Russia is out – cheap gas is back

There's news from Bloomberg that gas prices in EU countries could fall below zero. It's similar to what happened in April 2020 when oil prices dropped to zero. So, we won't see zeros in our gas and electricity bills, at least not for long. But what will happen?

So, what's happening now, in early June 2023? Currently, on the trading hubs in the EU, which serve as benchmarks for local suppliers, gas is priced at €26.852 per MWh or €286 per 1,000 cubic meters for "next-day" delivery. In May, it was €270 per 1,000 cubic meters, and further price decreases are expected.

This was to be expected

So, maybe Bloomberg is wrong about going "below zero"? Probably. Prices are unlikely to drop below zero. Nevertheless, there are significant reasons for further price decreases. Three reasons, to be exact.

The first reason is that at the start of the summer months, when gas storage facilities begin to fill up, they are already more than 68% full. Is that a lot? In early May 2022, gas storage in the EU was only 50% full. So, yes, it's quite substantial.

The second reason is that the EU is rapidly reducing its dependence on Russian gas. In pursuit of gas independence from Russia and diversification of sources, the European Union has launched numerous new terminals for receiving liquefied gas and expanded the capabilities of existing terminals.

The third reason is that during the period of expensive gas, consumers have spent a lot on costly but highly effective measures to conserve it. As a result, they will require much less gas for the coming winter.

At the end of May, the European Commission took note of these factors and announced that gas demand in the European Union could decrease significantly in the next 12 months, to the extent that supplies from Russia may not be necessary. According to a document referenced by Reuters, European Commissioner for Energy Kadri Simson stated that energy-saving policies should reduce the EU's gas consumption by 60 billion cubic meters. This would surpass the combined volume of pipeline and liquefied gas that the EU had planned to import from Russia in 2023. Now, it seems that this will no longer be necessary.

Why did they buy bloody gas?

There's a reasonable question to be asked: why did they continue purchasing gas from Russia in 2022 and early 2023? Was it to provide Putin with enough euros to finance the war in Ukraine? No, of course not.

The problem was that in 2022, gas prices and other fossil fuels were rising so rapidly that Europe had to take a pragmatic, albeit not entirely ethical, step. They decided to continue buying Russian gas to slow down inflation, even if just a little.

In general, the EU kept importing gas from Russia to buy some time. Fortunately, that time was utilized quite rationally: they established deliveries of liquefied gas and implemented energy-saving measures. And now, we have the opportunity to do away with Russian gas. However, some European countries did so a year ago, like Poland, for example.

But it's likely not as simple as it seems. Many in the EU have long-term agreements with Gazprom, so for some, continuing to pump is an obligation. It's a "take it or pay" principle: you get stable and favorable prices from the supplier, but only if you purchase a certain minimum volume of gas. And if you don't need that much gas at a given moment, you still pay for the agreed minimum, regardless of how much you actually consumed.

By the way, in 2022, Poland completely stopped buying Russian gas, which also led to the cessation of transit through its territory from Belarus.

What will happen next?

Gas is still being supplied to Western Europe through the Ukrainian network of main gas pipelines. For example, in recent weeks, Gazprom has been using transit through Ukraine at an average volume of around 40 million cubic meters per day. This roughly corresponds to 1/7 of the capacity of Ukrainian pipelines or about 12-14 billion cubic meters annually.

However, the Kremlin is still waging war in Ukraine.. Therefore, there's a significant possibility that unpleasant incidents may occur with Ukrainian transit. Who knows what could happen at a gas compressor station somewhere in northern Ukraine or in the east where Ukrainian forces managed to push out the Russian aggressor a year ago.

In that case, Gazprom won't be able to fulfill its obligations to European buyers, just as it happened with deliveries through both Nord Streams, where catastrophes occurred. Then the "take it or pay" principle will no longer apply.

But Russia will still have the option to pump gas through the pipeline to the Balkans and beyond, specifically via the "TurkStream" pipeline. Indeed, one of the two strands of this pipeline is intended for deliveries to the southern part of Europe, but the volume is limited to no more than 15 billion cubic meters per year.

And what about Ukraine without Russian gas? They have their own deposits, which fortunately continue to supply gas to the local network. They also have their own underground storage facilities with significant reserves. Moreover, due to the war, gas consumption has sharply decreased. For example, two colossal metallurgical plants in Mariupol have been destroyed, and many other major industrial enterprises in eastern Ukraine have either stopped completely or drastically reduced their gas consumption.

The most important thing that is already clear is that Western Europe not only wants to stop buying gas from Russia but can do so without harming prices and their energy security. It's not like the autumn of 2022 when every murmur from Gazprom's office made Western Europeans fear further increases in their electricity, gas, and heating bills.

Yes, there are still technical problems surrounding the distribution of gas from sources other than Russia in the EU. However, gas transportation networks in Western Europe have benefited from the change in gas flow directions. This change occurred because there was an active replacement of pipeline gas from Russia with gas imported into the EU through maritime terminals, where liquefied natural gas was received. And the money earned from these additional transactions within European networks is helping gas companies in the EU carry out modernization. So, those technical issues will soon be finally resolved.