Alexey Belogoryev: "Gazprom is turning into a company with a moderate profit"

Alexey Belogoryev: "Gazprom is turning into a company with a moderate profit"

Alexey Belogoryev: "Gazprom is turning into a company with a moderate profit"

19 July, 17:38
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An interview for those who are confused in the flow of news about the intricacies of Russian gas exports, still do not believe that Europe will survive without a Gazprom pipe and that the “northern streams” will turn into scrap metal at the bottom of the sea.

Yekaterina Maksimova

Novye Izvestia interviewed Alexey Belogoryev, Deputy Director for Energy at the Institute of Energy and Finance. The expert predicted how the eurozone countries would spend the coming winter, explained from which countries the Europeans would have to take gas "with a fight" and warned that it was time for the domestic market and the Russians themselves to start preparing for an increase in prices for blue fuel.

-Data on hectic gas reserves in European countries are updated daily. At the moment, how much are the vaults in the eurozone filled with?

-The volume of gas reserves in underground gas storage facilities in the EU as of July 17 is, on average, 64.4%. In many countries they are higher. In Germany already 65%. The worst situation remains in the countries of Eastern and Central Europe: in Bulgaria, Croatia, Hungary, Latvia and Austria they are still below 50%. In general, stocks are replenished much more actin than last year. And if there are no problems with current supplies, then the reserves will be brought up to 80-85%, and under favorable conditions even up to 90% by the end of October.

How many months will this be enough for Europeans? And in what autumn-winter month will all the most interesting things begin for them?

-Gas reserves cannot be enough to cover the entire winter demand. Their selection must be combined with large and stable import supplies. Reserves are needed, first of all, on the coldest winter days, when gas pipelines simply do not have time to deliver due to technical limitations. In addition, they play an important economic role, making it possible to equalize the seasonal fluctuations in demand and make it possible for gas companies to earn on the seasonal fluctuations in prices. Gas prices in Europe tend to be much higher in winter than in summer.

How is Europe going to survive the winter then?

-Difficult. As recently as July 18, Fatih Birol (Executive Director of the International Energy Agency - ed.) published a detailed commentary on this subject, in a very gloomy tone. There are serious concerns, but there is no one ready-made solution. In order to replace Russian gas, a whole range of measures is needed. Some measures are already being taken, others are just outlined, but there is little movement.

The main substitution of Russian gas so far is provided by a sharp increase in LNG imports, but its supply is unstable and will be clearly insufficient in the winter period. Therefore, the main idea of F. Birol is: it is necessary to immediately reduce demand, incl. during the remaining warm months.

Indeed, reducing demand in various ways is potentially the most effective measure. Thus, in the electric power industry (it accounts for 25% of gas consumption in the EU), it is planned to switch to coal, fuel oil, renewable energy, and in some countries also increase the generation of nuclear power plants.

- That is, now Europe is not up to its favorite topic - the development of "green energy"?

-Vice versa. Now the "golden age" for "green energy" has come, because, firstly, very high prices for oil and gas, which means that even the most expensive investment projects pay off.

Secondly, now more than ever wind, sun, all types of renewable energy (RES) are in demand. According to Goldman Sachs, the complete replacement of Russian gas in the EU (according to the European Commission's REPowerEU plan), taking into account the achievement of the set climate goals, will require total investments in the EU countries in the amount of 3.7 trillion euros by 2030, of which 27% is investment in new RES power. As a result, if in 2016-2020 only about 20 GW of new renewable energy capacities were commissioned in the EU annually (in 2021 - 30 GW), now it is necessary to introduce 100 GW every year, and after 2026 - more than 150 GW.

Therefore, there are no contradictions here. Of course, Europe did not plan to abandon Russian gas until the 2040s, but European countries gradually intended to reduce the consumption of "blue fuel". The general attitude towards gas in the EU in recent years has been quite negative.

Everything that is happening now, current world events - it has come as a very unexpected surprise, especially for energy companies that trade gas. On the other hand, the "greens", who fought against the "dominance" of Russian gas in Europe, are satisfied. They waited for the moment when our gas became politically inconvenient and the question arose that supplies would stop in a matter of years, if not months.

- A year ago, no one would have believed that Europe could suddenly refuse the services of Gazprom ... Still, what can replace our gas in such a time frame?

- When we talk about the replacement of Russian gas, we need to separate short-term prospects, and this is the period of the upcoming winter, and long-term ones, that is, what will happen in a few years.

The biggest problems are what is happening right now. Because Russian gas occupied up to 40% of gas consumption in Europe. This is a lot, of course. And this gas cannot be quickly and even more completely replaced by other sources.

