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Can Russia Maintain European Demand of Natural Gas in a Changing World?

Russian President Vladimir Putin signs a pipeline
Posted: January 31, 2018 at 8:09 pm   /   by   /   comments (0)


Joniel Cha is a second-year M.A. candidate concentrating in International Economics and Energy, Resources & Environment at Johns Hopkins University School of Advanced International Studies. He has 11 years of experience working in Eurasia. He holds a B.A. in Leadership & Public Policy and a B.A. in Foreign Affairs with a concentration on Europe from the University of Virginia.


Russia contains one of the largest proven natural gas reserves (Chart 1) and is one of the largest natural gas producers in the world (Chart 2). Taking advantage of its rich natural gas reserves and geostrategic location bridging Europe and Asia, Russia produces and exports natural gas to its surrounding countries primarily via pipelines. The politicization of commercial gas transactions with the European Union (EU) and transit disruptions through former Soviet countries such as Belarus in 2004 and 2010, and Ukraine in 2006 and 2009 complicate Russia’s natural gas market and have far-reaching consequences. Merely the rhetoric and unfounded fears surrounding the instability of natural gas supply, energy insecurity, and dependency on a single supplier (namely Russia) incentivize Europe to diversify its imported energy sources. Yet at the same time, these fears distract Europe from the real issue at hand. That is, Europe seeks to procure a stable supply of natural gas to meet its demand, and Russia remains one of several countries capable of meeting it. Although Europe claims it wants to diversify its sources, Europe focuses primarily on purchasing a stable supply of gas at competitive prices. Therefore, Western Europe welcomes Russian gas because it offers one of the most commercially viable and economically feasible sources.[1] Central and Eastern Europe, on the other hand, oppose Russian dominance in Europe’s gas market because the subject is heavily politically charged.[2] In this changing world, Russia must address how to maintain Europe’s demand for its natural gas.


Chart 1: Countries with the Largest Proven Natural Gas Reserves (tcm) (2000-2015 in 5-year increments)[3]Countries with the Largest Proven Natural Gas Reserves (tcm) (2000-2015 in 5-year increments)Years in 5-year increments from 2000-2015 for each respective country


Chart 2: Top Natural Gas Producing Countries (bcm) (2004-2015)[4]Top Natural Gas Producing Countries (bcm) (2004-2015)Years in 1-year increments from 2004-2015 for each respective country


Natural Gas Market

Russia’s Supply


Graph 1: Top Natural Gas Producing Countries (bcm) (2006-2016)[5]

Global Natural Gas Production 2006-2016

As Graph 1 indicates, Russia has consistently been one of the largest natural gas producers in the world. Russia is likely to maintain this position over the short term. The total proved reserves in Russia have increased over the past two decades. For instance, Russia had 30.9 trillion cubic meters (tcm) in 1996; 31.2 tcm in 2006; and 32.3 tcm in 2016.[6] Gazprom holds 72% of the share of Russian gas reserves.[7] Meanwhile, Russia’s natural gas production has fluctuated over the past decade, with dips in 2007, 2009, 2012, 2014, and 2015 (Graph 2). The financial crisis in Europe in 2008-2010, the Russia-Ukraine disagreement in 2009, the sanctions imposed on Russia since 2014, and fluctuating oil prices explain the major decline in natural gas production.[8] In 2016, while Russia’s natural gas production rose by 0.5%, its consumption fell by 3.2%.[9]


Graph 2: Russia’s Natural Gas Production (2006-2016)[10]

Russia's Natural Gas Production

Although the United States has exceeded Russia’s gas production since 2009 (Chart 3), presently the United States exports only 0.5 bcm of liquefied natural gas (LNG) to Europe.[11] In the near future, however, Russia must compete to maintain its market share in the face of greater LNG imports.[12] Europe stands to gain from this increasing competition to supply its gas demand at affordable prices.


