Gazprom has started to remove caps on gas production from wells with high condensate content at its core legacy fields in the Yamal-Nenets region in West Siberia, according to company executives.

The Russian state-controlled gas monopoly has worked out temporary solutions to handle the condensate, which is produced with the natural gas, to avoid massive flaring.

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The caps were introduced at the beginning of August following a major fire at the first processing train at a key condensate processing facility near the city of Novy Urengoy.

Gazprom executives said this train can not be rebuilt because of the extent of the damage it suffered.

However, a second train is now back in service and being brought to operating at full capacity. Some condensate is also being shipped for processing via urgently built links to other facilities, including the one that is operated by Russia's largest independent gas producer, Novatek.

The lack of additional condensate processing capacity is expected to become another factor in holding back the growth of Gazprom’s gas production this year and next, adding to prior delays in commissioning greenfield developments.

According to company executives, a new condensate processing train at the Novy Urengoy facility is only planned to be built by end of 2022 at the earliest.

European customers in limbo

Therefore, Gazprom is expected to refuse to answer calls from its customers in Europe for higher gas deliveries, as strong demand on the continent has held spot gas prices at European trading hubs well above $500 per 1000 cubic metres.

Despite opportunities in its core market outside Russia, Gazprom expects its exports to Europe to grow by just 6 billion cubic metres to 183 Bcm this year against 2020 when demand declined because of Covid-19 restrictions.

The monopoly has to struggle with meeting increasing domestic demand and bolstering the country’s underground storage facilities to hold about 73 Bcm ahead of the winter.

Gas transit across Poland under threat

Gazprom executives dismissed suggestions that commissioning of its much criticised Nord Stream 2 subsea export pipeline to Germany would lead to higher Russian gas exports to Europe in the fourth quarter.

Even if Nord Stream 2 comes into operation, it may only carry volumes that Gazprom will divert from other export pipelines running to Europe, company executives suggested.

Because of contractual transit commitments to Ukraine, Gazprom may only reduce gas flows via the Yamal Pipeline across Belarus and Poland if it opts to do so, as all capacity of this line is sold at auction rather than contracted in advance, analysts in Moscow suggested.

Gazprom executives also acknowledged the company was caught off guard by this year’s rise in European gas demand.

Gazprom caught offguard

According to the company, European gas consumption increased by 9% in the first quarter and by another 25% in the second quarter against similar periods of 2020, while its own gas production on the continent declined by more than 10% between January and June and coal usage dropped.

Gazprom reduced its gas production to 125 Bcm in the second quarter from 136 Bcm in the prior three months despite seeing the spike in European demand.

Although the monopoly still expects its gas output to grow by 55 Bcm to 510 Bcm for the whole of 2021, company executives were unable to provide a forecast for production next year during a conference call on Tuesday.

No spare production capacity?

They also turned down questions from industry analysts on where Gazprom has any spare remaining capacity to increase its output to satisfy strong demand.

Gazprom is just “working hard” to achieve maximum production plateau of 1.5 Bcm per day of gas, they said, without providing any indication on when this target might be reached.

For years, analysts in Moscow have repeatedly warned about impending production constraints at Gazprom.

Under the tenure of company’s executive board chairman, Alexei Miller, appointed in 2001, the monopoly has focused on spending dozens of billion of dollars on new export pipelines while delaying investment decisions on major onshore greenfield gas developments in West Siberia and offshore, such as Shtokman, despite witnessing production declines at its core gas fields.

Outdated gas pricing mechanisms

Analysts also said that Gazprom has rejected opportunities to adapt its marketing practices in Europe where authorities in recent years have fostered the growth of independent gas producers, transmission operators and spot trading hubs to create an independent natural gas market.

Gazprom’s long-term contract pricing mechanisms are linked to long-term average prices of oil and products in Europe, with little gas of its own production sold on the spot basis.

Therefore, company executives expect the average annual sale price of its gas in Europe to top $270 per 1000 cubic metres this year — half the level that has been seen at spot trading hubs in Europe since July.