A European gas market crunch and the completion of the Nord Stream 2 pipeline have brought renewed calls for the Kremlin to review Gazprom’s monopoly over Russian gas exports.

The company has built more transmission capacity than it can fully use, but under Russian law, independent gas producers cannot use the Gazprom-operated trunkline network to export gas.Many analysts expect Nord Stream 2 to operate intermittently for the next several years until the company brings online its greenfield projects on the Yamal Peninsula in West Siberia.

Gazprom executives dismissed suggestions that the commissioning of Nord Stream 2 will lead to more gas exports to Europe in the fourth quarter of this year.

In the final quarter, Nord Stream 2 may carry volumes on condition that Gazprom will divert them from other export pipelines running from Russia to Europe, executives suggested.

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Because of contractual transit commitments to Ukraine running until the end of 2024, it can opt to reduce gas flows via the Yamal pipeline across Belarus and Poland, according to analysts in Moscow.

Capacity on the Yamal line is sold at regular auctions, rather than contracted long-term in advance.

No export incentives

Analysts also pointed out that outdated pricing mechanisms in Gazprom’s long-term contracts with European customers provide no incentive for the monopoly to increase supplies to Europe.

These mechanisms are linked to long-term average prices of oil and products in Europe, not to the matured spot-gas market on the continent.

Gazprom expects the average annual sale price of its gas in Europe to top $270 per thousand cubic metres this year, against $600 per thousand cubic metres and more seen in spot transactions recently.

Its latest financial report suggests that it has preferred trading third-party gas on European gas hubs rather than increasing shipments from Russia in the first half of this year.

Gazprom will also be unable to use the full shipping capacity of Nord Stream 2, set at 55 billion cubic metres per annum. Under European gas market regulations, it will be entitled to just half of that.

The restriction, which Nord Stream 2 unsuccessfully tried to overturn, applies to Gazprom because it is the producer of shipped gas as well as owner of the new pipeline.

Rosneft and Nord Stream 2

Igor Sechin, executive chairman of Russia's largest oil producer, Rosneft, has appealed to President Vladimir Putin to relax restrictions that favour Gazprom, suggesting that his company has capacity to deliver up to 10 Bcm per year of its own gas to Europe via Nord Stream 2.

Moscow business daily Kommersant quoted Deputy Prime Minister Alexander Novak as saying that relevant ministries are working on their response to Rosneft’s proposal before the matter goes to the Cabinet.

According to Rosneft, its gas deliveries to Europe could start without amending existing legislation to remove Gazprom’s export monopoly, as Gazprom can be hired “as a sales agent” to market Rosneft’s gas in Europe.

A memorandum signed in 2017 between Rosneft and its minority shareholder, BP, calls for the Russian producer to deliver between 7 Bcm and 20 Bcm of gas per anum to the UK supermajor in Europe once it is allowed.

Another leading Russian oil producer, Lukoil, has repeatedly indicated it has spare gas production capacity at its assets in the Yamal-Nenets region.

According to Lukoil president Vagit Alekperov, its Yamal-Nenets gas greenfields can be put into service by the end of 2023 if Gazprom increases the purchase price for gas produced from these fields.

Novatek sticks with LNG

However, independent Novatek — Russia’s second-largest gas producer and operator of Yamal LNG, the country’s largest liquefied natural gas development — has presented another option.

Speaking in Vladivostok this month, executive board chairman Leonid Mikhelson said Novatek has no immediate plans to secure capacity to supply gas to Europe via Gazprom-operated domestic and export pipelines.

Transporting LNG by sea from the Yamal Peninsula to Europe is “somewhat 50% less expensive than shipping this gas” to the continent via existing pipelines, he said.

He predicted that inflation could lead to an economic downturn in Europe if gas prices there remain above $600 per thousand cubic metres for long.

Such “super-abnormal” prices may also lead to customers returning to coal as a cheaper energy source, counter to Europe’s energy transition efforts, he suggested.

Mikhelson has also called on authorities to consider transferring major Yamal Peninsula assets from Gazprom to Novatek to further its LNG ambitions, rather than waiting for slow-moving Gazprom to develop them.