Chart 3: The United States Surpasses Russia as the World’s Top Producer of Petroleum and Natural Gas Hydrocarbons Since 2012[13]

The United States Surpasses Russia as the World’s Top Producer of Petroleum and Natural Gas Hydrocarbons Since 2012


Russia’s Imports and Exports


Russia produces 17.8% of the world’s total natural gas. Its comparative advantage in this natural resource enables Russia to maintain its position as the world’s largest exporter of natural gas (23.6% of the world’s total).[14] Despite Western sanctions on Russia, Russia’s natural gas production, domestic consumption, and exports have remained relatively stable. (Chart 4).[15]


Chart 4: Natural Gas in Russia: Production, Consumption, and Exports (bcm) (2011-2015)[16]

Natural Gas in Russia: Production, Consumption, and Exports (bcm) (2011-2015)

Years: 2011-2015


Kazakhstan and Uzbekistan supplied Russia with natural gas in the amounts of 16.1 and 5.6 bcm respectively in 2016 (Chart 5). Russia consistently imports natural gas from these two former Soviet countries in Central Asia. Russia’s dominance in the Europe and Eurasia region in natural gas illustratively accentuates its Russian empire- and Soviet-era historical legacy of providing for its neighbors. Meeting the needs of the European-Eurasian continent feeds Russia’s geopolitical psyche and preserves its significance and influence in the natural gas playing field. By holding a tight rein over natural gas supply and exports, and limiting its imports to two CIS countries, Russia ensures the longevity of its ability to execute power plays.[17]


Chart 5: Natural Gas Trade by Pipeline from Europe and Eurasia to Russia in 2016[18]

Natural Gas Trade by Pipeline from Europe and Eurasia to Russia in 2016

Germany, Turkey, and Italy depend the most on Russian imports of natural gas (Chart 6). Due to the uncertainty and potential disruption in imports from Russia through Ukraine, Germany seeks to procure Russian natural gas through direct pipelines under the Baltic Sea (Nord Stream 1 which came online in 2012 and now Nord Stream 2 to come online by 2019).[19] Italy planned to access Russian natural gas by building a direct pipeline (South Stream) but the project was cancelled. Finally, Turkey receives Russian natural gas via a direct pipeline (Blue Stream) and may construct a second (Turk Stream). Note that although Ukraine is not included, it imports Russian natural gas secondhand from neighboring European countries.[20] In this manner, Russia fulfills its national goal of remaining relevant in the European natural gas market, cementing its role as a key energy player, and reaping economic and geopolitical benefits.


Chart 6: Natural Gas Trade by Pipeline from Russia to Europe and Eurasia in 2016[21]

Natural Gas Trade by Pipeline from Russia to Europe and Eurasia in 2016

The two-headed outward-facing eagle not only turns to Europe but also to Asia. Similarly, utilizing liquefaction technologies, Russia exports LNG primarily to Japan, South Korea, and Taiwan in the Asia Pacific region (Chart 7). However, Gazprom plans to increase capabilities and capacity to support greater LNG exports as the global LNG market grows.[22]


Chart 7: LNG Trade from Russia[23]

LNG Trade from Russia

Yet due to the costs associated with LNG, as well as efficiency factors and demand response, Russia relies substantially on its pipelines in Europe and Eurasia for its natural gas exports (Chart 8). Moreover, the construction, operation, and maintenance of liquefaction plants to convert gas into liquid yield heavy costs. Hence, unless profit margins can be guaranteed to cover operation and maintenance (O&M) costs, LNG production is not an economically viable solution. Additionally, efficiency factors play a key role in determining the cost-effectiveness of developing liquefaction plants. For instance, liquefaction and shipment of LNG not only bears extra costs, but also loses gas volume through the liquefaction process. Due to heavy demand from landmass Europe connected through pipelines and transported in gaseous form rather than via ships in LNG, Russia opts to export natural gas to Europe rather than LNG to South and East Asia. Further, as previously discussed, Russia holds a geopolitical interest in Europe, and natural gas serves as one tool at Russia’s disposal to exert control in this arena.


