Gazprom's Chinese “Go” Game in Europe

Europe is reaping the benefits of the Third Energy Package and spot gas prices
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print 17 7 2021

There is such a wonderful Chinese game called "Go". In it, players step by step move white and black stones to eventually capture the entire space of the game board. It is interesting by the fact that real masters have the scale of a strategic plan that becomes visible only when there is nothing left to oppose it.

What is happening now in Europe with "Russian gas" is very similar to this Chinese game. At first glance, events loosely connected between themselves took place during 10 years at different points of the "game space".

Thus, we recall that back in July 2009, the European Union adopted the Third Energy Package, initially presented as a purely internal European matter. Five years later, in February 2016, the European Commission's Directorate General for Energy suddenly extended it to the Russian Nord Stream-2 under construction. Like saying that not only the internal highways of the EU, but also any pipelines leading to the EU are obliged to comply with EU standards. Why? Because the European Union decided so.

There was an impression that the collective West was very successfully moving towards its goal – to take control of Russian energy exports. Plus, by putting on Russia the task of financing the economies of countries that are actually hostile to it, especially Ukraine and Poland.

In particular, because of the game of doubts about Russia's ability to fulfil contractual obligations for the supply of natural gas to Europe, Brussels forced Moscow to sign a five-year transit contract with Kiev under the "take or pay" scheme for pumping 225 billion cubic meters of gas through the GTS of Ukraine with a payment of 7.2 billion dollars "for transit". And this is for country that claims that it is at war with Russia, a country whose revenue part of the budget for 2021 is only 37.5 billion dollars.

There was an impression, especially after the fall of spot gas prices in Europe below $2 per million British thermal units (MBTU) in the 2019/2020 season, that Gazprom was definitively defeated, and it does not make economic sense to complete the second Nord stream. But it was just an impression, because the events taking place in Europe today show a completely different picture.

A huge surprise for the "almost victorious West" was the refusal of the Russian transnational energy corporation to book gas transit capacities through Poland and Ukraine for the next gas year, which begins on October 1, 2021: 34 billion cubic meters of gas through the Yamal-Europe pipeline through Poland and 40 billion cubic meters through the Urengoy-Pomary-Uzhgorod (i.e. through the GTS of Ukraine) remained unclaimed. And there is no one else for who to sell them, because there are no other applicants for delivery in the nature.

Of course, what happened does not mean that Russia completely refuses to use these routes for its gas exports to Europe. The figures mentioned above belong to additional volumes besides of the previously concluded firm transit contracts. For example, the remaining unclaimed "additional volume" through Ukraine amounted to 9.8 million cubic meters per day, while the contractual obligations in the "take or pay" mode exceed 109 million cubic meters per day.

Translated into understandable language, this means that Gazprom does not need additional sales volumes at the moment. It is quite satisfied with the existing contractual ones. In particular, to teach Brussels an object lesson about the unpleasant consequences of trying to put a crowbar in a well-functioning mechanism for long-term gas supplies.

European gas prices on the spots have already exceeded $400 per thousand cubic meters and continue to grow. It is not excluded that they will reach $480-500 by the beginning of August, when the leading consumers will begin to fill the UGS in large quantities before the next heating season.

The traditional summer period of low prices for almost two decades will clearly not be this year. And the European bureaucrats themselves who have thought about themselves "too much" are to blame for this. Gazprom only uses their mistake to cover the unplanned costs of the previous period.

In addition, now the meaning of putting other stones on the board began to appear. The development of the Turkish Stream and the construction of a highway through the Balkans (Serbia and Hungary recently connected the continuation of the Turkish Stream) formed a transport channel with a transit capacity of 15.75 billion cubic meters. Of course, it does not completely cover 40 billion cubic meters through Ukraine. But after the commissioning of “Nord Stream 2", the need for the GTS of Ukraine will disappear completely for Russia.

And the funny thing is that even the most corrupt European bureaucrats will not be able to repeat the success of forcing Russia to preserve Ukrainian transit under the threat of sanctions. Otherwise, the shortage of supply will raise gas prices in Europe to a fantastic - Londonesque - height.

In short, it seems that Gazprom has outplayed Europe in the "Chinese game" after all.

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