Market Analysis

Western European governments have been striving to diminish their reliance on Russian energy supplies since the onset of the Ukraine conflict. In particular, they have been shifting away from Russian pipeline gas towards liquefied natural gas (LNG) imports. According to a Reuters analysis, more than 10% of the gas that previously flowed through pipelines from Russia to the European Union has been replaced by LNG deliveries.

This transition has been partly driven by discounts offered by Russian producers, such as Novatek, who have sold discounted LNG cargoes to the EU. Additionally, Gazprom has increased its LNG exports through projects like Portovaya LNG, compensating for declining pipeline shipments.

Spain, boasting the EU's largest import terminal fleet, has emerged as a key re-exporter of Russian LNG despite not historically importing Russian piped gas. The rise in LNG imports has seen the share of Russian gas in EU supply rebound to around 15%, up from a low of 8.7% during the conflict.

Unlike oil, sanctions have not been imposed on Russian natural gas, although the European Commission has called for a voluntary phasing out of all Russian fuel imports by 2027. However, this shift to LNG comes with environmental costs, contradicting the EU's goal of achieving net zero greenhouse gas emissions by 2050.

An interesting aspect of this shift is that the ultimate origin of LNG cargoes becomes obscured, as delivery records only indicate their previous destinations. Consequently, LNG arriving in EU countries sheds its Russian label, potentially deterring buyers. 

Independent traders have capitalized on discounts, with some cargoes being rerouted to Spain after being rejected elsewhere.

Major Spanish energy companies claim they do not directly purchase Russian gas, but there are indications that it may enter their supply chains through third parties. Nonetheless, the influx of Russian imports has reshaped Spain's and the EU's energy landscape.

The reversal of gas flows is evident, with Russia's gas now arriving on Europe's western periphery and making its way inland, as opposed to the previous east-to-west flow. For instance, France's Russian LNG imports accounted for a significant portion of its net exports, while Belgium saw a substantial increase in Russian LNG imports compared to piped gas.

Germany, which no longer directly imports Russian gas, still indirectly receives Russian molecules via neighboring countries. Despite efforts to reduce reliance, the share of Russian gas in certain countries' supplies has increased, prompting some, like Greece, to pursue arbitration against Gazprom due to alleged unfair pricing practices.

Starting in April, EU countries have the option to ban Russian firms from booking infrastructure capacity to deliver LNG, but major importers like Spain and Belgium are hesitant to do so without a unified EU approach.

Paraphrasing text from "Investing UK" all rights reserved by the original author.