GIF INSIDE STORY: Russian gas supply alternatives to Nord Stream 2

Author: Diane Elijah


LONDON (ICIS)--The potential completion or cancellation of Russian Gazprom-led Nord Stream 2 pipeline project can reshape Europe’s natural gas imports and transit.

The 55 billion cubic metres (bcm) offshore pipeline would give Russia more options for delivering gas to its European customers under long-term supply contracts, entering Germany.

It can also affect the price of transit by giving Russia a stronger negotiating position for other transit routes, such as Ukraine.

Head of the Russian State Duma (lower house of parliament) energy committee Pavel Zavalny said on 15 April that Nord Stream 2 will be completed by the summer. Germany could start receiving gas via the pipeline during the same timeframe, Zavalny was quoted in the Russian media as saying during a Russian-German parliamentary meeting.

However, Nord Stream 2 is under heavy sanctions imposed by the US. Four of its six investors - OMV, Wintershall, Uniper and Gazprom - acknowledged at the end of last year the increasing risk of having to write off their investment in the project.

OMV, Wintershall, Uniper, Engie and Shell committed to invest up to €950m each in the pipeline, while Gazprom contributed the remaining €4.75bn and is the sole shareholder of the project.

The delays and obstacles in the way of launching the pipeline have raised concerns regarding Russia’s ability to deliver the contracted gas after its long-term transit agreement with Ukraine was slashed to 40 billion cubic metres (bcm)/year from the beginning of 2021. Ukraine was historically the main transit route for Russian gas and years ago used to flow 80% of Gazprom’s deliveries to Europe.

Industry experts say Gazprom is unlikely to successfully call force majeure if Nord Stream 2 is stopped so long as there are other means to deliver gas to the EU. Gazprom has several alternative options at its disposal, all of which can be used in some capacity with or without Nord Stream 2 coming online. Its historic transit routes, such as the Yamal pipeline via Poland and the Ukrainian pipelines could offer additional capacity, for example, but that is subject to availability and negotiations.

Ukrainian transit

According to the 5-year transit agreement signed at the end of 2019, Gazprom holds a transit capacity of 40bcm per year via Ukraine until 2024.

Gazprom can buy additional capacities for gas that would have otherwise been sent via Nord Stream 2 in auctions on a short-term basis.

In 2020, 55.8 bcm transited via Ukraine, according to the Ukrainian gas transmission system operator GTSO, less than the 65bcm provided for in the transit deal with Ukraine for that year.

So far in 2021, Russia only bought additional capacity auctions a month in advance in January 2021 (41mcm/day), and February, March and April (14mcm/day). This suggests the need for additional transit has been limited.

The second line of TurkStream, dedicated to the European market, came online in January 2020 and can transport up to 15.75bcm/year to Bulgaria.

From there, flows can reach Greece, Northern Macedonia, Hungary and Serbia once the Hungary-Serbia connection is built.

The connection is set to start with a capacity of 6bcm/year by October, with potential to further increase to 8.5bcm/year from gas year 2022 if interest during a binding open season for capacity justified the expansion.

Following the end of the long-term transit contracts between Romanian grid operator Transgaz and Gazprom on the Transbalkan pipeline , the Russian producer redirected the volumes it used to transit via Ukraine to the second leg of TurkStream via Turkey.

In 2020, around 20.6mcm/day or 7.5bcm/year was delivered from Ukraine to Hungary and Romania, data from GTSO and Transgaz shows. This means up to 7.5bcm/year could be freed in the 40bcm/year booked by Gazprom via Ukraine and instead could be used to deliver other European countries like Germany, one gas trader told ICIS. A reallocation of flows at the Velke Kapusany delivery point together with a maximisation of TurkStream 2 is likely, the trader added.

“The southern route via Turkey and Hungary will become more and more important. The end of the Transbalkan contract is a proof that, as well as Hungarian storage fully booked for the next five years, which only Gazprom could have done because no other trader would book that much that long in advance,” the trader argued.

All these points suggest Russia’s need for additional transit capacity via Ukraine above the already contracted 40bcm/year may be limited. It is possible Russia may need to book additional capacity on an ad-hoc basis. This is because the current transit agreement has daily caps on the volumes Russia can send via Ukraine, according to Igor Yushkov, an expert of the National Energy Security Fund and the Financial University under the government of the Russian Federation.

