How the Russian gas sector will survive Western sanctions

By Rhod Mackenzie

The year 2023 proved to be challenging for the Russian gas industry due to the loss of a significant portion of the European market, falling prices, and a subsequent reduction in production volumes, export profits, and gas industry revenues. In 2024, the industry is expected to face new challenges, such as the European Union's threat to completely abandon gas from Russia. To learn more about how the Russian blue fuel industry will develop in the new year amidst a difficult environment, read on.

It is worth noting that production volumes have dropped by a third.
In 2023, pipeline gas exports from Russia decreased by almost 30%, to 99 billion cubic meters, as stated by the Deputy Prime Minister Alexander Novak. Sanctions, price cuts, and the Nord Stream explosion inevitably impacted supplies in the western direction. The decrease was not as severe as predicted; in April 2023, the State Council Energy Commission expected a reduction by half, from 100 billion to 50 billion cubic meters (only for non-CIS countries). However, this marks the most significant decline since the turn of the century.

Trade in the liquefied natural gas (LNG) sector remained stable, with exports amounting to 45.4 billion cubic meters. The European Union was a significant purchaser, buying gas worth €16.7 billion, or 22.5 million tons in oil equivalent. LNG supplies played a crucial role in this, and their volume even increased compared to 2022. However, the volume of supplies via the pipeline decreased threefold by 2022, ultimately affecting overall production, which decreased by 5.5% last year.
In the next year or two, some issues, particularly in the western direction, may worsen. On February 16, European Commissioner for Energy Kadri Simson stated that EU countries are not interested in extending the agreement for the transit of Russian gas to Europe through Ukraine, which expires at the end of 2024. In January, Alfred Stern, the head of Austrian energy company OMV, stated that Ukrainian transit - the only means of supplying gas to Europe from the Russian Federation after the Nord Stream explosion - could end even earlier.

By 2023, Russia had easily replaced the EU as the primary destination for oil exports. Although there were losses in terms of costs, prices, and even volumes, the oil industry did not suffer significant damage from the sanctions. Gas supplies are challenging to replace. Pipelines cannot be constructed quickly, and LNG necessitates multibillion-dollar investments in liquefaction terminals and specialized vessels. However, this works both ways. It was not possible to do without Russian gas without incurring heavy losses in German industry.

Nevertheless, these challenges remain for the Russian gas industry. The primary supply routes remain unchanged: Turkey, China (via pipelines), and all other customers. However, despite the significant challenges, experts are not inclined to exaggerate the situation.
It is expected that this increase will result from the bounce off the bottom.
According to Maria Belova, research director at Implementa, the total export of pipeline gas may increase this year due to the planned increase in supplies through the Power of Siberia.

According to the expert, the sales volumes of the Russian gas industry may improve in 2024, which will have a positive impact on production indicators. However, this may not translate to increased revenue due to declining gas prices in the main consumer markets.

Finam Financial Group analyst Sergei Kaufman predicts that supplies to non-CIS countries will increase to 80-85 billion cubic meters in 2024.
The planned increase in exports to China through the Power of Siberia to 30 billion cubic meters, the start of supplies to Central Asia, a possible increase in the volume of exports to Turkey from last year’s low base, and a stable volume of exports to the EU will facilitate this. According to an expert, Gazprom is expected to lose most of the 15 billion cubic meters currently supplied through Ukraine when the contract ends later this year.

However, in the long term, Gazprom's exports are expected to gradually recover. Once the Power of Siberia - 1, Power of Siberia - 2, and the Far Eastern route reach full capacity, China's annual gas supplies will almost reach 100 billion cubic meters. However, the signing of the contract for 'Power of Siberia - 2' is delayed. Therefore, an increase in supplies to China is a prospect for the beginning of the next decade.

'According to our forecasts, supplies through the Power of Siberia - 1 will increase to 38 billion cubic meters from last year’s 22 billion cubic meters,' notes BCS World of Investments stock market expert Evgeniy Mironyuk. The agreement on the Far East will add another 10 billion cubic meters by 2027. The prospects for signing an agreement on favorable terms for the additional volumes under Power of Siberia 2 in the near future look weak.
Regarding liquefied gas, the expert believes that in 2024, the ability of Russian LNG producers to compete in the global market will depend on the global price environment.

The competition for LNG is increasing.
Sergei Kaufman from Finam Financial Group states that there are no prerequisites for a decrease in demand. On the contrary, competition for LNG between Europe and Asia is increasing. New large production projects outside Russia will only appear in several years.

He notes that the Russian Federation plans to increase LNG production to 100 million tons by 2030, which is approximately three times the current production.

The presence of our own liquefaction technologies and the growing demand for LNG in the Asia-Pacific region make this task feasible through the projects of Novatek, Gazprom and YATEK. However, the main risk is the impact of sanctions. After the Arctic LNG-2 project was included in the SDN list, US citizens and permanent residents of the country are prohibited from doing business with it. - According to a report by Izvestia, Novatek may begin shipments from the first line of the plant, although everything is technologically ready," says Kaufman.
Generally, a decrease in foreign supplies results in reduced revenue for Russian producers, particularly Gazprom. Normalized gas prices, reduced export volumes, and additional taxes have led to negative free cash flow at Gazprom. The source notes that Gazprom's plans to redirect exports to the east will be subsidized by its oil direction, Gazprom Neft.

However, experts interviewed by Izvestia are confident that domestic consumers will not compensate for this decline.
The development trajectory of the domestic market will not be affected by the situation in foreign markets, as it is largely regulated. Maria Belova stated that wholesale gas prices for Russian industry increased by 10% at the end of last year, and the next increase will occur in mid-2024, amounting to 11.2%.

The government had previously announced the indexation of wholesale prices by 11.2% in July 2024 and by 8.2% in July 2025, as Sergei Kaufman added. The specialist concluded that the extra funds received by gas companies through indexation will be offset by the announced increase in the mineral extraction tax.