FEATURE: Russian gas still big business in Europe despite vows to cut imports

Russian gas is -- and looks set to remain -- big business in Europe despite Moscow's invasion of Ukraine and growing opposition to continued purchases by European buyers.

While the European Commission has signaled its intent for a sharp reduction in EU demand for Russian gas -- by as much as two-thirds by the end of the year -- contracted European buyers, mostly privately-owned companies, have pledged to continue buying.

France's TotalEnergies this week pointed squarely to the problem in a statement laying out its principles of conduct with regard to Russia.

"Contrary to oil, it is apparent that Europe's gas logistics capacities make it difficult to refrain from importing Russian gas in the next two to three years without impacting the continent's energy supply," it said.

With European gas prices still at sustained highs -- and having surged again March 23 after Russian President Vladimir Putin said European supply contracts should be switched to ruble-based pricing -- state-controlled Gazprom is bringing in significant amounts of money.

Deputy Prime Minister Alexander Novak on March 23 said European gas prices could move past the $4,000/1,000 cu m mark given the state of European storage stocks and the effective cancelation of Nord Stream 2.

Gazprom's gas deliveries to the EU were 340 million cu m/d on March 22, according to data on its website, so roughly speaking that volume of gas would bring in a staggering $1.4 billion per day if prices were to reach such a level on a sustained basis.

Prices are currently around one quarter of that level, however, and the pricing structure for each of Gazprom's long-term supply contracts with European buyers is different.

Contracts are priced against a variety of indices including pure European hub indexation, a hybrid of hub and oil indexation, and some remaining with just oil-based pricing.

Within the hub-indexed contracts, there will also be a range of different measures from day-ahead to month-ahead and further out to season- and year-ahead.

Contracts also typically have a time lag of six-to-nine months before payment, which Gazprom says improves financial visibility.

Since August last year, the TTF month-ahead price has averaged just over Eur85/MWh, according to Platts assessments by S&P Global Commodity Insights.

At that price, Gazprom's current gas deliveries to the EU would be worth roughly Eur330 million ($365 million) per day.

Big buyers

Almost all of Gazprom's long-term customers in Europe have said they would continue to buy Russian gas, mostly due to the risk to supply security if they didn't.

Of course, buyers are also locked in under their contractual obligations to buy a minimum volume of gas from Gazprom.

Germany's Uniper said earlier this month that its long-term import contracts with Russia played an "essential role" for gas supply in Europe, especially in Germany.

"Uniper sees it as its mission to do everything in its means to supply people in Germany and Europe with energy, also and especially in these volatile times," it said.

Other big European buyers have shared the same message. France's Engie said in early March it would continue to prioritize gas supply security for its customers, and Italy's Eni said gas continued to flow normally from Russia as per the contracted volume.

Dutch utility Eneco said it would continue to buy gas under a long-term contract with Gazprom subsidiary Wingas, saying that if it stopped, Gazprom would be able to make more money by selling its "relatively cheap" contracted gas at market prices.

Dutch buyer GasTerra also said it would defer to the Dutch government on any action around Russian gas supply. "GasTerra buys some of its gas in Russia but we cannot take any independent decisions on this matter due to its importance for the gas supply," it said.

Government action

It remains to be seen if other forces at play could see a shift in Russian gas sales in Europe, however.

French President Emmanuel Macron has said "nothing is off the table" when it comes to sanctions against Moscow, which could also mean restrictions on Russian gas imports.

Putin's comments on switching to the ruble for payment could also be interpreted as a move by Russia to complicate or restrict European buying -- though any impact this could have would likely hurt Moscow too.

European leaders have dismissed the idea of contracts being shifted to rubles, however, with EC President Ursula von der Leyen saying March 24 it would be a "clear breach of contract."

"The time when energy could be used to blackmail us is over," von der Leyen said.

Ukraine has long accused Russia of blackmail over gas supplies, in particular since Russian flows were curtailed last summer and Gazprom-operated storage sites in Germany and Austria were left close to empty ahead of the past winter.

Gazprom's export arm also halted spot selling on its Electronic Sales Platform in October last year.

The Kremlin suggested numerous times that it would ramp up supplies to Europe if the Nord Stream 2 pipeline won early approval, but with the pipeline project now dead in the water, it is difficult to imagine any new supply-side response from Moscow.

Indeed, it is buyer-side behavior driving Russian gas deliveries into Europe at present.

When Gazprom's contracted gas turns competitive versus the European hubs, long-term buyers tend to nominate upward to restrict exposure to spot gas and switch the strategy when the opposite is the case.

That led to Russian exports via Ukraine reaching maximum levels in the early days of the war.

Where deliveries go from here will likely depend on the situation on the ground in Ukraine and what response the West -- and the Kremlin -- decide on as a result.