Chart 8: Russia’s Gas Trade in 2015 and 2016[24]

 Russia’s Gas Trade in 2015 and 2016

Europe’s Gas Demand


Europe’s gas demand is relatively flat with a few slight declines and will most likely remain that way (Graph 3). Historically, the demand for natural gas in the European Union has been strong. Though it dropped 20% from the peak level of 513 bcm in 2010 to 417 bcm in 2014, the demand has picked up again in 2015 to its current level of 433 bcm as Graph 3 reflects.[25] This decline in 2010-2014 is attributed to diminished economic growth in Europe, tensions with Russia, and competition with substitutes such as cheap coal from the United States and subsidized renewable energy sources.[26] The International Energy Agency (IEA) projects flat EU demand for gas through 2022. However, the European Commission estimates 2030 EU gas demand could fall as low as 380 bcm or rise as high as 450 bcm, largely based on the European Union achieving its 2030 targets to increase the share of renewable energy sources to at least 27% and to improve energy savings by at least 27%.[27] Despite this push for renewables, however, the EU is reaching full renewables deployment capacity. While coal production and consumption decline rapidly, natural gas production actually remains stable. Moreover, renewable sources alone will not be able to compensate for the loss in fossil fuels energy generation especially as Europe shuts down nuclear power plants. Therefore, natural gas will bridge the necessary gap.


Graph 3: OECD Europe Gas Demand by Country[28]

OECD Europe Gas Demand by Country

However, Europe’s domestic gas production has declined (Graph 4).[29] This entails that Europe faces an increasing import gap. The European Union relies heavily on net imports to meet its gas demand, as demonstrated in its gas dependency rate (% of net imports over domestic production) increasing from 57.1% in 2005 to 69.1% in 2015.[30] As illustrated in Table 1, Russia (29.4%), Norway (25.9%), and Algeria (8.8%) constitute the top three external gas suppliers to the EU (two-thirds of the EU’s total gas imports) during the period of 2005-2015.[31] Russia also dominates in natural gas production in the Eurasia region, which depends on Russia for natural gas imports.


Graph 4: Decreasing European Gas Production, Increasing Import Needs[32]

 Decreasing European Gas Production, Increasing Import Needs



Table 1: Main Origin of Primary Energy Imports to the EU-28 from 2005-2015[33]

Main Origin of Primary Energy Imports to the EU-28 from 2005-2015

According to the World Energy Outlook 2017, although the EU’s gas demand is forecasted to stay constant, the EU’s gas net imports are expected to rise steadily from 329 bcm in 2016 to 378 bcm in 2040 due to plummeting indigenous gas production.[34] Thus, the EU’s gas net import will remain strong in the future.


 Graph 5: The EU’s Gas Demand, Production, and Net Imports: Forecast to 2040[35]

EU: Gas demand, prodution and net imports Forecast to 2040

Europe diversifies its natural gas suppliers to meet its import gap. In 2011, for example, Europe sought to diversify its imported energy sources by supporting Algeria to build pipelines and liquefaction facilities in Spain.[36] However, the volume of gas imports from Algeria pales in comparison to gas imports from Russia (Table 2). Gazprom increased exports to Europe by an annual 12.3% in the first six months of 2017, following a 12.5% annual increase in 2016. At present Gazprom supplies 34% of European gas.[37] Despite the EU’s variety of gas suppliers, Russia remains dominant in its market share.[38] With new pipeline projects under way, Russia solidifies its role as the main supplier of natural gas to Europe. As noted in Chart 6, Germany, Turkey, and Italy largely depend on Russia for natural gas.


