What if Nord Stream 1 doesn’t come back online?
The Nord Stream 1 pipeline closed down on July 11 for routine maintenance that was planned well in advance, and which takes place every summer. While under normal circumstances the 10-day closure would be no cause for alarm, European officials have raised the possibility that Moscow may keep the 55bn cubic metre per year pipeline offline for longer, in order to further destabilise European energy markets.
The EU consumed 412 bcm of natural gas in 2021, and Russia covered around 155 bcm of this demand, giving it a market share of just under 40%. However, due to Russia cutting supply off to a number of buyers earlier this year for failing to comply with its rubles-for-gas decree, and a curtailment in supply via Nord Stream 1 last month, June shipments slumped to a record low of 4.7 bcm, or 56.4 bcm on an annual basis. In comparison, deliveries in June last year totalled 12 bcm.
The good news is that despite this reduction in supply, Europe has so far managed to continue increasing the amount of gas it has storage, albeit at a slower rate than previously envisaged. Its underground storage facilities were filled to 61.6% capacity as of June 9, which is close to the average utilisation rate for this time of year over the past decade.
If Nord Stream 1 remains closed, Russia’s transport capacity would be sufficient to maintain supply at the current low rate. It can send up to 33 bcm per year of gas to Europe via the Yamal-Europe pipeline that runs through Belarus and Poland to Germany, even though this link has mostly been flowing in reverse since the end of last year, because of curtailments in Russian gas supply.
The TurkStream under the Black Sea can carry an additional 31.5 bcm per year, with the pipeline once again fully operational following maintenance last month. However, one of the pipeline’s 15.75 bcm per year pipes is dedicated to supplying the Turkish market.
Then there is Ukraine’s gas transit system, but how much Russian gas it is capable of sending depends on who you ask. In May, Ukrainian gas grid operator GTSOU suspended the flow of gas through its Sokranivka transit point, which usually accounts for nearly a third of Russian gas deliveries to Europe via Ukraine. But the operator said that these flows could be diverted to the Sudzha interconnection point further west. Gazprom said at the time that it would be “technologically impossible” to move all the volumes to the other route, however.
GTSOU’s CEO Sergiy Makogon told Reuters in an interview in late June that Sudzha’s technical capacity was 244 mcm per day, or 89 bcm per year, which if accurate, would mean that Ukraine could comfortably handle all the gas that currently flows through the 55 bcm per year Nord Stream 1. And much of the gas pipeline infrastructure in Central Europe and Eastern Europe was originally built to handle Russian gas arriving from Ukraine, meaning there would be fewer technical constraints within the bloc to distribute this supply.
All this suggests that Nord Stream 1’s closure will have little impact on Russian gas supply, assuming Moscow does not curtail shipments via other routes at the same time. After all, in 2021, the EU imported 37 bcm via the Ukrainian gas route, 33 bcm via Yamal-Europe and 9 bcm via TurkStream. This suggests that there is more than enough capacity to handle Russian supply, not only at the present record low level but even at close to the pre-war level in January.
If Russia cuts off supply completely
Were Russia to completely shut down gas supply to Europe, the situation would be very different, however. Global LNG production is already running at maximum capacity. Based on data from the EU and Refinitiv, Europe received an estimated 9 bcm of LNG in June, and could struggle to get any more than 1 bcm extra by outbidding Asian buyers.
The US has said it could deliver some 15 bcm of gas to Europe this year, but the closure of the 20.4 bcm per year Freeport LNG terminal in early June after a fire may make it difficult for this target to be reached. The terminal was a major supplier to the European market, and is not expected to resume normal operations until the end of the year. There are a number of other LNG projects in the works in the US, but only one, a 5.2 bcm per year expansion at the Calcasieu Pass LNG terminal, is scheduled for commissioning this year.
Globally, while there was some 190 bcm per year of LNG capacity either under construction or approved for development as of April 2022, according to the International Gas Union, only a small fraction of that capacity is due for launch this year, including the third train of the Tangguh LNG terminal in Indonesia (5.2 bcm per year) and the Coral-Sul FLNG in Mozambique (4.6 bcm per year). In short, the global LNG market will remain very tight for the foreseeable future, only beginning to ease up towards the mid-2020s.
Norway is the second-biggest supplier of gas to Europe, and has been taking steps to ramp up deliveries in the wake of Moscow’s invasion of Ukraine. Companies have approved several new Norwegian gas fields for development, and some have also been reducing gas reinjection, effectively sacrificing oil supply in order to bolster gas exports. But there is a limit to how quickly Norway can replace Russian gas. Indeed, its petroleum ministry estimated in late May that gas supplies to Europe would only increase 8% this year to 122 bcm, although in a normal year this would be an impressive feat.
The largest among Europe’s North African suppliers is Algeria, but there is limited scope for an immediate expansion in flow, and the same is also true of Azerbaijan, which delivers gas to south-east Europe via the Southern Gas Corridor (SGC).
What is clear is that Europe is set to see further destruction of gas demand during the rest of the year, whether or not Russia cuts supply. Regardless of whether there is a physical shortage of supply, the soaring cost of gas will prompt European governments to likely restore more coal-fired power generation, in addition to the capacity that has already been revived. They may also have to impose rationing, such as limiting households’ energy use and limiting the operations of gas-intensive industries such as fertiliser plants and steelworks, and those industries may take such steps anyway as the high cost of gas will simply make their production uncompetitive.
Europe already seems to be hurtling towards a recession, and a cut-off in gas supply from Russia would seal its fate. Ironically, that might be the way that Europe successfully deprives the Kremlin of revenues to finance its war in Ukraine, as a protracted downturn would cause gas prices to drop, perhaps to the low levels seen in years prior to the coronavirus (COVID-19) pandemic.