BOFIT Viikkokatsaus / BOFIT Weekly 2020/05

Slightly less than half (roughly 70 billion m3 per year) of Russia’s natural gas exports to EU countries is transmitted to customers via pipelines running through Ukraine. Russia’s other pipeline exports to Europe transit Belarus (Yamal-Europe pipeline), travel under the Baltic Sea from Russia to Germany via Nord Stream 1 pipeline, or are piped directly to countries that share a border with Russia. As transit fees represent an important revenue source for the Ukrainian government, the EU and US are concerned about the future of gas transmission from Russia via third countries. The nearly complete Nord Stream 2 pipeline, which parallels Nord Stream 1, could reduce Ukraine’s transit fee income to a fraction of its current level. Partly because of this and partly because of America’s interest in growing its domestic liquefied natural gas (LNG) industry, the US issued targeted sanctions on companies involved in construction of the Nord Stream 2 pipeline. The move has halted construction work on the pipeline and it appears that Gazprom must finish the project on its own.

Russia and Ukraine reached a new agreement on gas transit at the end of December just as the old agreement was expiring. Under the new agreement, Gazprom commits to transmit via Ukraine at least 65 billion m3 of gas this year and at least 40 billion m3 of gas a year during 2021—2024. Before Gazprom and Naftogaz reached the agreement, they had to settle their disputes on earlier transit agreements. In late December, Gazprom finally payed Naftogaz 2.9 billion dollars in damages for its breach of the previous agreement. Naftogaz in return committed to not pursuing further claims on transit fees.

The Turk Stream pipeline, which runs under the Black Sea from Russia to Turkey, was completed late last year and officially commissioned at the beginning of January. The pipeline supplies gas to the Turkish market, but potentially could also supply customers in Southeast and Central Europe. The Nord Stream 2 and Turk Stream pipelines do not open new markets for Gazprom, and their commissioning will not lead to any net increase in Russian gas exports.

Russia gained direct access to China’s growing natural gas market with the official inauguration in early December of the Power of Siberia gas pipeline. Russia’s pipeline exports were earlier entirely dependent on trends in European and Turkish markets. Initially the volumes piped to China will be small, and it is difficult to judge the overall profitability of the pipeline. Once the pipeline reaches its full capacity of 38 billion m3 a year, the amount of Russian gas shipped by pipeline to China will be roughly on par with the amount of gas Turkmenistan ships to China.