Table 2: Snapshot in 2016[39]

Source of European gas Bcm
Norway 116.6
UK 41.0
Netherlands 40.2
Ukraine 17.8
Romania 9.2
Germany 6.6
Italy 5.3
Denmark 4.5
Poland 3.9
Other EU 8.7
Total EU Production 253.8
Gazprom 246.8
Other non-EU pipelines 53.2
Qatar 23.7
Algeria 14.9
Other 12.7
United States 0.5
Total non-EU Imports 351.8


Natural gas is the dominant fuel produced in Russia (Chart 10). Indeed, natural gas has not only constantly increased from 2002-2014, but has also consistently dominated in Russia’s energy production mix during the same period. The only exception to this trend is in 2010, which may be due to truncated natural gas production in 2009 as observed in Graph 2 or due to faulty data accounted that year. Should the pattern continue as indicated in Chart 10 after 2015, Russia will most likely see a continuous rise in natural gas in its energy production mix.[40]


Chart 10: Russia’s Energy Production Mix[41]

Russia's Energy Production Mix

Russia’s gas prices have declined rapidly since 2014, from over $350/mcm to $176/mcm (Graph 6).[42] The main factor contributing to this sharp fall lies in a combination of the 2008-2010 financial crisis in Europe, Western sanctions on Russia, and Russian economic decline.[43] The price of Russian gas is expected to continue to decrease, and thus become even more attractive to the European market.


Graph 6: Russia’s Gas Prices (USD/mcm)[44]

 Russia's Gas Prices (USD/mcm)


New Infrastructure Projects

Russia prepares to construct the Nord Stream 2 and Turk Stream. Yet in response to Russia’s energy encroachment, Central and Eastern Europe oppose Russia’s pipeline construction.[45] Meanwhile, Western Europe welcomes Russia’s developments and simultaneously pushes back on U.S. intervention efforts in Europe. Russia must prepare for and respond effectively to challenges of cost overruns.[46]

 Knowledge for Investors

Russia provides favorable tax regimes and exchange rates (as oil sales are in U.S. Dollars). Indeed, Russia attracts a significant amount of foreign direct investment particularly in the power and utility sectors, including gas.[47] Moreover, Russia’s natural gas production has risen since 2016 to meet the growth in Europe’s demand for natural gas.[48] For instance, OECD Europe’s demand for natural gas spiked by 6% in 2016.[49]

 Risks and Unknowns

As large masses of ice melt in the Arctic region, Russia’s focus on the Arctic for oil and gas extraction will only grow. With intensifying exploration activities into 2030, Russia has discovered 20 provinces and basins in the Arctic with 10 proven gas reserves.[50] It is estimated that Russia possesses over half of the total Arctic gas resources. Therefore, the extent to which this will enlarge future Russian production of natural gas remains unknown.

Since 2014, the United States has applied sanctions on Russia. In 2017, the United States added more sanctions targeting Russia’s energy companies and construction of the Nord Stream 2. The implications of these sanctions and their effect may reflect a similar slight downturn in Russia’s natural gas production as depicted in Graph 1.[51]

OPEC struck a deal with Russia, among other countries, to restrain oil production in 2016 in order to increase the price of oil. Russia extended this commitment into spring 2018. Therefore, Russia’s natural gas production is projected to continue and displace the production of oil for the time being.



In conclusion then, Russia effectively responds to Europe’s energy security dilemma by developing pipeline projects to major countries including Germany, Turkey, and Italy. Russia thereby tightens its role as a main supplier of natural gas. Meanwhile, Russia searches for additional hydrocarbon reserves in the Arctic and exports LNG to the Asia Pacific region. Amid U.S. sanctions and an ongoing oil production deal with OPEC, the future short-term and long-term implications remain uncertain.

Although Russia’s natural gas production plummeted to 527.7 bcm in 2009, its production has since picked up to 579.4 bcm in 2017. However, complications with Ukraine caused Germany, Turkey, Italy, and other European countries to seek alternative suppliers of natural gas.[52] Then, to maintain its dominance and relevance in the region, Russia responded by launching projects to develop natural gas pipelines to connect directly to Germany, Italy, Turkey, Greece, and other countries. These important players with commercial and financial interests are direct beneficiaries of Russian gas.

