The Ukraine crisis has led to unprecedented economic sanctions on both individuals and Russia as a nation. While the current tightness in the energy market is putting pressure on European nations to continue purchasing Russian gas, announcements are already being made to ensure movement away from reliance upon Russian gas. Important to note is that companies are not being sanctioned, but rather the west is self-sanctioning on moral grounds.
Which leaves us with the
question – once all of these heavily-dependent European clients stop buying it,
who is going to buy the cheap, effective Russian natural gas supply? If the
western nations of the world are avoiding it on ethics and trust grounds, will
anyone else be interested? The short answer is yes – in the end, price is king.
The larger problem may be the practical realities of logistics.
Russia currently supplies Europe
via pipelines that come through western Russia into Poland, Ukraine or Turkey. Some LNG is supplied from facilities in the
Russian north and West (Yamal LNG, Arctic-2 LNG, and the under-construction
Baltic LNG). To the east, the Power of Siberia pipeline into China and LNG
facilities in the far eastern parts of the country (Far East LNG, Sakhalin-II
LNG ) are or will supply Japan, China and Korea. A small portion of gas supply (relatively
speaking) is directed towards Pakistan and the CIS nations.

The desire for Europe to
uncouple itself from the suddenly politically unacceptable Russian suppliers is
ambitious, and subject to several practical limitations. Before 2024, a tight
LNG supply market and limited regas infrastructure will see few alternatives to
the pipeline supply from Russia, securing that front for the energy giant even
as its European customers try to pull back.
Russian supply into Europe is
roughly 160Bcmpa, approximately 115Mtpa. This represents roughly 4% of the
world’s gas supply, a significant realignment of suppliers and purchasers is
required.
Divorce Proceedings
Sanctions on Russia have been
placed by a lot of Ukraine’s friends and family, countries generally aligned
with the western powers, but few have been implemented by those outside the
immediate European sphere of influence. Additionally, sanctions imposed on
Russia have largely targeted either individuals or financial institutions, rarely
targeting Russia’s valuable commodities markets directly.
Most notably, China and India
have categorically refused to discuss sanctions on a major trading partner in
their immediate global neighbourhood, especially one soon to become available
in global markets, and Japan likewise has withdrawn sanctions on energy
commodities.
China is currently playing a
cautious game balancing the interests of its economy against the opinions of
many of its most valuable trading partners. The country continues to purchase
oil and gas from Russia, albeit at slightly lower rates due to the unrelated
maintenance shutdown of the Power of Siberia pipeline.
India is likewise sticking to
its carefully curated will-they-won’t-they neutrality, maintaining that the European
Union, despite outrage and sanctions, is still purchasing Russian oil and gas,
and that India would continue to seek the best deals available. India has
already bought over 13 million barrels of Russian oil since February 24th,
almost as much as the entirety of 2021.
Europe will continue to purchase
Russian natural gas despite targeted sanctions, largely because they lack a
viable alternative. Despite the moral outrage, the feasibility of full
replacement does not currently exist either from alternative suppliers of pipeline
gas or from LNG. Some additional gas from Norway - roughly 1.4Bcmpa in 2022,
plus 4Mt of LNG from the Snøhvit LNG plant planned to restart in May- and any
additional supplies from Algeria will be preferred over Russian suppliers, despite
discounted prices, due to political and image concerns.
Overall, this will mean that
supply out of the nation remains available and flowing steadily to its largest
customers despite sanctions for the next two years.
Alternative Suitors
As Europe divorces itself from
its tight co-dependence on Russian gas, the region will be able to replace an
increasing quantity of pipeline gas with LNG. Ramping up utilisation and
construction of new LNG regasification terminals will be needed as more supply
becomes available, primarily from the US and the Middle East.
As pipeline demand in Europe
begins to fall, Russia will have to look elsewhere to sell its natural gas. The
Power of Siberia pipeline extension and connection to western Russian oil and
gas fields will enable a significant rerouting of natural gas, up to the line’s
capacity of 38bcmpa. In 2021, Russia shipped 16.5Bcmpa to China via pipeline
and LNG, well below the pipeline’s maximum capacity. Agreements have already
been made to increase throughput to the maximum design capacity from 2025.
Russian supply into Europe
amounts to roughly 160Bcmpa. Allowing that the Bluestream (16.5bcmpa) and
Turkstream (31.5bcmpa) pipelines are likely to maintain much of their
throughput, and assuming 80% replacement of the remainder (a significant
divestment on Europe’s part), Russia is left holding roughly 90Bcmpa of ‘extra’
gas in 2025 and beyond that it will need to find buyers for.
The announcement of a 30-year
supply contract via the Power of Siberia 2 pipeline from mid-February this
year, just before the invasion of Ukraine, has secured another 10bcmpa of sales
into China. More deals with China are likely to come, especially if Russian gas
follows the price trend of Russian oil products. The stumbling block may be the
ability to grow the gas transfer down the eastern pipelines by 2025 without
financing from western organisations, as there are no current connections
between the eastern and western gas fields.
Arctic-2 LNG and Baltic LNG may
run into financial difficulties caused by the sudden severing of ties by
European energy companies like Total SA, Shell, Eni and BP. If, however, the
projects can complete on schedule, the two projects would see LNG availability
of 20Mtpa for Arctic-2 LNG and 13Mtpa for Baltic LNG. Combined the two projects
are the equivalent of 45Bcmpa, and likely able to find buyers in the east despite
the longer route will alleviate much of the Russian oversupply.
The other half, however, is
somewhat trickier. An expansion to the Power of Siberia pipeline to link the
East and West could serve, but a two-year construction timeline is extremely
challenging and comes with significant ongoing transport costs (roughly 38% of
the current pipeline’s gas capacity is consumed as compressor fuel). Alternatives
could include an expansion of the relationship with Pakistan, India and South
Asia, albeit through another stretch of difficult and expensive terrain, or
ties closer to home with the CIS bloc.
It is plausible that the other
25Bcmpa, roughly 18Mtpa of ‘unallocated’ natural gas may become the impetus for
a new LNG terminal in the Yamal peninsula or the Black Sea, heading into
South-East Asia or Africa. The expense of construction and financial sanctions may
become prohibitive, but Russia has long experience and expertise in
construction of both LNG terminals and pipelines.
Russian gas supplies will be
shifting to the east and south as the west closes off. China, Japan and Korea
will remain major offtakers, while India, Pakistan and other nations with no
stake in Ukraine will see an opportunity for competitive advantage over other
alternatives.
Western financial sanctions may
prove more damaging in the long run than their break away from the energy
market, as it will restrict Russian options for development and growth to
restructure its pipeline and refinery networks.