The Key Issues Of Russia-EU Gas For The Markets

By Orbex

– Last week, there were reports that flows in the Yamal-Europe gas line had reversed. In turn, this sent energy prices on the continent to new record highs and weighed on equities. A sharp drop in most equities was due to the sudden loss of risk appetite, as investors weighed the impact of higher energy prices and geopolitical implications.

Thanks to media coverage, one might think that the Yamal pipeline is the only way Russian gas gets to Europe, or that this is a new phenomenon. That’s particularly because of the emphasis on Nord Stream II.

The thing is, gas transportation is rather complex. Therefore, this means hours and hours of study to get a general idea of how the system works. Let’s have a look at some key points that might help us understand why the market could react in certain ways.

It’s bigger than what’s in the news

For starters, Europe has been getting gas from Russia since the middle of the Cold War, so it’s not a new issue.

In fact, there was a James Bond movie with a plot point revolving around a gas pipeline from Russia. Since the end of the Cold War, however, Europe has dramatically increased its dependence on gas from Russia.

Because of that increase in demand, there are now 7 functioning pipelines between Russia and Europe. Nord Stream II would be the eighth and largest when it becomes operational. The gas that supplies Europe comes from the Yamal peninsula in Siberia, or Kazakhstan.

Why is the Yamal pipeline so important?

The Yamal pipeline is actually two pipes, which can confuse media reports. All of the other pipelines haven’t presented any supply issues to Europe, so the news hasn’t mentioned them.

The Yamal pipeline(s) are unique for two reasons. Firstly, it’s not just a single company operating them throughout their whole length. Secondly, they run through Belarus before entering Europe. And Belarus has operational control of the pipeline section in their territory.

Other pipelines also pass through a “third country”, Ukrain, before arriving in Europe. The only currently operational pipeline that goes directly from Russia to Europe is Nord Stream.

The importance of implementing Nord Stream II (which runs parallel to the already existing line) is precisely to bypass “third countries”. Furthermore, this would avoid the geopolitical turmoil associated with Belarus and Ukraine.

Europe’s gas distribution problem

Yamal accounts for 16.1% of the gas supplies that Europe receives from Russia. Aside from Nord Stream, the rest enters Europe through Slovakia or Romania, after transiting Ukraine.

However, these two gas systems aren’t currently connected. Should there be issues with the Yamal pipeline, it’s not possible at the moment to ship gas via pipeline from Romania and Turkey to make up for the loss. Nonetheless, a pipeline is currently in the works to fix this problem.

Europe additionally gets gas from Algeria into Italy. But this line doesn’t connect to the main grid, because it doesn’t cross the Alps. Algeria also ships gas to Spain, through a relatively small pipeline with just 12B cm/yr (Yamal has a capacity of 33B cm/yr, and Europe consumes over 300B cm/yr).

The other source of gas for Europe is the North Sea, which has already passed peak production. Lastly, a minor amount of supply comes from the US through LNG ships.

The main issue isn’t just that Europe relies on gas supplies from Russia, but that a key portion of the gas supplies goes through Belarus, which Europe is currently targeting for sanctions. With Nord Stream II still facing regulatory hurdles, it’s unlikely for the market to consider the supply of gas to Europe as stable.

Article by Orbex

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