Preparing for a New Gas Crisis: The European Union Takes Measures
With moderate natural gas prices and well-stocked reserves, there's hope that we won't witness an energy crisis this upcoming winter. However, if the winter proves to be unusually cold, consumers across the EU—both private and industrial—might face energy shortages. Moreover, the threat of strikes at major liquefied natural gas (LNG) shipping facilities in Australia could disrupt supply chains and pose challenges to the entire market, including the EU.
As of today (late August), gas prices remain stable in Western Europe, staying below $400 per 1,000 cubic meters. This stability is attributed to the calmness observed in the global natural gas market. Since December 2022, gas prices have been consistently decreasing. In early June 2023, the cost of 1,000 cubic meters of "blue fuel" on the TTF gas hub in the Netherlands reached $260, marking the lowest value in two years.
The nearly tenfold drop in prices is quite optimistic for European consumers, especially after the price of gas in Europe reached a historical peak of $3,800 per 1,000 cubic meters in March 2022 due to Russia's invasion of Ukraine. The current return to normal price levels raises hopes that European countries will manage the upcoming heating season without a gas shortage. However, risks still linger.
Prepared for Cold Snaps
The energy crisis caused by Russia's invasion last winter turned out to be less devastating for the European Union than initially anticipated. Unusually warm weather last winter, the shift to new suppliers, and the increased share of "green energy" helped European countries avoid the worst consequences. For instance, power cuts and production shutdowns due to electricity shortages were averted.
Furthermore, the EU is well-prepared for the upcoming cold season. According to the European Commission, by August 17, gas storage facilities of EU member states were over 90% full, which is about 2.5 months ahead of the November 1 deadline.
"The EU's energy market is in a much more stable position than at the same time in 2022," stated EU Commissioner for Energy Kadri Simson.
As per data from the Gas Infrastructure Europe energy association, Spain's storage is at 100%, Croatia's at 97%, Sweden's at 95%, and the Netherlands, Portugal, and Slovakia's at 94%.
The robust pace of gas storage accumulation is largely due to the EU's ability to replace Russian supplies. Politico reports that Russia's share in EU gas imports has dropped to 8.4%. In comparison, Russian supplies accounted for over 40% of the EU's gas market in 2021.
According to Eurostat data, the EU meets its gas appetite through Norway, Algeria, and the UK, which lead in pipeline gas deliveries. The EU also receives liquefied natural gas (LNG) from Norway, Qatar, Algeria, the United States, and still from Russia. Notably, LNG imports from the US surged by 140% to 56 billion cubic meters in 2022, with the US's share in European LNG supplies reaching 40%.
The EU is determined to further increase the share of LNG in its imports. The EU's energy strategy includes constructing over 10 gas terminals, with a focus on American LNG.
Moreover, the EU is recommitting to its green agenda. According to the Ember analytical center, the share of solar and wind generation in European countries reached 22% by early 2023. In late March 2023, the EU Council and European Parliament agreed to raise this figure to 42.5% by 2030.
Likely, the EU will consider the lessons of September 2021 when a drop in wind power production led to a severe electricity shortage. This wind lull, combined with the halt in Russian gas deliveries, dramatically raised electricity prices to record levels.
Weak Demand Leads to Low Prices
The slowdown in the pace of global economic growth is also contributing to a decline in gas prices. According to Eurostat data, in the first quarter of 2023, the GDP of the European Union (compared to the previous quarter) decreased by 0.1%, while the Eurozone's economy grew by 0.1%. In the second quarter, EU GDP remained unchanged, while Eurozone GDP grew by 0.3%. According to the estimates of the European Commission, the EU's economy will grow by no more than 1% in 2023.
Weak economic growth is accompanied by reduced consumption and declining industrial production. This impacts the need for energy sources, and the demand for them decreases. Following the decrease in demand, prices also fall. In May, energy sources in the EU became 1.8% cheaper, in June - 5.6%, and in July - 6.1%. This refers not specifically to the prices of gas or electricity but to the cost of the so-called energy product basket tracked by Eurostat. This basket includes gas, electricity, and other components.
The pressure on the gas market has eased not only from the EU but also from Asian countries that import this type of fuel. In spring, the Bloomberg agency noted an increase in re-export from China, South Korea, and Japan, as they try to get rid of gas oversupply.
The International Energy Agency (IEA) also speaks about inventory growth in its July report. It mentioned that gas markets have transitioned to a "gradual rebalancing" since the beginning of the year, and the high levels of storage in key Asian and European markets provide a basis for "cautious optimism" in anticipation of the 2023-2024 heating season.
Trouble from Australia
Nevertheless, the balance on the gas market is still quite fragile. According to analysts at Goldman Sachs, it's not excluded that by the end of 2023, gas prices in Europe could soar to 100 euros per megawatt-hour, which is about 1500 USD/1000 cubic meters.
"A cold winter and a complete cessation of Russian gas supplies to Europe at the start of the heating season could trigger market tension. There might also be intense competition for gas supplies in Northeast Asia if the weather is colder than usual there, and China's economic growth turns out to be higher than expected," stated the IEA in its report.
An additional risk factor for market stability is the dry summer in Europe. Spain, Portugal, France, and Italy have been most affected by drought. Weather calamities negatively impact hydroelectric and nuclear generation. It's also not ruled out that in autumn and winter, the European Union will have to use more gas for electricity generation.
The situation in Australia adds to the nervousness. It's the world's second-largest LNG supplier. Workers at gas facilities owned by Chevron Corp. and Woodside Energy are threatening to go on strike, demanding higher wages. For now, unions are in negotiations with corporate representatives. But if the sides don't find a compromise, some production capacities might be shut down as early as September 2. This will lead to supply disruptions and logistical problems.
Woodside and Chevron account for 10% of the global gas market. And although Europe isn't among the major purchasers of Australian LNG, supply disruptions will become a big problem for Asian countries. They will seek other gas sources to meet their needs. This will not only increase competition for fuel with other countries but will also drive up gas prices. This includes the European Union.
What Can Europe Counter With? More rational consumption, as learned from the 2021/22 and 2022/23 seasons, as well as the expansion of LNG supplies from the US, Qatar, and Algeria. And, of course, unprecedentedly high gas storage volumes. They are already filled "to the brim."