December 2022
Europe may be closer than ever to breaking its energy dependence on Russia, but in the short term it still can’t live without one type of Russian natural gas. While Russian exports of natural gas carried via pipelines to Europe have fallen sharply since Russia’s invasion of Ukraine in late February, imports of Russian LNG, have risen.

Most Russian LNG imports come from privately owned Novatek, the country’s second-largest natural gas producer after Gazprom. Novatek operates the Yamal LNG project in the northwestern Arctic. Most of November’s imports went to France, Spain and Belgium, though some of those cargoes were then reloaded and shipped to countries outside Europe, including China.

However, Russia’s strategy to leverage European reliance on its gas has become a double-edged sword, and Europe is much better suited to adapt, at least in the medium term, to this grand shift in energy relations. European countries have shown that they can secure fast-track deployment of additional gas import infrastructure, effectively ending their historical dependency on Russian supplies.



Supply Forecast

Russia’s natural gas supply was approximately 2.27Bcmpd in 2021, but this is expected to decline by 7.7% to 2.21Bcmpd in 2022 as supply to Europe declines. State-owned Gazprom produced 745MMcmpd of natural gas in 2021, being the leading natural gas company in Russia. The second-largest volume of gas was produced by Novatek at approximately 148MMcmpd in the same year.



China and India, two of Asia's biggest oil importers, are cutting back on supplies from Middle Eastern countries and are taking more crude oil from Russia at steep discount. Russia’s liquid hydrocarbons supply was approximately 10.7Mbpd in 2021.

AME is forecasting this to plummet 10% to 9.5Mbpd in 2022 as Western sanctions take hold and as EU buyers shun Russian purchases. EU leaders have agreed to embargo Russian crude oil imports that will take full effect by end-2022, but Hungary and two other landlocked Central European states secured exemptions for the pipeline imports they rely on.



Sanction Impacts

As western sanctions take grip Russia has turned to supply Asia. The Power of Siberia 1 pipeline serves as Russia’s main gas supply artery to China. A second gas pipeline – the Power of Siberia 2 will stretch from Yamal in Western Siberian to northern China; it has a target date to be online in 2030.

By tapping into the vast reserves in Western Siberia, Russia will enhance its ability to divert gas flows towards Asia instead of Europe. Along with pipeline gas, Russia is expected to increase LNG exports to China as the first train of Novetek’s Arctic LNG-2 project prepares to commence operation in 2023 and a final train targeting start-up in 2025.

If further sanctions on Russian energy exports come into effect, then the most likely scenario is a gradual phase-out of Russian oil in Western markets that will take several months to complete. Russia’s ability to redirect all unwanted cargoes from the West to Asia is limited, meaning that, Russia will be forced to cut production further as it lacks storage capacity for extra crude volumes.

The situation will be aggravated by a lack of investments and foreign technologies, which will lead to lower drilling activity. Russia is, as a result, not expected to return to pre-conflict production levels even by 2026.

In response to Russia’s invasion of Ukraine, BP announced it will sell its nearly 20% share in Russian energy giant Rosneft. Shell is also pulling out of all of its operations in Russia, as is ExxonMobil and Equinor. TotalEnergies pulled out of Russia’s Kharyaga oil field.

The conflict has changed Western energy companies’ cost-benefit analysis of doing business in Russia and that it may take many years for these companies to re-engage there.


Emissions Targets and Renewables

In 2021, carbon emissions from energy in Russia reached 1.58Bnt of CO2, surging by 9% from a 2020 low level. Under current policies, Russia’s economy-wide emissions will not start falling until 2030.

Russia has committed to reduce carbon emissions by 30% below 1990 levels by 2030 and become carbon neutral by 2060. Its long-term strategy targets an 80% reduction below 1990 levels by 2050, projecting on doubling the level of negative emissions from land use, land use change and forestry.

Russia plans to continue supporting the expansion of natural gas and oil capacity and related infrastructure.  Russian state controlled Rosneft is reliant on natural gas and oil production and plans to increase the share of gas in its portfolio to more than 25% by 2035.

The company has recently published a Carbon Management Plan that reinforces its low-carbon transition strategy, but the company is yet to take actions leading to effective emissions reduction.


Expansions and Ramp Ups

National gas company Gazprom expanded its share of global supply in 2021, but its output is likely to fall in 2022 as Europe pushes to end its reliance on the Russian supplier. Gazprom is looking to expand, with the goal for natural gas to account for 50% of its total hydrocarbon output by 2030.

Gazprom accounts for 12% of global natural gas output and 68% of domestic natural gas production. The company produced about 358Bboe between January and June 2022, with natural gas accounting for 22% of its output.

At present, the company is actively implementing large-scale natural gas development projects in the Yamal Peninsula, the Arctic shelf, Eastern Siberia and the Russian Far East as well as developing several oil exploration and production projects abroad.

One such project is the giant Bovanenkovo natural gas field which is expected to reach 115Bcmpd by 2022. The Bovanenkovo–Ukhta pipeline corridor will deliver natural gas to both domestic consumers and the European export market.

To monetise its gas abroad, Gazprom is considering intensifying its recent strategic shift toward gas processing, petrochemicals and LNG. But these sectors are highly dependent on foreign technology and equipment, putting them at risk from ever-expanding sanctions and the exit of Western companies. There is also a danger that buyers, especially those in Europe, may shun Russian LNG volumes as has already happened at some European ports.

Russia is prioritising expansion of pipeline gas exports to China as relations with the West worsen.  During the wave of Western sanctions over annexation of Crimea in 2014, Gazprom signed the 38Bcmpa Power of Siberia gas supply deal with China National Petroleum Corp. and began shipping volumes in 2019.

Gazprom later said it could export up to 130Bcmpa via pipeline to China. So far, however, it has only signed one new deal for an additional 10Bcmpa of supply through the “far eastern route” in early February this year.