This year deliveries from Norway have sharply increased, they extract the maximum from what they can. Supplies of liquefied natural gas to Europe have increased sharply, while Algeria, which is the third largest supplier, is reducing supplies for internal reasons (albeit after a sharp increase in 2021).

Europe's main hopes are for an increase in LNG imports, and so far they have come true. But how long this will last is unclear. The main consumers of LNG have traditionally been the countries of Northeast Asia, where the so-called premium pricing model has been operating for decades. That is, Japan was ready to overpay for gas so that suppliers would be guaranteed to focus on the Japanese market.

Accordingly, LNG prices in Asia have always been higher than in Europe. And liquefied gas was supplied to Europe on a residual basis - what remained unclaimed on the world market went there, because prices in Europe were the least attractive. Now the situation has turned 180 degrees. Europe has had premium prices since last winter, and Europeans are overpaying for gas and taking it away from Asian consumers.

In the first half of this year, liquefied gas was delivered to Europe at a record high, but several factors played into the hands of the Europeans at the moment, including warm weather in Asia and lockdowns in China. But this is a rare combination, in which Asian demand for gas formed in the first half of the year.

Most likely, in the second half of the year and next year, demand in Asia will begin to grow again. At the same time, unlike Europeans, most Asian consumers do not have a choice where to take resource. The same Japan and Korea do not have pipeline supplies, and they can only rely on LNG. Therefore, in the event of an increase in domestic demand, they will be forced to outbid European prices.

The current expectations are as follows: in the second half of the year, the situation with LNG supply on the European market will begin to deteriorate. How sharply - here again, a direct dependence on weather conditions. If there are low temperatures in Asia, a relatively cold winter, which happens once every few years, then the situation could be much worse.

Therefore, returning to the question of how Europe will winter, a lot will depend on weather conditions, incl. in other parts of the world. Depending on the temperature, consumption varies greatly - in the annual range of up to 60 billion cubic meters of gas.

- If the Ukrainian conflict had happened not in February, at the end of the heating season in Europe, but, for example, in October. How much would the rhetoric and position of Europe change?

- Deliveries of Russian gas began to decline at the least painful moment for consumers. The heating season ended at the end of March. And July is generally the bottom of demand. And we must understand that 40% of gas demand in the European Union falls on households, and they use gas primarily for heating. Therefore, it is so important for them now to fill the storage as much as possible.

- Do you personally believe in a series with a turbine for Nord Stream? Some of your colleagues are sure that supplies were not dependent on the turbine stuck in Canada. There are eight more turbines. Stopping Nord Stream, including for maintenance work, is an exclusively political story.

- Why Gazprom needed to take 5 out of 8 turbines out of operation at once - no one can explain this. Gazprom itself is confused in the testimony. I'm not ready to judge here, it's a black box. And besides Gazprom, in fact, few people have access to the technical side of the issue. All the information is from Alexey Miller and from Rostekhnadzor, probably.

It is very difficult to prove, but in Europe, Gazprom's version is not believed. They don't believe at all. They believe that the decline in supplies is due to political motives. I'm not ready to take one side in this case. They can only state that counterparties in Europe are not satisfied with Gazprom's explanations.

- And after July 21, when the preventive maintenance is over, will Gazprom, your forecast, resume deliveries? Some Russian analysts are calling for everything to be done to prevent Europe from filling up the vaults, as this is a strategic and economic defeat for Russia.

- It seems to me that Gazprom will resume supplies via Nord Stream. At least at the level that was before the start of the repair, that is, approximately 40% of the usual level.

And then the question is in this very turbine, which will probably be delivered in August. And then Gazprom will either have to resume supplies at full capacity, or give some additional explanations. Because so far all the arguments are reduced, first of all, to this turbine. And that for some reason, several more turbines were temporarily unusable at exactly the same time. If deliveries are not resumed, then Gazprom will be in a very unpleasant situation in terms of reputation. In the meantime, all explanations boil down to the problem of sanctions from Canada (the turbine was detained there), which does not satisfy Europe.

- Do Gazprom's rehearsal risks play any role in such a situation? Force majeure - there is already an explanation.

-Of course, we can stop exporting anything to Europe, including gas, but this is, firstly, a matter of income. It was Europe that provided the windfall profits for the Russian gas industry, to which everyone is accustomed. No other market, including China, can provide us with anything like this. There is no substitute for the European market, either from a technical point of view (we cannot redirect supplies in the coming years), or from an economic point of view.

And, secondly, Gazprom now supplies all gas to Europe under long-term contracts. And if Gazprom maliciously violates these contracts, then consumers have every right, and they will do it, to apply to the Stockholm Arbitration. And Gazprom is facing multibillion-dollar fines in the future. Gazprom has always considered long-term contracts as its protection, but at the present time, if someone really sets a goal to stop gas supplies to Europe (I'm not sure about this), then Gazprom, as a company, faces very big legal risks.

