Russia’s Gas Threat Is a Bluff By Gregory and Krishnamoorti, Aug. 24, 2022, WSJ
Vladimir Putin relishes blackmailing an apprehensive and intimidated Europe with access to natural gas. His game: threatening that Russia will deliver only 40%, 20%, maybe even zero if you don’t do what he wants. Governments hang on his words without asking whether his threats are credible. The International Energy Association warns that Mr. Putin might cut off gas to the European Union entirely. But that would require a complete shutdown of the Nord Stream 1 pipeline, and every petroleum engineer knows the consequences for Mr. Putin would be dire.
In gas markets, a gathering system transports gas from fields. This system connects to a pipeline, which transports gas to customers. Transactions between buyers and sellers are usually governed by long-term contracts that promise sufficient revenue for construction, operating costs and profits to satisfy demand at the other end of the pipeline.
That Gazprom, Russia’s state-run gas company, isn’t an investor-owned for-profit enterprise complicates conventional economic analysis. Gazprom serves as an instrument of Russian foreign policy. Its Nord Stream pipeline transports gas to the EU through its northern route. The pipeline draws its gas from fields in Russia’s remote Arctic areas, including Yamalo-Nenets. This gas enters the pipeline at Vyborg, close to the Finnish border. It then flows under the North Sea to Greifswald, Germany, and enters the EU distribution system. A parallel undersea pipeline, Nord Stream 2, has yet to enter into service.
Nord Stream’s capacity is 62 billion cubic meters a year. From 2019-21, Gazprom shipped annually some 55 billion cubic meters of gas through Nord Stream, and it operated at this rate—near capacity—up to the Feb. 24 invasion of Ukraine.
We don’t yet know how much pipeline capacity will be used in 2022, but, in late July Nord Stream operated around 40% capacity. After a return to service, following so-called routine maintenance in July, flow fell to 20% of capacity. Gazprom’s threat of further stoppages materialized as it again shut down deliveries for three days at the end of August for maintenance.
If the pipeline operates at 20% of capacity for the rest of the year, Gazprom would transmit about 19 billion cubic meters of gas to the EU via Nord Stream in 2022. This gas will be drawn from fields that in the preceding three years produced about 55 billion cubic meters a year.
Unlike crude oil, which could be diverted to other markets by tankers, Gazprom can’t send its excess northern gas elsewhere. That would require massive new pipeline systems, taking years to build. Gazprom could divert some gas to storage, but its tanks already are nearly full in preparation for winter.
Producers can’t increase or reduce output according to pipeline demand, so Gazprom would seem to have no choice but to shut in a substantial number of Northern gas wells. It can do so without losing lucrative oil production, because these fields are “dry,” primarily gas wells, not a mix of oil and gas. Gas production for the whole of Russia declined more than 10% in the first half of 2022 compared with the previous six months as wells began to be shut in.
Shut-in wells are always challenging when dealing with hundreds of wells across different geological formations. As time passes, shut-in wells can experience fluid buildups that threaten the underlying reservoir structure, keeping some from returning to full production. That can be avoided with good field management. But Gazprom must now do without Halliburton, Baker Hughes and Schlumberger, international service companies with expertise in well management that are winding down their business in Russia. As a last resort, Gazprom could flare the excess gas, causing environmental damage and effectively burning money.
The excess-gas problem is only one potential cost of dramatic cutbacks in deliveries to the EU. The cutbacks likely won’t damage the pipeline itself, although steel can corrode and leaks could form. Rather, the accessories that regulate the gas flowing into the pipeline could be damaged by operating at a low capacity. Most of the compressors that pressurize the gas, as well as valves and meters, tend to operate best at high capacity. Lower pressure and diminished throughput can compromise ancillary equipment.
But we have yet to examine Mr. Putin’s most extreme option: stopping all gas deliveries to the EU, shutting in entire fields and idling Nord Stream not for days or weeks but months. Such a shutdown during the winter would require a complete overhaul of Nord Stream’s ancillary equipment, and no one could know what damage the pipeline and related infrastructure would incur.
Mr. Putin can threaten to cut off gas, but he can’t act unless he is willing to risk one of his crown jewels. So who has whom over the barrel? As he becomes more belligerent, the EU is booking substitutes for Russian gas from Qatar, Algeria, Azerbaijan and others, returning to coal and nuclear power, and expanding its liquefied-natural-gas infrastructure.
The threat to Russia’s gas infrastructure from Mr. Putin is trivial compared with his sacrifice of Russia’s reputation as a reliable supplier, which the Soviets began cultivating decades ago. As he jerks his EU customers around with threats, small concessions and more threats, he risks losing his best EU customers for good. Who will benefit? Mr. Putin’s enemy No. 1—the U.S. and its burgeoning LNG behemoth.
Mr. Gregory is a professor emeritus of economics at the University of Houston and a research fellow at Stanford’s Hoover Institution. Mr. Krishnamoorti is a professor of petroleum engineering at the University of Houston.