Thread by @MarcoGiuli

1.IEA’s chief Birol sparked intense debate by accusing Russia of orchestrating the current gas supply crunch in Europe. But why would Russia do that? A (long) thread ft.com/content/668a84…

2.First some background. There are two drivers through which Russia has influenced gas prices in Europe: the levels of storage in Gazprom’s facilities in Europe, and the level of spot sales to European markets

3. Historically low storage levels in Europe are recorded since July. But some facilities are emptier than others. It is the case of Gazprom’s facilities in Germany and Austria, which take down overall EU level

4. In terms of supply, in contrast to other suppliers (i.e. Norway or LNG), Russia is not adding much beside contractual requirements. While Nord Stream and Turk Stream supply at max capacity, transit through Belarus and Ukraine is limited to non-existent (source:@Bruegel_org )

5. In Q4 2021, Russian supplies were 25% lower than in Q42020 e 22% lower than Q4 2019, as IEA estimated, claiming they could be raised by one third. More detail in this OIES paper oxfordenergy.org/wpcms/wp-conte… (Source:@OxfordEnergy)

6. So,the gas crunch is aggravated by supply issues concerning Russia, which mentioned different causes often contradicting each other. A selection:
Chizhov: ft.com/content/80109d…
Novak: bloomberg.com/news/articles/…
Putin 1 euractiv.com/section/global…
Putin 2 ft.com/content/228db4…

7. Let’s make some hypotheses on Russia’s motives and narrow possible explanations to three aspects: technical, economic, political – this last one having both a material and ideational sub-aspects

8. Technical explanations point to an absence of spare capacity in Russia. This would have caused by a range of issues, ranging from the need to refill domestic storage first to a domestic demand driven by a cold winter

9.Background:Over the last years, Russia has underinvested in its depleting capacity in the Nadym-Pur-Taz basin, privileging the Yamal’ province serving both LNG capacity and Gazprom’s pipelines northern routes – Yamal’-Europe and Nord Stream.
(Source: Gazprom)

10.However, such an explanation does not match with Russia’s claim that unblocking Nord Stream 2 – now technically filled and suspended in waiting for certification - would ease the supply crunch edition.cnn.com/2021/10/07/bus…

11. One could argue that Nord Stream 2 is a diversionary route. Its aim is rerouting gas previously shipped across the Ukrainian corridor. So there might still be no spare capacity even if NS2 is read to go. However...

12.... both the Ukrainian and Belarusian corridors - are next to empty. NS2 supply would be “additional” under the present conditions even if the original purpose was diversionary

13.Also,Russia claimed that EU buyers (FR,DE) are not asking for more supply.Might be true – buyers are silent and may well prefer not to buy (or sign long term contracts) at current price conditions.But this again suggests that there is available capacity bloomberg.com/news/articles/…

14.All in all, the missing capacity explanation is weak. But spare capacity might in fact be lower than assumed especially in certain phases. To dig more into it, I suggest taking a look to background information and relevant questions posed by @Asabadus. blackseareflections.com/does-gazproms-…

15. The second explanation is commercial. Russia has discovered its power on European price formation – courtesy of the European shift from oil-indexed long-term contracts (LTCs) to spot prices – and is privileging prices over volumes

16. As such, Russia might want to create a high price environment and narratives as some LTCs will be expiring soon and will need to be re-negotiated. From Russia’s point of view, better to negotiate them from a strong position. Rational, but…

17…such a strategy is risky. Pushes buyers to pursue demand reduction more aggressively at a time Europe is organising a gas phase down in accordance to climate objectives. Tightening supply may open opportunities for Russia's competitors, although..

18....Russia may calculate that EU climate policy creates a challenging environment for new rival supply infrastructure and removes coal from the range of alternatives.

19. Still, significant LNG capacity will come onstream over this decade. A case for LNG long term contracts is growing in Europe thanks to Russian actions – some have signed contracts already in 2021

20. A third explanation is political. Russia might be trying to push Europeans to start Nord Stream 2 operations regardless remaining bureaucratic hurdles, or create a case for LTCs raising the expectation that all this would be conducive to more affordable supply.

21. A 2nd political explanation is that Russia might be weaponizing its gas interdependence with Europe in a moment of high political tension between Russia and the”historical West”.How?Perhaps showing Europeans the cost of siding with US or Ukraine or whatever.Any ideas welcome.

22. Something also concerns Germany. By gaming interdependence, Russia might be trying to weaken the German government. SPD is pro-NS2 and prone to instrumentalise econ interdependence to better relations with Moscow. Greens have instead atlanticist orientation and opposed NS2.

23.Also this is a risky tactics for Russia, who might end up making the pro-Russia voices in Germany’s political and business elite look like fool and naïve. Unless of course the objective is just to create divisions and mistrust

24.(also, to what extent the gas crunch and Nord Stream 2 are central to German voters’ concern? Actually, less than many working on these issues tend to believe – but things can of course change especially as a result of exogenous shocks) -

25. Let’s now move to the ideational level. For a while, LNG abundance and EU regulatory/infrastructural upgrade provided a perception that the terms of EU-Russia energy interdependence moved in favour of the EU. -->to be continued...

26. Now, courtesy of the global gas crunch, Russian gas is again perceived as indispensable to Europe. It counts for Russia,as a country that founds its(super)power self-perception on –among many other material and ideational assets– its energy riches and others’ desire for them

27. Another element in the ideational battlefield is that Russia can push the narrative of a EU weak or counterproductive in energy matters, also suggesting connections between the crisis and the Green Deal or EU competition rules challenging LTCs.

28.Omitting that European buyers moved to spot pricing because it was convenient, not because the EU instructed them so. But the Russian narrative may still be appealing for some EU govts or firms happy to shift the blame to Brussels.

29. Let’s remember, after all, that for a long while Russia has been trying to de-legitimise the EU role in energy affairs, perceiving the EU attitude on how to organize gas interdependence ideologically rigid and lecturing.

30. Summing up, explanations are not mutually exclusive, while the only either/or is the physical existence and amount of spare capacity. Absence should be actually the most terrifying explanation for Europeans, but not many seem to believe it.

31. That said, what can be done? It is often suggested that the EU has no alternative but sit down with Russia and talk, trying to find an agreement in a grand gas bargain. I see two main problems. What should be discussed, and how?

1) How not to make such a bargain look like conceding to Russia in a moment of high political tension?
2)What the content should be? Companies, not the EU, sign LTCs.If they don’t do,it's because prices are high so better to wait and see.On NS2,the EU is not in charge