Because Europe faces relatively stable gas demand with an increasing import gap, it seeks to expand its capacity for long-term supply. Specifically, Europe must import more gas arrangements due to falling domestic gas production. Thus, the energy security that will be gained by having a stable and undisrupted supply of natural gas remains relevant for the continent. Europe must also improve its internal energy market, and receive gas at competitive prices. Russia has been a long-time supplier of natural gas to Europe and has extensive experience in constructing, operating, and maintaining pipelines. Gazprom has been a reliable gas supplier with a long track record and holds a major share of Russian gas reserves. Yet politicization of gas pipelines complicates the commercial, economic, and financial issues at hand.


[1] Ian Cronshaw, Jacob Marstrand, Margarita Priovska, Daniel Simmons, and Joost Wempe, “Development of Competitive Gas Trading in Continental Europe,” International Energy Agency, May 2008,

[2] Sadek Boussena, and Catherine Locatelli, “Gazprom and the Complexity of the EU Gas Market: A Strategy to Define,” Post-Communist Economies 29, No. 4 (2017): 549-564.

[3] Analytical Center for the Government of the Russian Federation, “Russian Energy 2015,” Sep 2016,

[4] Ibid.

[5] BP Statistical Review of World Energy, June 2017.

[6] International Energy Agency, “Key World Energy Statistics,” 2016,

[7] Gazprom, “About Gazprom,” 2017,

[8] BP Statistical Review of Energy 2017, Gazprom 2017; International Energy Agency.

[9] British Petroleum, “Statistical Review of World Energy,” Jun 2017,

[10] Ibid.

[11] BP Statistical Review of Energy 2017, Gazprom 2017.

[12] Henry Foy and David Sheppard, “U.S. and Russia Step Up Fight to Supply Europe’s Gas,” Financial Times, 3 Aug 2017,; Mariusz Swora and Anna Mikulska, “U.S. LNG in Central and Eastern Europe – Taking Diversification Seriously,” Forbes, 11 Jul 2017,

[13] Energy Information Administration, Today in Energy, “United States Remains the World’s Top Producer of Petroleum and Natural Gas Hydrocarbons,” 7 Jun 2017,

[14] International Energy Agency, “Key World Energy Statistics,” 2016,; International Energy Agency, “Natural Gas Overview,” 2017,

[15] Gazprom, “Unified Gas Supply System of Russia,” 2017,; Rosneft, “Development Prospects and Strategy,” 2017,

[16] Analytical Center for the Government of the Russian Federation, “Russian Energy 2015,” Sep 2016,

[17] American Enterprise Institute, “The Political Economy of Russian Oil and Gas,” 29 May 2013,

[18] British Petroleum, “Statistical Review of World Energy,” Jun 2017,

[19] Nick Butler, “Nord Stream 2: A Test of German Power,” Financial Times, 2 Jul 2017,

[20] BP Statistical Review of Energy, 2017; KPMG, “Situation of the Ukrainian Natural Gas Market and Transit System Market Study,” 10 Apr 2017,

[21] British Petroleum, “Statistical Review of World Energy,” Jun 2017,

[22] Bloomberg New Energy Finance, “Global LNG Outlook 2017,” Sep 2017,

[23] British Petroleum, “Statistical Review of World Energy,” Jun 2017.

[24] Ibid.

[25] International Energy Agency, “World Energy Outlook 2017,” 2017.

