Economic Statecraft
Friendly Fire: Sanctions Against Gazprom Trigger Another Gas Crisis in Europe

If Europe and Canada are unable to find a face-saving compromise to deal with the sanctions mess over gas turbines now, by November Germany’s choice might become even more embarrassing: to let Nord Stream 2 flow or risk a full-blown gas crisis and super-high prices in the midst of winter, writes Valdai Club expert Vitaly Yermakov.

Summertime, and the living usually gets easy in the gas business: demand is down, and prices decline. Not this summer in Europe, though. Since the beginning of June 2022, European gas prices spiked 70 percent, to $1,600 per thousand m3, the level almost seven times higher than a year ago. The key reason is the reduced flows of Russian gas to Europe: instead of “normal” 300 million m3/day they dropped to about 70 million m3/day. 

This has tightened Europe’s gas balance and led to gas withdrawals from storage (instead of the normal practice of pumping gas into storage during summer), putting the program of refilling the European gas storage facilities before the next heating season in jeopardy. The default reaction of the European politicians was to blame Gazprom for using the “energy weapon” and restricting supplies. The closer examination, however, reveals that the trigger to the crisis was the indiscriminate application of the western sanctions against Gazprom. Instead of punishing Russia’s gas giant, these sanctions are now hurting European gas consumers.

The main routes by which Russian gas arrives to Europe are as follows: 

  • Via Belarus/Poland. Polish gas company PGNiG refused to switch to the “gas for rubles” scheme in the end of May 2022 and terminated its long-term contract with Gazprom. At the same time, Gazprom stopped booking transit capacity in the Yamal pipeline, which runs into Germany via Belarus and Poland, because of western sanctions on EuRoPol GAZ, which owns the Polish section of the pipeline. No Russian gas is flowing via Poland to Germany at present.

  • Via Ukraine. In spite of the ongoing military conflict between Russia and Ukraine, gas transit has been continuing, through two entry points/gas compressor stations at the Russia-Ukraine border: Sudzha and Sokhranovka. In the beginning of May, however, Ukraine said that it would not transit gas arriving to Sokhranovka, claiming it had lost operating control over the facility that is located in the Lugansk region. This has reduced the transit flows via Ukraine in half, to about 41 million m3 per day at present. 

  • Via Turk Stream. One of the two strings of the undersea pipeline connecting Russia and Turkey is designated for transit of Russian gas to South Europe. At maximum loading, about 40 million m3 per day flows via Turk Stream to the EU. From 21 to 28 June the flows were stopped completely due to regular summer maintenance of the pipeline. This has been planned and announced well ahead. Now Turk Stream is flowing at full capacity again, and delivering gas to Turkey and Europe.

  • Via Nord Stream. This is the main transportation corridor for Russia gas to Germany. Until recently, the flows were about 170 million m3 per day, will full pipeline capacity utilization. On June 14th, however, Gazprom announced that it would reduce the flows 40%, down to 100 million m3 per day, because it had to stop some of the gas turbines that create pressure needed to transport gas via the 1,200 km undersea pipeline for operational safety reasons. Two days later Gazprom announced that it had to reduce the flows further, to 67 million m3 per day due to the order by Rostekhnadzor, Russia’s technical safety agency to stop more gas turbines at the Portovaya gas compressor station since they required capital repair. As a result, the deliveries of Russian gas to Germany and further on to other European countries like France, dwindled.

As it turns out, the gas turbines that are used at Portovaya compressor station near Vyborg to transport gas via Nord Stream (since 2011) have been produced by Rolls-Royce. The Rolls-Royce gas turbines business was then bought by Germany’s Siemens in 2014. There are 6 units of 52 MW and two units of 27 MW. As any equipment, gas turbines require regular servicing and capital repair which are part of the contract between the user (Gazprom) and equipment supplier (currently Siemens). During capital repair the gas turbine must be disassembled and shipped to a specialized plant equipped for such work. The facility that services the gas turbines produced by Rolls-Royce and the one where Siemens sent one of the 52 MW units for capital repair is in Montreal, Canada.

In the process of introducing economic sanctions against Russia, the EU officials have been careful to exclude Gazprom from the sanction lists since they realized that the interruption of the gas flows might hurt Europe more than it would hurt Russia, at least in the near term. This was never a limiting factor for Canada, which explicitly included Gazprom in its sanctions list.

Sanctioning economic activity is a blunt weapon that may produce unintended results.

Presently, Canadian authorities are refusing Siemens’ request to release the repaired and serviced gas turbine for Nord Stream, since it apparently would violate their sanctions legislation.

While the conundrum drags on, the problem grows bigger, since other gas turbines at Portovaya require capital repairs as well while Siemens does not seem to have an alternative facility to the Canadian workshop that currently performs the necessary service. On the other hand, Gazprom does not want to risk operating the gas turbines that formally require repairs. It seems to be prudent to seek a resolution to the issue now, during warm time of the year, rather than interrupt the flows of Russian gas to Europe in winter when this might become a “life or death” situation.

As a result, only three of eight gas turbines at Portovaya are currently in operation, and the flows via Nord Stream are at record lows. Moreover, a regular summer maintenance for the pipeline is scheduled for July 11-21. During this time gas flows via Nord Stream will stop completely. The “friendly fire” from Canadian sanctions has triggered a large-scale gas supply crisis in Europe. At stake is Europe’s plan to have 80 bcm of gas in storage by the start of the heating season. Now, instead of refilling gas storages in July, Europe might need to withdraw gas from them, creating concerns that targets for storage levels by the start of the heating season won’t be met. 

Gazprom’s CEO Alexey Miller, speaking at the Saint-Petersburg Economic Forum in June reminded that an alternative exists: one string of the Nord Stream 2 pipeline is now filled with gas and is under operating pressure. Gazprom re-directed gas for the other string to Russia’s domestic market when Germany refused to certify the operations of the Nord Stream 2 but even at half capacity Nord Stream 2 could flow about 80 million m3 per day to Germany. The gas turbines for Nord Stream 2 at Slavyanskaya compressor station near Ust-Luga have been produced in Russia (the Ladoga 32 MW units). If Europe and Canada are unable to find a face-saving compromise to deal with the sanctions mess over gas turbines now, by November Germany’s choice might become even more embarrassing: to let Nord Stream 2 flow or risk a full-blown gas crisis and super-high prices in the midst of winter.

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