How can Russia maintain gas exports to EU?
Europe’s demand problems
From a Russian export perspective Europe’s demand decline has been offset by problems with North African gas exports and by the diversion of LNG to Asia following the Fukushima disaster.
Russia’s bypassing transit pipelines
The Ukraine transit risk can be solved by construction of bypassing transit pipelines. Russia has offered several alternatives including South Stream, Turkish Stream and an expansion of Nord Stream.
Non-Russian supply sources
The principal options for additional non-Russian sources of supply to Europe prior to 2020 are LNG and Azeri pipeline gas (arriving via Turkey). Of these sources, LNG is potentially the more important, albeit subject to wider fundamental global trends. Azeri gas will not exceed 10 bcm in 2020, and although larger volumes are possible by 2030 they will certainly not rival the capacity of European LNG import terminals (Dickel, p. 34).
US LNG imports
Lower oil prices have currently reduced the competitiveness of Henry Hub-based gas in Asia. The economics of US supply are of great importance to Gazprom.
Gazprom has been attempting to develop an LNG business for many years, with its only success being involvement in the Sakhalin 2 project that was originally developed by Shell. Attempts to develop the Shtokman field in the Barents Sea and the Baltic LNG project near St Petersburg both failed in the 2000s, mainly due to changing market circumstances. More recently plans for an LNG plant at Vladivostok have been hit by a reluctance among potential customers to commit to purchasing new LNG from Russia for fear of future sanctions undermining the project.
Gazprom’s position on oil-linked prices appears to be driven by political will as much as commercial argument. Russia should continue to support gas pricing based on oil/oil products indexation to ensure fair prices and stable development of natural gas resources. From a more commercial perspective, Gazprom has also argued that long-term oil-linked contracts provide suppliers with security of demand and support the flexibility offered by the take-or-pay arrangements.