[26] World Energy Council, “World Energy Resources 2016,” 2016,

[27] Jonathan Gaventa and Simon Skillings, “Energy Union Choices: Cleaner, Smarter, Cheaper,” E3G, 21 Nov 2017,

[28] Rodrigo Pinto Scholtbach, Willem Braat, Pedro Cespedes Ruiz, Volker Kraayvanger, Minoru Muranaka, Jaime Gonzales-Puelles, and Costanza Jacazio, “Gas 2017”; International Energy Agency, “Market Report Series,” 2017,

[29] International Energy Agency, “World Energy Outlook 2017,” 2017.

[30] Ibid; Eurostat, “Energy Production and Imports,” Dec 2017, Eurostat nrg_100a, nrg_102a, and nrg_103a,; Eurostat, “Energy Production and Imports,” Jun 2017,

[31] Eurostat, “Main Origin of Primary Energy Imports, EU-28, 2005-2015,” 12 Jul 2017,,_EU-28,_2005-2015_(%25_of_extra_EU-28_imports)_YB17.png

[32] International Energy Agency, “Gas Market Report 2017,” Center on Global Energy Policy, 13 Jul 2017,

[33] Eurostat, “Main Origin of Primary Energy Imports, EU-28, 2005-2015,” 12 Jul 2017,,_EU-28,_2005-2015_(%25_of_extra_EU-28_imports)_YB17.png.

[34] International Energy Agency, “World Energy Outlook 2017,” 2017.

[35] European Commission, “Energy Modelling,” 2017,

[36] The Oxford Institute for Energy Studies, “Algerian Gas: Troubling Trends, Troubled Policies,” May 2016,; Lamine Chikhi, “Algeria Top Gas Supplier to Spain in 2016, Eyes More EU Exports,” Reuters, 27 Jan 2017.

[37] Eurostat, “Main Origin of Primary Energy Imports, EU-28, 2005-2015,” 12 Jul 2017,,_EU-28,_2005-2015_(%25_of_extra_EU-28_imports)_YB17.png.

[38] International Energy Agency, “World Energy Balances Database Documentation,” 2017,

International Energy Agency, “Gas Medium-Term Market Report,” 2015,

[39] Ibid; BP, Statistical Review of Energy, 2017; Gazprom, 2017.

[40] Bank of Finland, “Overview of Russia’s Oil and Gas Sector,” 2017,

[41] Energy Information Administration, “Russia,” 2017,

[42] Deloitte, “Russian Oil and Gas Outlook Survey,” 2018,; Deloitte, “2016 Russian Oil and Gas Outlook Survey,” 2016,

[43] Central Bank of Russia, 12 Oct 2017; Shaun Walker et al., “Recession, Retrenchment, Revolution? Impact of Low Crude Prices on Oil Powers,” The Guardian, 30 Dec 2015,; Lauren Carroll, “How Have U.S. Sanctions Impacted Russia’s Economy?” PolitiFact, 21 Feb 2017,

[44] Gazprom, 2017; International Gas Union, “Wholesale Gas Price Survey,” May 2017.

[45] Dimitar Bechev, “Central and Eastern Europe’s Pushback against Sanctions on Russia,” Atlantic Council, 11 Oct 2017,

[46] Ekaterina Kozinchenko, Dmitry Mordovenko, Douwe Tideman, and Georges Chehade, “Capital Projects in the Russian Oil and Gas Industry,” PricewaterhouseCoopers, 2015,

[47] Ernst and Young, “Russian Infrastructure in the Global Context,” 2018,

[48] Gazprom, “The Power Within 2012-2016,” 2016,; Gazprom, “Factbook: Gazprom in Figures 2011-2015,” 2015,

[49] International Energy Agency, “Natural Gas Information Overview,” Statistics, 2017,

[50] Ernst and Young, “Arctic Oil and Gas,” 2013,

[51] Deloitte, “Oil Flows Around Sanctions,” Russian Oil and Gas Outlook Survey Results 2017, 2017,

[52] Steven Erlanger and Neil MacFarquhar, “E.U. Is Uneasy, and Divided, about U.S. Sanctions on Russia,” The New York Times, 25 Jul 2017,