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Impact of Russian Crisis on UK Gas Supply

Prime Minister Theresa May has commented that she is looking to find alternative sources of natural gas supply after Russian ‘ex-spy’ crisis.

With the recent cold snap fresh in our minds and another, albeit predicted to be short lived, right around the corner, this statement has sparked some concerns within the energy sphere around security of supply. How likely is it that the UK’s gas supply will be affected?In short, Ecova expects the following to happen:

  • Pipeline gas difficult to trace to source
  • Possibility of a reduction in Russian “direct” gas flows to the UK; will reach the UK either way via other market participants
  • Europe is dependent on Russian gas; Russia is economically dependent on Europe as an off-take market

It is important to remind ourselves that there are no direct gas pipeline connections between the UK and Russia. Most of the gas imported by pipeline comes from Norway, Belgium and The Netherlands. The Russian gas that we do receive comes ashore in Germany, Poland, Ukraine, and Romania (via Georgia) and is fed to us through the European gas network via those countries. One problem with this is that, like electricity, once the gas is on the grid it is difficult, if not impossible, to trace back its origin as it will be blended with gas from other sources and become a homogeneous product. The only directly traceable source of Russian gas is LNG imported to the UK. While since the start of the year half of Britain’s LNG import were Russia-sourced, historically the bulk of LNG imports come from Qatar. Hence, aside from a few cargoes, there should not be too much impact on the delivery of LNG to UK terminals.

A second thing to consider is that sales to UK utilities comprise roughly 10% of Russia’s state-owned energy company Gazprom’s flows to western-Europe; around 16 billion cubic meters a year or roughly 20% of the Britain’s annual demand. This means that if British utilities are restricted in buying that 10% volume, Gazprom would need to find a different buyer – be it other Oil & Gas companies or third-parties like trading houses located in other European countries. Vice versa, British utilities would need to find a different seller, likely the same parties that bought the gas from Gazprom previously for cheap. These parties then sell the gas on to the utilities for a higher price than they bought it for and make a profit on the transaction. Initially, this would likely cause prices on the Continent to fall due to excess gas on the Gazprom-side, and for prices to rise locally in the UK to cover the gap in supply and demand. However, as there is no such thing as free profit in the market, prices across the UK and Europe will eventually consolidate in the longer run bridging the price gap between Russia and the UK.

Third, as the Continent is highly dependent on Russian gas, Europe is very reluctant to act against Russia even when significantly provoked. For instance, think back to the 2014 Russia annexation of Crimea which the EU condemned, but even then, gas imports were not restricted. Similarly, Russia’s economy is highly dependent on European off-take. To put this into perspective, in 2017 alone the country earned roughly £27 billion from sales to the Continent. Any loss in revenue from sales to the UK they will want to make up, as mentioned before, to sales to other market participants. Therefore, Ecova deems the chance that we will see much flow limitation to the UK via European pipelines to be low to the point of non-existent.

To conclude, while unlikely, in the event gas flows to the UK some way or another get restricted there will still be ample gas available on the market but the price we’ll pay for the gas will increase. By how much, will largely depend on the UK’s deficit.

Author: Koen Wessels, Ecova Inc. Limited