- "Nord Stream -2", in the construction of which billions of euros were invested, can it be dismantled for scrap?

-Some experts and politicians in Europe believe that the reduction in supplies via Nord Stream 1 is Gazprom's latest attempt to lobby for certification of Nord Stream 2.

Why was it needed at all, if by 2030 Europe planned to slide into the Russian gas pipeline?

-That's a good question. If the EU really and consistently achieves a reduction in gas supplies from Russia and is able to replace it, then Nord Stream 2, of course, will not be needed. This is now an open question. But in that case, obviously, Nord Stream 1 will not be needed either. These assets will become scrap metal at the bottom of the sea.

But still, one cannot rule out the scenario that political relations between Russia and the EU will somehow normalize. And this may happen earlier than in 2027-2030.

In this case, of course, we will not regain the status quo in terms of supply volumes, but some contracts will continue to be executed and then Nord Stream will remain in demand.

Let me also remind you that in addition to Nord Stream 1, gas was previously supplied through Belarus and Poland via the Yamal-Europe pipeline, which came under fire from bilateral sanctions in the spring and has not been used at all since May 11. And this is quite a powerful gas pipeline. Plus, Gazprom is very much reducing supplies through Ukraine.

And now our giant has only three routes left: Nord Stream 1, Ukraine in a truncated version, and Turkish Stream, which continues further in the form of the Balkan Stream and part of the gas through it reaches, among other things, Hungary.

Accordingly, if we proceed from the scenario that the demand for Russian gas in the EU remains, but will fall sharply by 2030, then it would be best for Gazprom to leave supplies only via Nord Stream and Turkish Stream, completely stopping transit through Belarus and Ukraine.

But in general, the prospects for Nord Stream 2 are extremely vague and so far look sad. At the same time, it cannot be said that politically this is a completely “dead” project: it still remains in the spotlight. Its fate depends primarily on the general political relations between Russia and Germany in particular and the European Union as a whole.

- Germany will be able to spend the winter only at the expense of Russian gas?

- This is also a difficult question. In fact, over the past few weeks, Europe has been actively discussing the scenario of a complete halt in Russian gas supplies on the Russian initiative. Many fear that Russia will "block" the pipe. And this is being discussed very actively, all kinds of organizations are calculating what the cumulative losses will be from this.

Germany in this case, as you know, will be one of the most vulnerable countries, along with Austria, Italy and others. And above all, the German gas-intensive industry is vulnerable - petrochemicals, metallurgy, cement production, etc.

Germany does not yet have its own LNG terminal, but the country is in the center of the European gas market, so Germany can receive the same LNG from other countries in a regasified (pipeline) form - from France, Great Britain. Plus, there is Norwegian gas and our own production. But without Russian gas, Germany will in any case have to drastically reduce and ration gas consumption in the winter, especially for industrial enterprises.

-The Baltic countries and Finland, which have already refused Gazprom's services, will they still ask for Russian gas in winter?

- They have a more difficult situation than, for example, Poland, since this region is isolated from the rest of the EU gas market in terms of gas transport links.

But if the winter is not too cold and LNG supplies are stable, they should have enough gas, taking into account the accumulated reserves in Latvia. But there are risks. Much will depend, as I said, on the weather. Temperature and LNG are two key factors. And I repeat: in the scarce LNG market, serious passions for supplies will boil.

-The European Union will quarrel over the internal division of gas?

- I think no. On the contrary, the idea of so-called European energy solidarity is now very popular. Everyone is calling for it and so far there are no signs that they will swear, although it is obvious that the situation in the EU countries is different.

France can afford to give up Russian pipeline gas for one or two, while Hungary, Slovakia or Austria, which are inland, have no direct access to either LNG or Norwegian gas.

But, most likely, Gazprom will support deliveries to Hungary and Slovakia even if it stops those supplies to Germany due to special political relations. In Hungary, yes.

Even if Gazprom blocks other directions, in my opinion, deliveries via the Turkish Stream will be supported. Since Russia has obligations to supply Serbia. And part of the gas is now supplied to Hungary through the same stream. "Zero deliveries" to Europe do not mean that they will be completely abandoned, some volume to individual countries, obviously, will remain.

- What are the prospects for the Yamal LNG project now?

- In various proportions, Yamal LNG has traditionally supplied gas to both Europe and Asia.

