As analysts from the Oxford Institute for Energy Studies note in their report ‘Catch-22 for Russian gas: Big supply in a disappearing market,’ Russia's gas production in 2022 amounted to 673 billion cubic metres, which is 90 billion cubic metres (12%) less than the previous year. For Russia and the USSR, this was the most significant decline in annual national production since 1990. At the same time, in 2022, Gazprom's gas production decreased even more impressively, by 20%, falling to 413 billion cubic metres.
In a single year, Gazprom lost its largest export market in Europe, and its pipeline gas exports to countries outside of Europe amounted to just 101 billion cubic metres, which is 85 billion cubic metres less than the previous year (-46%). Taking into account the increase in supplies of pipeline gas to China by 5.4 billion cubic metres, the reduction in Russian pipeline gas exports to Europe, including Turkey, probably equates to about 90 billion cubic metres per year. Gazprom will continue to reduce production in 2023, as pipeline gas exports to Europe have reached a minimum.
Exact data on gas production volumes, as well as Gazprom's available production capacities, have been unavailable since the second quarter of 2021 when the company suspended their reporting. The authors of the new report have estimated these indicators for 2022 based on previously available data. They show that the absolute level of Gazprom's available production capacity in 2022 was lower than the level of about 150 billion cubic metres registered in 2015 and 2016. Thus, Gazprom's management knew how to solve the challenges of balancing production in 2022, as they had faced a similar task just a few years earlier.
There is also limited information on the injection and withdrawal of gas from Gazprom's storage facilities in 2022. The company is known to have entered the winter of 2021/2022 with 73 billion cubic metres of gas in its storage facilities, which is the highest level in history. Analysts estimate the excess reserve of Gazprom's production capacity in 2022 to be at approximately 80 billion cubic metres. If Gazprom were to sell these reserves at a price of, for example, $300 per 1,000 cubic metres, it would make additional profits of $24 billion.
If Russia had had previously intended to diversify its gas exports by simultaneously increasing volumes to China, it has now abandoned that strategy, a fact symbolised by the explosions on the ‘Nord Stream’ pipelines. Moscow is urgently seeking new gas export strategies. In October 2022, Vladimir Putin proposed the idea of a Turkish gas hub to President Erdogan, through which Turkey could resell a mix of Russian, Azerbaijani, Iranian, and Turkish gas to Europe. If this were to happen, sanctions against such a mix would cut off the European market from Turkish and Azerbaijani supplies, once again making the energy deficit critical for Europe. Erdogan supported the idea in principle.
However, gas supplies to Turkey have recently faced financial difficulties. The contract export price used to be subject to ‘oil indexation,’ but then Turkey insisted on a different pricing mechanism — hub indexing. As a result, Turkey has faced huge price fluctuations at the gas hub since the end of 2021. Since then, Ankara has been asking Gazprom for permission to defer payments and for new discounts. Researchers estimate that the volume of Russian gas exports to Turkey via the existing Blue Stream and Turkish Stream pipelines is 20-25 billion cubic metres per year.
Moreover, Russia plans to increase its gas exports to China to 48 billion cubic metres by 2025 (38 billion cubic metres through the Power of Siberia-1 pipeline and 10 billion cubic metres through the so-called Far Eastern route), which should provide it with an additional stream of export revenue. Negotiations between Gazprom and the China National Petroleum Corporation (CNPC) on this project have been ongoing for several years, and its implementation requires the construction of a new pipeline from Yamal to China via Mongolia.
While the development of gas fields in Eastern Siberia is going according to plan, prospects for a radical increase in gas production on Sakhalin Island appear uncertain, according to the report. A review of the available options at Gazprom's disposal narrows the possibilities for Russia to increase its exports to China to the Sakhalin-3 project, specifically the South Kirinskoye field, which is the only one with sufficient reserves. Its expected annual gas production is 21 billion cubic metres.
However, the development of this field has been in doubt since the introduction of US sanctions against the project in 2015. In April 2021, Gazprom announced that the start of production at the field had been postponed until 2024. Analysts note that the company's ability to launch production at the site will be a litmus test for its ability to independently develop advanced underwater production technologies.
Finally, there is the idea of a so-called gas alliance between Russia, Kazakhstan, and Uzbekistan, which was announced in November 2022. Its implementation will require time and investment, and the position of the ‘allies’ towards this project appears extremely cautious.
Thus, the researchers note that Russia is not in control of any of the three possible options and will have to depend on its partners, who will take advantage of this situation to get discounts and other concessions from Gazprom. This will ultimately lead to a decrease in revenues. For example, China is negotiating an increase in gas exports extremely slowly, while Gazprom is literally sitting on a ticking time bomb, risking a sharp reduction in export volumes and revenue, which will force it to be much more compliant.
According to the analysts at the Oxford Institute, Russia has no more than two to three years to start implementing a new export strategy. If no solutions are found, the risks of losing export revenues may force the Russian authorities to weaken the ruble and raise domestic gas prices.
