Nina Chestney

LONDON (Reuters – Europe must secure huge quantities of natural gas if it is to prevent soaring energy prices next winter and crippling energy bills in case of Russian disruptions.

Germany recently stopped certification for Nord Stream 2, a pipeline that bypasses Ukraine, to transport gas from Russia into Europe. This was in addition to the military attack by Moscow on Kyiv.

Russia is the largest supplier of gas to Europe at 40%. However, analysts believe sanctions against Russian gas imports to counter its aggression in Ukraine this week, are highly unlikely.

However, there are risks of pipeline damage or Russia interfering with the flow of natural gas through Ukraine. Europe would be severely affected by this, as Russia is unlikely to replace Russian gas completely in the near future.

It is also possible that Western buyers might not be able to obtain guarantees from Western banks, or even pay for gas, if Russia is exempted from international payment systems.

“Europe would have to pull every lever to keep the lights on – reducing gas burn and cranking up mothballed nuclear and coal plants; maximising indigenous gas production and pipeline imports,” Wood Mackenzie analyst Kateryna Filippenko said of possible disruption to supplies from Russia.

Filippenko stated that these temporary solutions would leave Europe with low “perilously high storage volumes” for winter. He also said winter prices could be even higher than 2021/22.

The winter season that runs from the beginning of March to the end has witnessed record gas prices and power prices across Europe. This is due to low gas inventories and lower Russian gas supplies, outages, and global competition to liquefied petroleum gas (LNG)

Rystad Energy analyst Kaushal Ramesh stated that prices could rise in 2023 and 2022, and may be closer to 2021 winter prices.

The European benchmark for gas prices is Dutch, which are lower than December’s record-breaking highs. However, the price of Dutch gas rose by 60% Thursday following Moscow’s attack on Ukraine. [NG/EU]

In many countries, record power prices have led to bankruptcy of energy retailers. This has left consumers facing high bills and limited options for suppliers.

The major cause of rising inflation is high electricity prices. This has led European governments spend billions protecting consumers.

BUFFER

The European storage levels have recovered from records lows thanks to a warm late winter and increased LNG supplies, especially from the United States. However, their five-year average of about 30% is still below that level, according to Gas Infrastructure Europe data.

Europe requires a greater buffer because of tight supplies and potential disruptions to Russian flows. This winter, Europe has storage at 10 year lows.

A trader for a central east European utility said that it was very unlikely that anyone will be able pump into storage at the current price.

Nord Stream 2 had been scheduled to pump around 10 Billion cubic Meters (bcm, gas) later in the year. It was also expected that this will rise to 40 bcm next to 7% of European gas supply.

(GRAPHIC: North-west European gas stocks – https://fingfx.thomsonreuters.com/gfx/ce/gkvlgagwxpb/Pasted%20image%201645634678271.png)

EUROPEAN OPTIONS

Reuters obtained a draft document showing that the European Commission would like to compel the countries concerned to maintain a minimal storage level by the September end each year.

Information will be available next week.

Italy, Germany and other countries are currently examining ways to reduce storage.

Azerbaijan could supply higher supplies, as it plans to transport 16.2 billion cubic meters through Trans-Anatolian Natural Gas Pipeline through Turkey.

Rystad Energy predicts that 2022 LNG production will be around 410,000,000 tonnes per year (mtpa), which is 25 mtpa more than 2021.

Rystad’s Ramesh stated that there is sufficient LNG demand in Europe to absorb all 25 Mtpa incremental production in case of disruptions in Russian flows.

North-west Europe looks set to continue being the most popular destination for U.S. LPG shipments, even though its LNG regasification terminals only have a limited capacity.

Qatar claimed that it has no capacity to replace Russian gas supplies entirely with LNG.

Norwegian oil pipeline operator Gassco might defer maintenance to satisfy demand. Jefferies analyst Jefferies estimates that it could provide 5-7 bcm more supply. Gassco spokesperson stated that the company is looking into such options and will publish any modifications.

Europe’s coal consumption has risen in the last months due to its lower price than gas. This could be a bridge year.