BOFIT Viikkokatsaus / BOFIT Weekly Review 2022/33

Rosstat reports that Russian gas production contracted in the first six months of this year by 7 % from 1H21. Gas giant Gazprom announced that its gas production was down by 12 % y-o-y in January-July. Gazprom, which accounts for about two-thirds of Russian gas production, holds a monopoly on pipeline gas exports. The significant drop in Gazprom’s gas production largely reflects declines in export volumes. Gazprom says that its exports to Europe (including Turkey) fell in January-July by 35 % y-o-y. Although exports to China have grown rapidly, volumes remain quite modest.

Gas exports to EU countries collapsed this summer. Gas transmission via the Yamal pipeline running through Poland has halted altogether, while transmission via Ukraine now is limited to a single compressor station (Sudzha). In addition, a small fraction of the capacity available for the NordStream 1 pipeline, which runs along the bottom of the Baltic Sea to Germany, remains in use. EU pipeline gas imports from Russia were down in July by about 75 % y-o-y. Dramatic production cuts are inevitable for Gazprom if exports remain at this low level.

BP figures show that Russian gas exports in 2021 totalled 241 billion cubic metres. Of that, 202 billion m3 was traditional pipeline gas. About 83 % (167 billion m3) was exported to Turkey and Europe, 13 % to former Soviet states and 4 % to China. Roughly 40 billion m3 of liquefied natural gas (LNG) were exported from the Sakhalin island and Yamal peninsula. About 44 % of Russia’s LNG exports go to Europe, 22 % to Japan and 6 % to China.

Russian gas exports are very dependent on the European market. The sole export pipeline running to Asia, the Power of Siberia pipeline to China, has yet to reach full capacity. When the Power of Siberia pipeline reaches its full capacity of 38 billion m3 a year, China could account for 20 % of Russia’s gas exports. The share of gas going to China can rise higher than that over the next few years only if gas exports to Europe correspondingly decline. Under current plans, a second export pipeline to China, the Power of Siberia 2 pipeline, would be in operation in 2030 at the earliest. Even with the completion of the new pipeline, China could take about up to half of the gas volume exported by Russia to Europe before the war.

Gazprom’s shut-offs and reductions in gas transmission have caused gas prices to spike to record levels in the EU. The rise in gas prices has temporarily offset the losses to Gazprom caused by the decline in export gas volumes.

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