Stopping the Nord Stream 1 gas pipeline
On 11 July, in line with previous announcements and annual practice, Gazprom stopped gas deliveries to European customers via the Nord Stream 1 (NS1) pipeline, which runs from Russia to Germany along the Baltic Sea bed.
Although the supply interruption is thought to be of a technical nature (related to planned maintenance work), a number of European commentators and officials (including Germany’s Economy Minister Robert Habeck, France’s Economy and Finance Minister Bruno Le Maire and European Commission Vice-President Valdis Dombrovskis) are concerned that supplies will not be fully or even partly restored once the interruption ends (21 July). Already in June, Gazprom reduced gas supplies via NS1 (from 167 million m3 to 66 million m3 per day), citing one of the reasons being problems related to the sanctions-related blockage in Canada of Siemens gas turbines for the compressor station being repaired there. Russian presidential spokesman Dmitry Peskov rejected accusations levelled at Moscow that the decisions were political, and indicated (on 8 July) that the return of the turbine would help boost supplies after the technical break.
On 10 July, Canada’s Energy Minister Jonathan Wilkinson announced that the government would allow an exception to the country’s sanctions and grant temporary, revocable approval for the delivery to Germany of Siemens gas turbines that are being repaired in a Siemens subsidiary in Montreal, to be later delivered to Russia’s Gazprom. According to media leaks (published in the Canadian daily The Globe and Mail on 13 July), the approval is to last for two years and applies to six turbines. The Canadian decision was criticised by the Ukrainian authorities, including President Volodymyr Zelensky. On the same day, the Ukrainian Foreign Ministry conveyed its protest in a verbal note to the Canadian ambassador in Kyiv. Also, Ukraine’s energy and interior ministries called on the Canadian parliament to halt the return of the turbine, arguing that otherwise Moscow would gain support in its hybrid war against Europe. The statement stressed that the Russian side is not taking advantage of existing opportunities to increase gas supplies through Ukrainian territory.
On 10 July, the Canadian government’s decision was welcomed by German Chancellor Olaf Scholz. On 11 July it was also supported by the US State Department. In doing so, it stated that its implementation would allow Germany and other European countries to replenish their gas stocks and protect themselves from Russian energy blackmail. On the same day, a spokesperson for the German government stated that the German side had taken note of the critical position of the Ukrainian authorities regarding the return of the turbine, and stressed that EU sanctions do not cover equipment related to the supply of natural gas. A spokesperson for the European Commission gave a similar assessment.
On 8 July, during a meeting with members of the government on the fuel and energy industry, President Vladimir Putin called on the cabinet and Russian energy companies to prepare for a Western embargo on imports of Russian energy and to intensify efforts to diversify its exports to the South and East.
On 11 July, the Krasnodar Krai court in Rostov-on-Don, following an appeal by the KTK/CPC consortium (the operator of the oil pipeline from the Kazakh Tengiz field to the Russian terminal in Novorossiysk), amended the Novorossiysk district court’s order of 5 July and replaced the suspension of the company’s activities for 30 days for environmental violations (and consequently the operation of the oil pipeline) with a fine of 200,000 roubles (currently equivalent to approximately $3,300).
On 13 July, the International Energy Agency’s (IEA) monthly report was published, showing, among other things, that Russian crude oil production increased by 490,000 barrels per day (b/d) in June – to 11.07 million b/d. Crude exports decreased in June to 7.4 million b/d, down 250,000 b/d from May this year. (Crude oil accounted for about 5 million b/d of this and oil products, whose export volume remained unchanged, accounted for about 2.4 million b/d). At the same time, Russia’s oil export revenues increased by $700m in June compared to May and exceeded $20bn per month. This was due to an increase in the average price of Urals crude oil, which in June (according to the Russian Ministry of Finance) stood at $87.25 per barrel, 10.7% higher than in May this year.
On 13 July, credit rating agency Moody’s reported that Germany’s plan to reduce its share of natural gas imports from Russia to 10% by 2024 will be very challenging (despite having already managed to reduce this percentage from 60% to 35% in April this year). Italy, on the other hand, could become completely independent of Russian gas imports by 2025. According to the agency’s assessments, the possible suspension of gas supplies by Russia via NS1 and the resulting problems would cause losses estimated at 3–6% of Germany’s GDP and 1–3% of Italy’s GDP.
