FEATURE: Three years on, Russia-Ukraine war still hangs over gas market

Three years since Russia launched its full-scale invasion of Ukraine, the future of Russian gas in Europe still hangs very much in the balance despite concerted efforts led by Brussels to phase out imports.

The European Commission is -- for now -- sticking to its policy of wanting to eliminate Russian fossil fuel imports, including gas and LNG, entirely by 2027.

Energy commissioner Dan Jorgensen doubled down on his commitment on Feb. 20, saying he would put forward a plan next month to make sure the EU "gets 100% rid" of Russian gas.

But peace talks between Russia and the US over Ukraine have prompted renewed speculation that larger-scale Russian pipeline gas flows could return to Europe at some point in the future.

A lot might have to change before this could happen, however.

"Any return of Russian gas at scale is contingent on a peace accord and we expect negotiations will be complicated and take time to finalize," Michael Stoppard, Global Gas Strategy Lead at S&P Global Commodity Insights, said Feb. 20.

"When it comes to natural gas, Presidents Trump and Putin have opposing interests. Trump in his previous term was a strong advocate of US LNG, and a return of Russian pipeline gas works against that objective," Stoppard said.

TurkStream route

With the suspension of Russian gas transit via Ukraine on Jan. 1 -- and the loss of some 15 Bcm/year of supply -- there is now only one pipeline route at Moscow's disposal to reach Europe: the 15.75 Bcm/year European string of the TurkStream pipeline.

Russia can also supply gas to Europe in the form of LNG, and Russian LNG supplies to the EU rose last year, totaling 15.6 million mt (21.5 Bcm), according to data from Commodity Insights.

And a number of countries in Europe -- Hungary and Serbia chief among them -- remain largely dependent on Russian pipeline deliveries.

But could a peace deal see the likes of Germany -- which was cut off from Russian supplies when Gazprom halted deliveries via the 55 Bcm/year Nord Stream in August 2022 -- be tempted to take Russian gas again?

"All eyes are on Germany and the formation of a new coalition," Stoppard said. "There is a strong faction focused on re-igniting the faltering economy where the return of Russian gas is considered helpful or even essential," he said.

"However this view may not hold sway across the coalition and will be hotly contested across European governments."

European gas prices hit two-year highs in early February, with the loss of Russian gas transit via Ukraine and concerns over storage levels amid cold weather helping support prices.

Platts, part of Commodity Insights, assessed the benchmark Dutch TTF month-ahead price on Feb. 10 at Eur58.14/MWh, the highest level since late January 2023.

Prices have fallen since then, with Platts assessing the TTF month-ahead contract on Feb. 20 at Eur47.42/MWh.

Russian avenues

There are four short-term avenues for Russian gas and LNG to come back to Europe in larger volumes than currently: the Ukraine transit corridor, the Yamal-Europe route, the undamaged string of Nord Stream 2, and Arctic LNG 2.

The first three would require the buy-in of Ukraine, Poland, and Germany, respectively, which is difficult to imagine under current geopolitical conditions.

Analysts at BofA said in a note Feb. 17 that the flow of gas via any of these routes would be additional gas on top of current global supply, "impacting global gas prices".

Most of the sources of Russian gas supply to Europe were shut in after exports were curtailed as Moscow did not have the means to divert exports to other markets.

Morgan Stanley also sees a risk of additional oversupply later in the 2020s if Russian gas returns.

"If a peace deal is reached and creates a path for Russian pipeline gas (or Arctic LNG 2) to re-enter the market, it could worsen the global LNG capacity surplus later this decade," Morgan Stanley said in a note Feb. 12.

It also said a more well-supplied gas market would benefit Japan, China and India the most.

"If Russian gas were to flow into Europe, it would lower competition for Asia to source LNG," it said in a separate note Feb. 17.

Europe turned up its imports of LNG during the crisis period, with Norway also looking to maximize exports on the back of sustained high prices.

Other suppliers, such as Algeria and Azerbaijan, are lacking the upstream resource or pipeline capacity to deliver much additional gas.

Industry views

BofA said Feb. 17 that any short-term path for Russian energy to return to market would likely be "modest, incremental, and possibly linked to security guarantees," adding that peace negotiations would be "fraught with risks".

The question of increased Russian gas flows into Europe is also being asked of European companies, including Norway's Equinor.

Irene Rummelhoff, Equinor's executive vice president for marketing, midstream and processing, said Feb. 5 that the "big unknown" in the market is what would happen to Russian volumes to Europe if there were some kind of peace deal.

"The way we see it, it is probably going to be 8 Bcm through Nord Stream 2 -- Nord Stream 1 is permanently destroyed," she said.

"We do not expect volumes to come through Poland. We do expect Ukraine to bring another 28 [Bcm/year]. So maybe an additional Russian volume potential of 35 [Bcm/year]," she said.

Rummelhoff pointed out, however, that compared with LNG imports into Europe of some 125 Bcm last year, the potentially returning Russian volumes were "not really that significant."

Austria's OMV, meanwhile, seems to have put Russian gas behind it for good. CEO Alfred Stern said Feb. 4 that OMV now understood that Gazprom could not be viewed as a reliable gas supplier.

Asked whether OMV would ever consider resuming gas imports from Russia, Stern said: "In the gas market, being able to count on reliable supplies through long-term gas contracts is a key prerequisite."

"What we learned at OMV -- very intensely -- is that relying on a single gas supplier is not a good idea, and this is why we diversified our gas supplies."