then, that some typical summer maintenance was postponed due to the coronavirus and rescheduled for August 2021. If this is the case, there may be considerably more production offline this August than usual, further limiting available supply for export.

Russian domestic production running high in 2021 (source: CDU TEK)
Russian domestic production running high in 2021 (source: CDU TEK)

Domestic consumption clearly ought to be another factor to consider. But given the lack of data it is hard to assume anything other than normal summer demand in a country where heating is the main driver.

Priority export markets
Exports beyond western Europe do need to be considered, as Gazprom’s customer base with firm contracts is bouncing back, drawing gas away from the European traded hubs.

Turkey, for example, was supplied with 12 billion cubic metres (bcm) of Russian gas in the first 5 months of this year, almost triple the amount over the same period in 2020, according to data from the Turkish regulator. Even compared to 2019, Russian exports to Turkey have nearly doubled.

Similarly, pipe exports to China continue to grow, supplied with gas from new fields. In the first half of 2021, Gazprom’s exports to China reached 4.7 bcm, up from 1.7 bcm a year earlier, Chinese customs data shows.

Russian pipe gas exports bounce back (source: ICIS, European TSOs, China Customs)
Russian pipe gas exports bounce back (source: ICIS, European TSOs, China Customs)

European and global impact
The evidence therefore seems to suggest that Gazprom – perhaps only temporarily – does not have as much discretionary volume as either it or the market might like/need. That is not to say some strategic decisions over additional supplies have not also been made, but it nevertheless alters the perception from a European point of view, that gas could always flow.

And while this historically may have been explicitly a European issue to consider, the increasingly interconnectedness of the global gas market via LNG, means this paradigm shift – if true – needs to resonate from Brazil to Japan.

The ICIS LNG Supply & Demand Forecast – which covers the rolling 24-month horizon for every export plant and importing market – already sees 2022 as structurally undersupplied globally. In a world where Gazprom has ample export pipeline volume at its disposal – and is unconstrained by market-dominance concerns – this global LNG deficit is relatively easily backfilled.

But if next summer Gazprom is similarly short of spare production and the global market is short by 7 million tonnes of LNG or more, all of the equivalent 10 bcm may not be able to flow, even if policymakers deem it acceptable.

Of course, given current prices demand destruction cannot be discounted as also bringing the global market back to balance. In fact, the increasing tightness of the ICIS TTF Summer-Winter 2022 spread, only goes to show that the market expects current fundamentals to persist well into next year and could indeed drive global fuel switching away from gas.

It is unlikely ever to be fully qualified whether it is an inability or unwillingness by Gazprom to book Ukrainian interruptible capacity or backfill low flows via the Yamal pipe.

But the uncertainty these events have created do mean it is likely that nascent interest in granular Russian flows from market participants from Houston to Singapore – and not just by those in London or Amsterdam – will continue to for some years to come.

Tom Marzec-Manser is Lead Analyst – European Gas/LNG at ICIS.