“The contract includes daily transit volumes as part of the 40bcm/year. If, on some days, Gazprom wants to transit more than these daily volumes, then it will pay a higher tariff for each additional transited cubic meter,” Yushkov said.

Senior partner of UK-based Morten Frisch Consulting Morten Frisch said this scenario is only likely to be a short-term option if considered by Gazprom.

Long-term agreement

Under a different scenario, Russia could renegotiate with Ukraine for higher volumes in the five-year transit agreement.

“The current contract is very strict for Gazprom. The tariffs are high, the daily caps and ‘transit or pay’ condition are very strict, it is not possible to move volumes even on the next day. Gazprom cannot transit less in summer, when demand in Europe is lower, and more in winter [when demand rises],” Yushkov said.

CEO of GTSO Sergiy Makogon told ICIS that more capacity is available, as much as 146bcm/year - the total technical capacity of Ukraine’s transit system.

“We are ready to offer Gazprom and other shippers as much as 146bcm, Makogon said. The only thing we need is long-term commitment, which will justify our constant fixed costs related with maintenance of such a huge and powerful transit system,” Makogon said.

Some industry experts say Russia and Ukraine are likely to come to some sort of an arrangement under any scenario because they both need that business.

“Ukraine and Russia will have no choice but to negotiate, if Russia decided not to negotiate it would give the US the chance to fill the gap with its LNG,” a source in German government circles told ICIS. “Russia will probably intensify its own LNG exports but they might still need some transport capacity through Ukraine,” the source added.

LNG switch

Russia could also keep its transit via Ukraine to 40bcm/year and use LNG production to cover any need for additional capacities.

“It is possible. Gazprom could develop of bit of LNG together with Novatek,” a trader argued.

LNG is a very feasible way to adjust to EU demand with additional Russian LNG instead of Russian piped gas, according to Andrii Chubyk, a Ukraine-based energy analyst.

On 8 March, Gazprom delivered the first carbon-neutral cargo of LNG in the Atlantic Basin. The Russian-originated cargo was delivered at the UK Dragon terminal. This might be a way to comply with the European Green Deal in the medium term, according to Chubyk. At the same time, it is an option for third Russian producers to enter the European market without crushing Gazprom’s pipeline monopoly and the general Kremlin policy to bypass Ukraine, Chubyk added.

But Frisch said an LNG-based solution is unlikely to be considered by Gazprom because Russian LNG supplied to Europe normally all comes from Novatek’s Yamal LNG plant, in which Gazprom has no equity.

“Gazprom would not willingly give any of its European market share away to Novatek and its partners in Yamal LNG, even if the LNG cargoes in question had been purchased by Gazprom or its now 100% owned subsidiary WINGAS,” Frisch said.

Gazprom’s LNG capacity includes:

-floating storage and regasification unit (FSRU) Kaliningrad LNG (2million tonnes per annum or 2.8bcm/year).

-Far-East-based Sakhalin LNG trains 1 and 2 (10.9mtpa or 15.3bcm/year), 50% owned by Gazprom.

-Cameroon’s FSRU Kribi (2.4mtpa or 3.4bcm/year), in which Gazprom has bought all the offtake.

Title transfer

Another option that has been mentioned over the past few years both by Gazprom and the Ukrainian counterparts is moving the delivery point of Russian supplies to the Russian-Ukrainian border instead of the Ukrainian-European border, thus leaving to European shippers the need to book transit capacity in Ukraine in auctions.

Makogon spoke strongly in support of such arrangement.

“I think Gazprom should offer shippers some flexibility. If a shipper wants to offtake gas at the Ukrainian-Russian border, Gazprom should agree on that, he said. “In such situation 40 bcm might be enough for Gazprom, but other additional volumes could be transited via Ukraine by EU shippers.”

This option, however, is unlikely to suit European companies.

“Nobody in the EU will accept,” a trader told ICIS.

Another market participant agreed as it would mean managing the flows from the Russian border to the EU border which may be tricky.

This would require the renegotiation of a number of European Sales and Purchase Agreements with Gazprom, Frisch said. Since the Ukrainian gas transmission system now in effect is part of the EU gas regulatory system, Frisch did not see any major benefit to Gazprom from this move.