On 14 July, Russian Foreign Ministry spokeswoman Maria Zakharova described the plans discussed within the G7 to introduce price caps on Russia’s oil exports as “anti-market, adventurist and voluntarist”. She also threatened that their enactment would lead to a rise in global gas prices. Deputy Foreign Minister Sergei Ryabkov had earlier called the reports a psychological war waged against Russia by the West. These plans have already been debated on the initiative of the US, including at the G7 summit in Elmau on 26–28 June. In May, US Treasury Secretary Janet Yellen mentioned them. According to media leaks, they would involve setting a capped price level for Russia’s oil exports while establishing restrictions in case of exceeding it (notably in the form of a ban on freight insurance). On 14 July, Bloomberg reported that the Russian government had drawn up a plan to introduce a national oil benchmark in October this year and to make customers switch to a model where it is purchased on the Russian platform (rather than on international commodity exchanges). Moscow’s intention is to achieve a satisfactory level of trading and price by spring 2023, which will protect it from possible price caps set by Western countries. Russia has been trying to create its own oil benchmark for more than ten years but so far it has been unsuccessful due to the insufficient volumes traded on Moscow’s Spimex exchange.
According to India’s statistics, its imports of Russian crude oil rose to an average of 950,000 b/d in June, up 15.5% from May this year. Due to a significant discount on Urals crude, Russia now accounts for about 20% of India’s crude imports, and is its second largest source of oil after Iraq. Preliminary data for China suggest that Russia (whose exports there were around 2 million b/d for another month) remained China’s largest importer of crude oil. Russian natural gas exports to China via the Power of Siberia pipeline are also increasing. According to Gazprom data of 1 July, in the first half of 2022 it increased by 63.4% compared to the same period last year. The company forecasts that around 15 billion m3 of crude will be exported via this route this year.
Table. Oil and gas prices from 8 to 14 July this year (at end of day)
Source: author’s compilation based on data published on Прайм, 1prime.ru.
Commentary
- Canada blocked the return to Russia of a gas turbine for the Portovaya compressor station near Vyborg (operating on the Nord Stream 1 pipeline) due to the fact that it used a propulsion system developed from a Rolls-Royce aircraft engine also used in combat planes, which was considered a dual-purpose technology. Another turbine of this kind is still at the Montreal plant owned by the UK-based Industrial Turbine Company Limited (ITCL), which is a subsidiary of the German company Siemens. The Canadian government’s decision to return the turbine to Germany followed an agreement reached after intensive behind-the-scenes German-Canadian talks, presumably in consultation with the US government. The handover of the turbine (according to reports in the Canadian media it has already left Canada) to the Russian side is expected to take place in about three weeks. The Canadian-German agreement is also expected to enable the refurbishment of a further five Siemens turbines for Gazprom.
- The expectation (expressed in some German or American commentaries) that the return of the turbine will result in Gazprom restoring gas supply through NS1 to normal levels (the capacity is 170 million m3 per day) is unrealistic. Indeed, there are political intentions behind Moscow’s decision to significantly reduce transmission through NS1. The intention is to increase gas prices on the European market and cause disturbance there, make it more difficult to fill up gas storage facilities (especially in Germany) before the heating season and, above all, to cause economic damage to leading European consumers (especially in Germany, which is heavily dependent on imports from Russia). The aim is to provoke social unrest, which, in the intentions of the Kremlin, would influence a revision of the attitudes of individual governments towards Russia and the Russian-Ukrainian war, including increasing their political pressure on Kyiv to quickly end the hot phase of the conflict on terms favourable to Moscow.
- Russia could easily replace most of the transport ordered through NS1, especially by using the Brotherhood pipeline running through Ukraine (as well as the Yamal pipeline running through Poland), but is not doing this, maintaining supplies through this one route alone at an unchanged level of around 41 million m3 per day (against the 109 million m3 per day stipulated in the current contract, of which 77 million m3 through the only currently active Sudzha entry point). The lack of good-will from the Russian side is also demonstrated by the fact that Gazprom’s communiqué preceding the significant reduction (by 60%) in transmission via NS1 in June this year mentions among the reasons not only the blockage of gas turbines in Canada, but also the end of the technical residual life of other turbines (a total of eight are in operation at the Portovaya station, including one reserve). Allegedly, it also revealed unspecified technical problems with their engines. Also, Gazprom released a brief announcement on 13 July stating that the company had not received a guarantee for the return of the turbines being repaired in Canada and therefore could not guarantee an increase in supply via the NS1 pipeline, suggesting that it will not resume supplies.
- It is therefore to be expected that Russia will continue to blackmail European customers by arbitrarily reducing (or even temporarily withholding) gas supplies, especially since it will take the concession of Germany and Canada, combined with some (almost panicked) European comments regarding the expected energy crisis in Europe, as proof that its aggressive tactics are effective.
