LNG demand upbeat as Russia shuts pipeline to Europe
Sopuruchi Onwuka
Players in gas liquefaction and export should brace for more spot transactions as critical demand surge is expected from European countries that would now cease receiving pipeline gas from Russia after Ukraine terminates transit agreement.
Both Russia and Ukraine declared on New Year that flow of Russian gas through Ukraine would no longer continue as bilateral deals that sustain the passage collapse amid wars between the two neighboring countries.
Russia’s energy giant, Gazprom, announced in a statement that “Russian gas has not been supplied for transit via Ukraine since 8:00 am (0500 GMT)” on Wednesday, adding that it lost the “technical and legal right” to ship its gas across Ukraine to Europe.
The Kremlin has relied on oil and gas export revenues to fund its offensive in Ukraine, and last year announced massive tax hikes on the industry to cover its budget.
The Oracle Today reports that Gazprom had earlier stated that it was struggling with dwindling gas flows to Europe and a heavy tax burden after Russia launched its assault on Ukraine in February 2022. And European countries had also sharply cut gas imports from Russia in a bid to curb Moscow’s ability to fund the conflict.
While Gazprom has shifted some of its exports to China and Turkey, it slashed its gas production by a quarter in the first half of this year as it struggled to make up for lost sales.
The European Commission which has been indignant to Russia’s invasion of Ukraine declared Wednesday that it is prepared to absorb the supply shock and consequent price uptick in the alternative liquefied natural gas (LNG) market.
Russian gas has been supplied to Europe via pipelines crossing Ukraine since the end of the Soviet Union in 1991 in an arrangement that earned revenues for Moscow from the gas and for Kyiv from the transit fees.
The latest transit contract expired on Wednesday, with Ukraine opting not to extend the deal following Russia’s 2022 invasion.
On its part, Ukraine sees the end of Russian gas transit as strategic in the ongoing war effort, saying the loss of the European market would deal a blow to Russia’s finances and its war budget.
Russia’s proportion of gas to Europe has consistently dwindled from over 40 percent before the war to less than 10 percent in 2023, according to official figures which cited the remaining Russian gas market in Europe to be limited to some eastern EU members that still fell under Moscow influence during Soviet times who still depend heavily on Russian gas for geographical and political reasons. EU and NATO members Hungary and Slovakia have maintained close ties with the Kremlin despite the invasion. And Hungary is set to be largely unaffected by the gas flow shutdown as it receives most of its Russian gas via the alternative Black Sea pipeline which bypasses Ukraine.
European natural gas prices climbed above 50 euros ($51.78) per megawatt hour for the first time in over a year as buyers in Eastern Europe braced for the halt in supplies. But the European Commission has downplayed the impact the loss of Russian gas supply will have on the 27-member bloc.
“The Commission has been working for more than a year specifically on preparing for a scenario without Russian gas transiting via Ukraine,” it declared.
The halt in Russian gas transit through Ukraine is expected to force some countries to dip deeper into their reserves and seek to import more liquefied natural gas (LNG).
Although the global LNG trade is tied to long term purchase and supply deals, international spot markets provide opportunity for buyers without gas sales and purchase agreements (GSPAs) to snatch up cargoes from traders.
