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their immediate global neighbourhood, especially one soon to become available in global markets, and Japan likewise has withdrawn sanctions on energy commodities.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.