Russia’s state-owned natural gas company Gazprom has seen its market value drop by nearly 90 percent over the past six years, and it has itself to blame. As the FT reports, Gazprom’s decision (twice) to turn off gas to Ukraine in recent winters has pushed Europe into seeking ways to blunt Putin’s energy weapon:
The cut-offs sparked efforts by EU authorities and member states to complete the creation of a European single market in energy, diversify sources of gas, and reduce reliance on Russia. Brussels became cautious towards new Russian pipelines. The shift intensified friction with Gazprom. It blamed Kiev for damaging its reputation in Europe and stepped up its efforts to build pipelines such as Nord Stream and South Stream to bypass Ukraine.
In response to Gazprom’s inconstant delivery to Ukraine, Europe has made progress on two important fronts in diversifying away from Russian supplies. First, countries are moving to beef up the infrastructure necessary to import liquified natural gas (LNG)—Lithuania is already importing the chilled hydrocarbon by way of a floating import terminal, while Croatia is moving ahead with plans to construct its own import facility off its Adriatic coast. With the U.S. now adding shale gas into the mix, the global LNG market is well-supplied these days, which has depressed prices to levels that make LNG imports increasingly attractive for Europe.
Secondly, Europe is investing in its gas pipeline infrastructure by constructing more so-called interconnectors that allow members to trade natural gas between one another. In this way, countries can effectively counter Gazprom’s divide and conquer strategy by reselling gas purchased from Russia. Europe has already made plenty of progress in building out this reverse flow capability over the past few years, but as Reuters reports, it intends to invest even more towards that goal:
EU member states on Tuesday endorsed a plan to invest more than 200 million euros ($217 million) in cross-border energy infrastructure projects designed to help curb dependence on Russian gas.
The European Commission is seeking to improve power and gas connections across the European Union’s 28 member states to allow better distribution of available supplies as part of a single energy market.
Ukraine went from importing more than 40 billion cubic meters (bcm) of natural gas from Gazprom in 2011 to just over 6bcm last year, and though a certain portion of that decline can be attributed to the general economic malaise gripping the war-torn country (Ukrainian GDP has shrunk nearly 20 percent since 2013), Leonid Bershidsky notes that the “semi-official state of war” between Ukraine and Russia is the key driver there. But if that’s the “why,” the “how” of that change comes courtesy of reverse flows, as Kiev started importing natural gas that Slovakia purchased from Gazprom.
Europe’s gain is Russia’s loss, and it couldn’t come at a worse time for Moscow. Low oil prices are already pushing the ruble to record lows as the petrostate struggles to cope with lost revenues, but the bearish crude market is also hurting Gazprom. Most of Gazprom’s contracts with its European customers are tied to oil prices, which was a frequent point of contention when crude was trading above $100 per barrel. Now, with Europe’s Brent crude benchmark hitting 12 year lows (today trading below $28), that linkage is working decidedly in Gazprom’s customers’ favor, and wreaking havoc on the state-owned company’s bottom line. According to Bloomberg, Gazprom’s European prices “will probably slump 37 percent this quarter to levels not seen since 2005 because of the rout in oil.”
Every oil producer—from U.S. shale firms to OPEC’s petrostates—is reeling from today’s plunging prices, but Russia looks to be the biggest loser of them all.