As analysts from the Oxford Institute for Energy Studies note in their report ‘Catch-22 for Russian gas: Big supply in a disappearing market,’ Russia's gas production in 2022 amounted to 673 billion cubic metres, which is 90 billion cubic metres (12%) less than the previous year. For Russia and the USSR, this was the most significant decline in annual national production since 1990. At the same time, in 2022, Gazprom's gas production decreased even more impressively, by 20%, falling to 413 billion cubic metres.
In a single year, Gazprom lost its largest export market in Europe, and its pipeline gas exports to countries outside of Europe amounted to just 101 billion cubic metres, which is 85 billion cubic metres less than the previous year (-46%). Taking into account the increase in supplies of pipeline gas to China by 5.4 billion cubic metres, the reduction in Russian pipeline gas exports to Europe, including Turkey, probably equates to about 90 billion cubic metres per year. Gazprom will continue to reduce production in 2023, as pipeline gas exports to Europe have reached a minimum.
Exact data on gas production volumes, as well as Gazprom's available production capacities, have been unavailable since the second quarter of 2021 when the company suspended their reporting. The authors of the new report have estimated these indicators for 2022 based on previously available data. They show that the absolute level of Gazprom's available production capacity in 2022 was lower than the level of about 150 billion cubic metres registered in 2015 and 2016. Thus, Gazprom's management knew how to solve the challenges of balancing production in 2022, as they had faced a similar task just a few years earlier.
There is also limited information on the injection and withdrawal of gas from Gazprom's storage facilities in 2022. The company is known to have entered the winter of 2021/2022 with 73 billion cubic metres of gas in its storage facilities, which is the highest level in history. Analysts estimate the excess reserve of Gazprom's production capacity in 2022 to be at approximately 80 billion cubic metres. If Gazprom were to sell these reserves at a price of, for example, $300 per 1,000 cubic metres, it would make additional profits of $24 billion.
If Russia had had previously intended to diversify its gas exports by simultaneously increasing volumes to China, it has now abandoned that strategy, a fact symbolised by the explosions on the ‘Nord Stream’ pipelines. Moscow is urgently seeking new gas export strategies. In October 2022, Vladimir Putin proposed the idea of a Turkish gas hub to President Erdogan, through which Turkey could resell a mix of Russian, Azerbaijani, Iranian, and Turkish gas to Europe. If this were to happen, sanctions against such a mix would cut off the European market from Turkish and Azerbaijani supplies, once again making the energy deficit critical for Europe. Erdogan supported the idea in principle.
However, gas supplies to Turkey have recently faced financial difficulties. The contract export price used to be subject to ‘oil indexation,’ but then Turkey insisted on a different pricing mechanism — hub indexing. As a result, Turkey has faced huge price fluctuations at the gas hub since the end of 2021. Since then, Ankara has been asking Gazprom for permission to defer payments and for new discounts. Researchers estimate that the volume of Russian gas exports to Turkey via the existing Blue Stream and Turkish Stream pipelines is 20-25 billion cubic metres per year.
Moreover, Russia plans to increase its gas exports to China to 48 billion cubic metres by 2025 (38 billion cubic metres through the Power of Siberia-1 pipeline and 10 billion cubic metres through the so-called Far Eastern route), which should provide it with an additional stream of export revenue. Negotiations between Gazprom and the China National Petroleum Corporation (CNPC) on this project have been ongoing for several years, and its implementation requires the construction of a new pipeline from Yamal to China via Mongolia.
While the development of gas fields in Eastern Siberia is going according to plan, prospects for a radical increase in gas production on Sakhalin Island appear uncertain, according to the report. A review of the available options at Gazprom's disposal narrows the possibilities for Russia to increase its exports to China to the Sakhalin-3 project, specifically the South Kirinskoye field, which is the only one with sufficient reserves. Its expected annual gas production is 21 billion cubic metres.
However, the development of this field has been in doubt since the introduction of US sanctions against the project in 2015. In April 2021, Gazprom announced that the start of production at the field had been postponed until 2024. Analysts note that the company's ability to launch production at the site will be a litmus test for its ability to independently develop advanced underwater production technologies.
Finally, there is the idea of a so-called gas alliance between Russia, Kazakhstan, and Uzbekistan, which was announced in November 2022. Its implementation will require time and investment, and the position of the ‘allies’ towards this project appears extremely cautious.
Thus, the researchers note that Russia is not in control of any of the three possible options and will have to depend on its partners, who will take advantage of this situation to get discounts and other concessions from Gazprom. This will ultimately lead to a decrease in revenues. For example, China is negotiating an increase in gas exports extremely slowly, while Gazprom is literally sitting on a ticking time bomb, risking a sharp reduction in export volumes and revenue, which will force it to be much more compliant.
According to the analysts at the Oxford Institute, Russia has no more than two to three years to start implementing a new export strategy. If no solutions are found, the risks of losing export revenues may force the Russian authorities to weaken the ruble and raise domestic gas prices.