A difficult winter: why the gas crisis in Europe is far from over

Forbes has published a column by Marcel Salikhov, President of the Institute for Energy and Finance - "A Difficult Winter: Why the Gas Crisis in Europe is far from over".

Russia is unlikely to be able to significantly increase gas exports to the EU countries, and there are no other additional sources of fuel for the European market yet. Therefore, a steady decline in gas prices in Europe can be expected not earlier than spring, Marcel Salikhov says.

Having reached an absolute record of $ 1,900 per thousand cubic meters in early October, the prices of gas futures on the European market dropped rather quickly to about $ 1,000 thousand cubic meters. However, this is still a very high level. Gas in Europe is now significantly more expensive than diesel and propane, the most expensive alternatives in some sectors.

Will Russia be able to help?

In fact, the gas issue has become the main one in relations between the EU and Russia. On October 6, Vladimir Putin suggested that Gazprom think about increasing supplies to the European market. On the European side, EU High Representative for Foreign Affairs and Security Policy Josep Borrell said Europe may need more Russian gas than anticipated. Even news about a possible increase in gas supply from Russia contributes to lower prices, but there are no specific agreements yet. Europe, in order to restore reserves by winter to average volumes in recent years, needs 10-15 billion m³ of gas.

Hope for Gazprom is based on the assumption that the company has significant volumes of free gas that could easily be diverted to Europe. However, it is not the case. Only about a third of what is mined in Russia is exported, the rest is for domestic consumption. This means that the situation on the domestic market has a strong influence on the volumes available for export.

Domestic gas consumption has grown strongly this year. Gazprom's supplies to the domestic market increased in the first half of 2021 by 20% compared to last year and were 7% more than in the pre-crisis 2019. The main reasons are related to the recovery of economic activity and the growth of industrial production.

The cold winter of 2020/2021 also contributed to the decrease in reserves in Russian underground gas storage facilities (UGS). The withdrawal from the storage facilities became the largest in recent years and amounted to 61 billion cubic meters of gas, while the total reserves at the beginning of the heating season were 72 billion cubic meters. Before the start of a new winter, Gazprom must restore reserves. Gas production in Russia is at maximum levels for this time of year, so there may not be room for further increases.

For a long time in Europe it was assumed that Russia is the largest, but at the same time, a balancing source of supplies. It was assumed that, if necessary, the purchase of Russian gas could always be increased, while reducing the volume and duration of long-term contracts with Gazprom.

However, this year Russia also faced the achievement of production capacity limits. At the same time, Gazprom feels the uncertainty of long-term gas demand due to the active decarbonization of the European economy, so the priority for it has become the Power of Siberia gas pipeline to China and the development of new fields in Eastern Siberia, also designed for Asian markets. Oil companies limit oil production under the OPEC + agreement, which means that the volumes of associated petroleum gas production are also limited.

Perhaps Russia will be able to increase supplies to the European market as soon as pumping into its own UGS facilities is completed. However, this will largely depend on the dynamics of domestic demand and winter weather.

Political deficit

There are no other sources of additional gas for Europe to be seen either. The hoped-for LNG shipments from the United States have been declining for several months. American LNG has reoriented itself to the Asian market due to higher price levels. LNG plants are also currently operating at full capacity and cannot increase production. The commissioning of new plants in the United States is expected only next year. Norway, another key supplier of pipeline gas, is producing maximum volumes and has been forced to virtually stop shipping LNG, prioritizing exports to Europe. The Dutch authorities also did not abandon their plans for the early decommissioning of the Groningen field, the largest in Europe.

Therefore, the stabilization of prices in the European market does not mean that the worst is over. Ahead is a seasonal increase in gas consumption both in the EU and in Russia. Current weather models, while not very accurate, suggest that the coming winter in Europe could be colder than normal. European UGS facilities are currently 76.4% full. This is quite small - in the past five years, the average rate at this time of the year has exceeded 90%. Although renewable energy sources generate over 34% of electricity in Europe, gas and coal are still the main sources of heat produced, providing about 60% in total.

In these conditions, any interruptions in the supply or transportation of gas, especially in cold weather, will cause a new jump in prices in the spot market. The gas market remains in short supply and is sensitive to even small changes in the balance of supply and demand. A steady decline in prices, most likely, can occur only next spring, after the end of the heating season.