Gazprom PJSC was the largest contributor to Russia’s budget in 2022 despite a sharp drop in natural gas export volumes, but 2023 could prove more difficult as global prices have declined and the country searches for new customers to replace those lost in Europe.
Although Russia’s LNG exports remained strong last year and are expected to rise in 2023, gas pipeline flows to Europe have reached historic lows, dropping to around 50 million cubic meters per day (1.7 Bcf/d) in January, according to the European Network of Transmission System Operators for Gas.
“The abrupt disappearance of the European gas export market and an overhang of spare productive capacity represents a significant problem for Gazprom and for the Kremlin because of a threat to gas export revenues and the high opportunity cost of idled investments,” the Oxford Institute for Energy Studies (OIES) recently wrote in a research paper.
Moscow is eager to sign a third contract with China, pursue the creation of a gas hub with Turkey and increase deliveries to Kazakhstan and Uzbekistan for export to China. OIES noted, however, that all those plans require complex negotiations and binding agreements.
LNG Exports Soar
In the meantime, Russia has been given a boost by its liquefied natural gas exports. Those shipments will continue rising with Train 1 at the Arctic LNG 2 facility scheduled to come online later this year or early in 2024, said Jonathan Stern, a senior research fellow at OIES.
Europe imported nearly 47% of the 32.6 million tons (Mt) of LNG Russia exported last year, according to Kpler data. Overall, Russia’s LNG exports were up 8.5% from the 30.10 Mt it delivered in 2021.
Looking ahead, the volume of Russian LNG exports beyond 2024 is difficult to predict. Stern said after the start-up of the first train at Arctic LNG 2, the question is whether PAO Novatek can complete the facility’s other two trains given the sanctions in place that have hindered the project’s progress.
“Some say yes, but most doubt it,” he added. “And even if it is possible, they will be delayed beyond 2024-2025.”
Russia has ambitious plans for LNG. Columbia University’s Center on Global Energy Policy (CGEP) recently said the country is likely to be more motivated than before the war to diversify away from pipeline gas and turn to global LNG markets. CGEP said Russia could ultimately build 80 million metric tons/year of LNG export capacity if all its current projects become a reality, noting that it would represent about half of the pipeline capacity serving the European Union (EU) before the war.
Russia’s plans depend largely on access to financing and western technologies, which is limited under the current package of sanctions and creates additional pressure for future LNG projects.
That dims the country’s natural gas outlook.
Gazprom, for example, reported a steep decline in pipeline exports last year, which dropped to 101 billion cubic meters (Bcm) from 185 Bcm in 2021. Exports to Europe fell below 75 Bcm in 2022 from 150 Bcm in 2021, as the Kremlin continued cutting deliveries after it invaded Ukraine.
Stern told NGI that deliveries to Europe are likely to fall even more in 2023.
“This year, it’s more like 25 Bcm, and that’s if both routes via TurkStream and Ukraine continue to flow at December and January levels, which in the case of the Ukraine route is not certain.”
Despite declining pipeline exports, Gazprom still made a huge profit last year as record high gas prices buoyed revenue. However, future profits will depend on how quickly Moscow can strengthen its exports.
“Russia has two, maximum three years, to address the weak links in its gas export strategy,” OIES said. “If solutions are not found, the risks of very negative developments on the export revenue side will become very apparent, potentially forcing Russia to devalue the ruble and hike domestic gas prices.”
“The big revenue question is what happens to oil and oil products revenues under the price cap,” Stern said. Those volumes represent 35-45% of the country’s total exports.
“So far, they seem to be not so greatly affected, but we’ll see how that unfolds,” he added. “But Russia has huge currency reserves – even taking into account the $300 billion frozen in foreign banks – and I think it will take some time before this has a major impact domestically.”