Another solution would call for supplementing any additional capacity required above the 40bcm/year shipped via Ukraine by buying additional transit capacity on the Yamal pipeline via Poland.

“If Nord Stream 2 is stopped, Gazprom will likely be forced to make some sort of deal with Ukraine and/or Poland. These solutions will in turn support the Ukrainian and/or Polish economies while reducing Russia’s income from gas exports to the EU and/or decreasing the competitiveness of Russian piped exports to northwest Europe against Norwegian gas and LNG,” Frisch said.

He added that gas delivery through the Yamal – Europe pipeline’s Mallnow exit point to Germany on 13 April 2021 was the equivalent of 24.8 bcm/year or some 75% of total Yamal-Europe system capacity. In total 56.86% of available firm capacity at Mallnow for delivery to Germany has been booked until the end of September 2021, which is the end of the 2020/21 Gas Year, presumably by Gazprom or buyers of Russian gas. Starting with the 2021/22 Gas Year there are currently no capacity bookings at all on the Yamal–Europe pipeline for delivery to Germany. Should Nord Stream 2 not become operational, Frisch is of the opinion additional booking of capacity by Gazprom on the Yamal-Europe system is now the most likely solution.

However, according to an ICIS analysis, the Yamal capacity may currently be optimised nearly 100% with traders utilising virtual reverse flow at the Mallnow point leaving some of Gazprom’s gas destined for Germany in Poland.

Implications for Nord Stream 2 investors

  • Two of the five EU investors - Wintershall and OMV – reduce €950m commitment to €730m
  • Investors likely to bear financial losses if US sanction effectively scupper completion
  • Polish antimonopoly authority UOKiK imposes $6.5bn fine on the EU investors it considers ‘quasi stakeholders’, as they would take stocks in pipeline company in the event of default on loans
  • Investors and construction companies could seek compensation from German government

Nord Stream 2 scenarios

ICIS Analytics modelled three Nord Stream 2 scenarios to forecast how natural gas flows would change via the other key supply routes to central-western Europe. In all three scenarios commercial flows/nominations are modelled at Greifswald at the German beach for Nord Streams 1 and 2, Mallnow on the Polish-German border and at Velke Kapusany on the Ukrainian-Slovak border.

The models assume Gazprom will seek to deliver net 127 billion cubic metres (bcm) into the central-western European market area in 2021, rising to 147bcm in both 2022 and 2023, keeping a relatively flat profile. These volumes are derived from Russian supply expectations for eastern Europe and Turkey, and from Gazprom’s stated aim to typically deliver in a normal year 200bcm/year into the wider European region. For 2021, Gazprom has lowered this target to 183bcm.

The first scenario considers string 1 of Nord Stream 2 commencing operations in October 2021, with string 2 starting a year later. The second scenario models string 1 flows beginning in October 2022, with the second string starting 12 months later. In all instances the model considers a three-month ramp-up period for a string’s commissioning. The third scenario models no flows via Nord Stream 2 in the forecast period.

In all scenarios, Gazprom would need to book additional short-term capacity via Ukraine to meet the central-western European export targets. The model shows even if some deliveries via Nord Stream 2 are to commence in 2021, Gazprom’s short-term capacity requirement exceed the amount of capacity being offered currently at auction. In recent months, an additional 15 million cubic metres (mcm)/day has been offered, whereas Gazprom would need closer to 40mcm/day for the remainder of the year.

Should even one string begin to flow in 2021 (with that one string running at full capacity by January 2022), there would be no additional need for Gazprom to book short-term capacity via Ukraine from next year onward. This is even with the overall supply target for 2022 increasing by 20bcm year on year. As well as having Nord Stream 2 operational, the ongoing re-routing of flows to eastern-European markets via Turkey, will allow Gazprom to dedicate incrementally more of its existing Ukrainian capacity for flows to Velke Kapusany and beyond.

The models also show that once full operations have begun on both strings of Nord Stream 2 there would be little need for Gazprom to utilise the Yamal pipeline via Poland and into Mallnow.

ICIS currently forecasts LNG demand on a rolling 24-month horizon for many global markets, including Poland, Lithuania, Greece and Croatia and can be accessed here . Corresponding forecasts for western Europe will be released later this year.

For further information on ICIS Analytics regarding these scenarios or the wider European gas market please contact