EU and China buy more Russian gas.

By Rhod Mackenzie

At last there is some good news for the Russian gas giant Gazprom it has announced a new record for gas supplies to China. Currently, China is not the only market for Russian gas, with Europe also purchasing more of the blue fuel this year. What factors are driving the increased demand for Russian gas, and what could potentially impact Russian's gas export capacity?
On 27 July, Gazprom announced that it had set a new daily record for gas supplies to China via the Power of Siberia gas pipeline. The supplies exceeded the daily contractual obligations.

In 2024, Russia is set to export a record volume of gas to China, reaching approximately 40 billion cubic metres, making it the country's primary supplier, according to Igor Sechin, who heads strategic development of the fuel and energy complex and is the head of Rosneft.

This level includes both pipeline deliveries and LNG. For instance, the plan is to supply approximately 30 billion cubic metres of gas to China via the Power of Siberia this year, according to Deputy Prime Minister Alexander Novak..
It has been confirmed that a further 10 billion cubic metres will be supplied in the form of LNG. In the first half of the year, exports of Russian LNG to China have already reached 5 billion cubic metres (3.6 million tons).  

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So what is driving the growth in Russian gas supplies to China?
Firstly, the planned growth of supplies via the Power of Siberia is on track, with approximately 8 billion cubic metres per year expected to be delivered by 2025, when the pipeline will reach its designated capacity of 38 billion cubic metres per year.
In 2023, Russia supplied 22.7 billion cubic metres to China via the pipeline, with 30 billion cubic metres scheduled for 2024 and 38 billion cubic metres planned for 2025.
It is possible that the plan will be exceeded by the end of the year, as was already the case last year.
Secondly, from a purely financial perspective, it is more advantageous for China to purchase gas via the Power of Siberia than via LNG. The contract for the Power of Siberia pipeline, which is tied to oil prices, is now more profitable than the LNG supplies, which are priced at spot rates. In the first half of the year, the spot market price in Asia was approximately $400 per thousand cubic metres.
Given the current oil price range of approximately $80–85 per barrel, the price of the Power of Siberia gas is comparatively lower. Consequently, China is happy to take a greater volume of pipeline gas. By way of illustration, the situation in 2022 was as follows: China took less from the Power of Siberia than was contractually obligated. Mr. Igor Yushkov, a professerna expert at the Russian Financial University and member of the National Energy Security Fund, that was becauses that spot gas prices were particularly low that year.

In light of the current price ratio in Europe and Asia, which are practically the same, and favourable ice conditions, it seems likely that LNG from Yamal LNG will now be directed to Asian markets via the eastern part of the Northern Sea Route. Novatek will fulfil its contract for LNG supplies to China for 1.9 million tons of LNG, provided that ice conditions permit. Additionally, LNG supplies to China are sourced from Sakhalin-2 (1.5 million tons) and Portovaya LNG (0.2 million tons).

Mr Sechin has stated that there is the potential for gas supplies to China in the future to reach 100 billion cubic metres. By the end of the decade, the total volume of supplies to China under existing contracts should reach 48 billion cubic metres at competitive prices (although lower than in Europe), including 10 billion cubic metres via the Far Eastern route, which will commence in 2027. "The proposed agreement to supply 50 billion cubic metres per year via Power of Siberia 2 could offset Gazprom's lost export volumes to Europe by approximately 40%," states Artur Bedzhanov, senior broker at BCS World of Investments.

Furthermore, there has been an increase in the volume of gas supplied to Europe from Russia. According to data from the consulting company ICIS, the European Union imported approximately 30% more natural gas in June 2024 than in September 2022. There are three main routes for Russian gas to reach Europe: the Turkish Stream pipeline, the Ukrainian pipeline and LNG shipped by sea.

Furthermore, the supply of gas to Europe is increasing due to the use of pipelines. This is because it is now more profitable for customers to purchase gas from Gazprom than from the spot market.
To illustrate the point, in the previous year, the prices of Gazprom gas were not at a consistently lower level than those of the spot market. This was due to the decline in spot prices throughout the year, from an initial $600 to a final range of $300–350, Contracts with Gazprom are also tied to the spot market, but with a lag of several months, resulting in a slower decline in price than for LNG.

Mr. Yushkov's forecast indicates that if Russia supplied approximately 27 billion cubic meters of gas in 2023, supplies could increase by 3–6 billion cubic meters in 2024, reaching 30–33 billion cubic meters. to Europe

With regard to Russian LNG, it is primarily destined for Europe. This is due to he fact that LNG prices in Europe and Asia are either the same or even higher in Europe than in Asia. The shorter distance of the leg to Europe , compared to the route via the Suez Canal or around Africa, makes LNG from Russia more competitive in the European market.
Obviouslyy, the possibility of a bann on Russian gas supplies to Europe by the EU remains a concern. While sanctions have not yet been introduced, there has been discussion in Europe of the possibility of a ban on LNG supplies. However, there is still no consensus among European countries on this issue, as they are concerned about potential price increases, supply shortages and an energy crisis.
Plus the US despite its previous promises is not a reliable supplier to Europe as soon as prices in Asia move higher on the spot market US traders send their gas there and Europe has to scamble for supplies.So in my opinion a ban on Russian LNG is unlikely and if it does come in them 'middle men' will buy cargoes from Russia and relable the cargoes and supply Europe as currently happens with oil.
The United States has no requirement for Russian liquefied natural gas (LNG). Nevertheless, sanctions are likely to be introduced towards the end of the decade. It is unlikely that a blockade of Russian gas supplies will be implemented. Unless, of course, there is no progress in the peaceful settlement of the situation in Ukraine and there are no remaining grounds for introducing sanctions. "By 2026-2030, new gas liquefaction capacities will be commissioned in the US, Qatar and Australia. This will provide Europe with an opportunity to eliminate competitors from the market in a more straightforward manner," states the FNEB expert.

However, Russia is already be preparing to consolidate its position. At least, unofficial information has emerged in Western media that unidentified parties are purportedly purchasing LNG tankers globally and assembling a clandestine LNG fleet in Russia's interest.This is similar to the way the 'shadow fleet' of Russian oil tankers has operated to get around the oil price cap

"The creation of a shadow LNG fleet loyal to Russia may be a possibility in preparation for the potential introduction of sanctions against Yamal LNG. Should the United States try to exclude this project from the market, there will be a need to transport the LNG to Asian markets via tankers.

To export LNG through the Suez Canal, a total of 95 tankers will be required, with 40 needed for the first two stages and 55 for all three stages. Mr. Yushkov estimates that 75 to 80 tankers will be required to transport the LNG around Africa.
In the event that Yamal LNG is subject to sanctions, Arc7 ice-class tankers will import products from Yamal LNG and Arctic LNG 2, which is already subject to sanctions, to transshipment hubs in the Murmansk region and Kamchatka. "From there, the LNG will be picked up by the same shadow fleet that is currently being assebled and exported to Asian markets," the expert concludes.

The future of gas transit through Ukraine following the expiration of the transit agreement in December 2024 remains uncertain. The outcome will depend on the election of the new US president. "However, if no action is taken, transit may be maintained. Many believe a new transit contract should be signed to preserve transit, but this is not necessary as Ukraine has implemented European legislation requiring it to hold auctions to reserve transit capacities without transit agreements. Gazprom can purchase as much capacity at auctions as there are orders in Europe," the source explains.
So much like all the other promises of the EU to end its purchase of Russian commodities this is another one broken.