Global Insight Perspective | |
Significance | The agreement extends the largest contract in the history of the Russian-German energy relationship. |
Implications | The MoU is a timely reminder of Russia's unrivalled ability to supply gas to Europe into the future as European authorities continue to emphasise the importance of diversifying the bloc's supplies. At the same time, it also highlights the ongoing importance of the European market for Russia. |
Outlook | The agreement will be a foundation of the ongoing trading relationship between Russia and Germany for several decades and provides a further indication that Russia will continue to act as the cornerstone of European Union (EU) gas supplies for years to come. |
Looking Back While Looking Forward
A delegation from Russian gas giant Gazprom yesterday took part in a gala event in Leipzig, Germany, to celebrate 35 years of natural gas supply between the two countries. Despite the historical emphasis of the event, the delegates were clearly also looking forward, with a new MoU signed to secure gas trade between the countries into the future. The gala saw Alexander Medvedev, deputy chairman of Gazprom and head of Gazprom Export, and Reiner Steele, a director of German energy group Wintershall, sign an MoU to extend the gas-supply contract between Gazprom Export and WIEH for a 35-year period, stretching out until 2043. WIEH is one of three JVs for natural gas trading in Germany and Europe that is operated by Wintershall and Gazprom, with Wingas and WIEE the remaining two.
The existing supply agreement between Gazprom and WIEH is the biggest individual supply agreement in the history of the German-Russian energy partnership. The extension to the contract will see Gazprom provide WIEH with a further 500 bcm of natural gas over the 35-year term, equivalent to an average of over 14 bcm per annum. In combination with other contract extensions, the deal will mean that more than 800 bcm of natural gas—enough to supply all German households for a 25 year period—will be supplied to WIEH, Wingas, and WIEE over the next 35 years.
Mutual Interdependence
The contract extension is a powerful reminder of Russia's unrivalled ability to offer long-term, large-volume gas-supply deals to European consumers. Russia currently supplies around 25% of total European gas consumption. In Germany, the second-largest gas market in Europe, Russia supplied around 35 bcm of gas last year, equivalent to around 30% of the country's total gas supplies. The new deal further solidifies the ongoing relationship between Russia and Germany in the energy sector, and in particular highlights the importance of the various Wintershall-Gazprom joint ventures in this relationship. Gazprom and Wintershall are already co-operating on the planned Nord Stream pipeline, which, although not explicitly stated in the joint press release announcing yesterday's MoU, is almost certainly intended to act as the transport channel for a proportion of the gas covered by the deal.
At the same time as emphasising the importance of Russian gas for Europe, however, the MoU also highlights the importance of the European market for Gazprom. Over 60% of both the oil and gas that Russia exports is currently purchased by EU states, and Russia's revenue from European energy exports is a significant factor in both the 25% contribution to GDP made by Russia's energy sector and the country's impressive economic growth levels over the past five years. The existing WIEH agreement represents one of Gazprom's most important gas-supply contracts. Its extension will contribute to providing ongoing customer security for the company, and therefore represents a win-win deal for both the seller and the purchaser. The MoU, provided it leads to a formal contract extension, will be a foundation of the ongoing trading relationship between Russia and Germany, ensuring that the mutually beneficial trading of the previous 35 years continues for an identical period into the future.
Outlook and Implications
In recent times, the EU has sought to encourage a diversification of energy supplies away from Russia amid concerns over the country's reliability as a supplier, looking to obtain agreements from alternative suppliers in the Caspian region, the Middle East, and North Africa. In most cases, such discussions have brought only vague promises of future supplies. In contrast, the new MoU between Gazprom and WIEH is a further demonstration that Gazprom is willing and able to come forward with concrete long-term agreements to supply Europe with significant volumes of gas. In addition, the company has made clear its desire to develop new, more reliable delivery routes to the continent.
In what appears to be a general response to the apparent contradiction in EU concerns over the reliability of Russian supplies, the parties to yesterday's MoU took the opportunity to highlight the significant ongoing benefits of such arrangements. Emphasising Russia's unique ability to offer long-term, high volume supply agreements, Reiner Steele said: "Russia will continue to meet [Europe's] growing demand for natural gas under long-term contracts. No other producer has ever shown such readiness." Similarly emphasising the importance of Europe to Russia, Gazprom’s chief executive officer Alexei Miller said: "Europe has long been our most important market, and Germany is not only a major consumer of Russian gas among the European countries, but also a proven partner." With commercial entities highlighting the positive benefits derived from long-term agreements between established buyers and sellers, and showing no hesitancy in extending such agreements into the future, yesterday's MoU to extend the Russian-German supply agreement may well leave the EU with some food for thought as it continues its struggle to diversify its supplies away from its largest provider.