There is little LNG on the world market, it is in short supply. And our plants are in high demand. Another thing is that tough technological sanctions have been imposed against new Russian projects - Arktika LNG 2, Baltic LNG, etc. And everything is rather complicated there due to the fact that European companies had a virtual monopoly on technologies and production of equipment for large-tonnage liquefaction gas. There, apparently, for all projects there will be a shift in the commissioning period by 2-3 years.

In other words, Russia is currently unable to increase LNG supplies. Our current limit is 30-31 million tons per year. And while there is no way to increase supplies, but what we produce will be supplied. Another thing is that with discounts, like coal or oil. But it is profitable to buy LNG from Russia due to discounts.

- The world leaders in LNG are the USA, Qatar and Austria. Will the Ukrainian conflict significantly strengthen the position of the United States in this market?

-The United States is also a tangle of various internal interests. Yes, it is beneficial for companies that export LNG. This is beneficial for the extractive companies, but it is not beneficial for the mass consumer in America, because gas prices have skyrocketed. They remain, of course, much lower than in Europe, but for the American market they are super high. For both the Americans and Biden, given the imminent congressional elections, this is a problem. The situation is ambiguous, in fact.

- Are the gas prices prevailing in Europe unprecedented? And amid expectations that the ECB will raise its key rate, will prices for gas supplies to Europe drop?

-There really were no such prices, these are unprecedentedly high prices. I'm not sure that the increase in rates in Europe and the US will greatly affect the cost of gas. They will most likely affect oil prices, there is a dependence there. And gas prices have now got rid of the oil market and react, first of all, to the balance in the global LNG market, to the level of reserves in Europe and to Russian gas supplies. That is, fundamental factors are important - the balance of supply and demand. And in this sense, the change in rates does not affect so much.

- Can you give two long-term forecasts for Gazprom: the most optimistic and the most pessimistic.

- I'm not sure that in this case it makes sense to give a wide range of estimates. In fact, Gazprom as a company, not everything is so bad. Even if he is forced to completely stop deliveries to Europe, he still has a domestic market.

It must be understood that 2/3 of the gas produced in Russia is also consumed here. And this is actually very important. Gazprom and the Russian gas industry in general have a very strong reliance on the domestic market. And there is an opportunity to develop it, to increase demand through gasification and stimulation of natural gas industries. As did, for example, the same Germany.

Another thing is that a sharp decline in export earnings will sooner or later lead to the fact that the Russian government will somehow liberalize prices for commercial consumers in Russia. And that means higher prices to keep gas companies' revenues up.

In other words, Gazprom and the gas industry have a fairly good margin of safety. Long term, I mean. Plus the availability of infrastructure, a very expensive structure was built back in Soviet times and in recent decades.

There are also export opportunities - China, Turkey, EAEU countries, LNG supplies. They are much less profitable, I repeat. The same LNG deliveries so far bring us much less money, especially to the budget. But all the same, exports will remain and after a short shock fall will begin to grow again.

Another thing is that Gazprom will stop being that "cash cow", a super-rich company, to which we are accustomed. There will be no such margin, the usual excess profit. It will be just such a state-owned company with moderate profitability. Moreover, the main source of profit will come from the domestic market.

The main risk here is for consumers in Russia, because in such conditions lobbying for higher gas prices is increasing.

- And now Gazprom is skimming the last cream off the European market...

- Yes, the overall economic losses from the fact that we prematurely and sharply reduce exports to Europe will be huge. This will be a painful issue for the country's budget in the coming decades. I repeat: before the 2040s and even, perhaps, after 2050, Europe did not plan to completely abandon Russian gas. Current events have accelerated this process unprecedentedly and made it tougher.

-Who will remain the main importer of Russian gas. As with oil and coal - the only way to Asia and only at a discount?

-China on the "Power of Siberia" and the new "Far Eastern Route" (it will work by the middle of the decade). Gazprom is now lobbying in every possible way for the construction of the Power of Siberia-2. This is about 50 billion cubic meters. Many questions remain there, but theoretically after 2030 it may also start working.

The Chinese market is quite promising. Another thing is that the Chinese are not at all ready to pay as much as the Europeans. They love to get everything as cheap as possible. These are consumers of a different quality.

In addition, five years ago it was clear that Russia would stake on the development of LNG. In this sense, nothing has changed. Therefore, now a lot depends on how quickly and efficiently we can replace equipment for large-tonnage gas liquefaction, develop our own analogues and launch their serial production. Import substitution in this industry is perhaps the most important and medium-term, and even more so long-term task for the gas industry.

- Why do you think Alexey Miller has only once spoken on such important topics for the industry since February? questions?

-Every statement has a price. Especially for the head of the company, which is under fire from international criticism. I think he's just being advised not to add fuel to the fire.

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