February 23

ANALYSIS-Healthy gas storage warms Europe, but not enough


OSLO, Feb 23 (Reuters) – As Europe emerges from a mild winter with gas storage close to record levels, it must brace for another costly race to replenish its reserves on the international market.

European gas prices TRNLTTFMc1 rallied in the run-up to Moscow’s invasion of Ukraine begun almost exactly a year ago and they leapt to record highs when Russia subsequently cut supplies of relatively cheap pipeline gas.

Although European prices have eased to around 50 euros ($53) per megawatt hour (MWh) from last August’s peak of more than 340 euros, they remain above historic averages.

That means European governments face another huge bill to refill storages before peak winter demand.

To ward off market volatility and protect against shortage, they will have to repeat the exercise annually until the continent has developed a more permanent alternative to the Russian pipeline gas on which it depended for decades.

Analysts and executives say the amounts already in storage will help, as will an increase in French nuclear generation following unusually extensive maintenance.

“The situation on the gas market is currently no longer so tense,” Markus Krebber, CEO of RWE RWEG.DE, Germany’s biggest utility, told Reuters.

He did not expect any repeat of last year’s record price spike, but also said “one must not lull oneself into a false sense of security”.

Similarly, analysts cautioned against leaving it too late to buy for future delivery.

“We do not expect filling storage to be as costly next summer as it was this past year,” Jacob Mandel, senior analyst at Aurora Energy Research, said.

“That said, firms that rely on spot supply to fill storage, rather than hedge against future price jumps, will risk paying similar costs to last summer.”

He estimated buying gas over the summer months would cost “2-2.5 times more on a per unit basis than it had been pre-crisis” and that European governments last year spent tens of billions of euros on supplies.

That was even when they had received significant levels of Russian gas on long-term contracts prior to the shut down of the Nord Stream pipeline to Germany in August.

Nord Stream’s closure drove up European gas prices, as well as liquefied natural gas (LNG) prices, which also hit record levels of around 70 million British thermal units (mmBtu), compared with around $16 now LNG-AS.


Russia’s long-term contract prices, based on complex calculations, are not public but are much cheaper than the spot market rate, industry sources say.

In all, last year’s European imports of Russian pipeline gas were 62 billion cubic metres (bcm), 60% below the average of the previous five years, European Commission data showed.

This year, Russian deliveries to the EU are expected to fall to 25 bcm, assuming flows via the TurkStream pipeline and through Ukraine are in line with December 2022 volumes, the International Energy Agency (IEA) forecasts.


Even when filled to the brim, Europe’s storage caverns, capable of holding some 100 bcm, can only meet around a quarter of European demand.

Think-tank Bruegel, which provides analysis to EU policymakers, has called for a 13% demand curb this summer, compared with the EU agreement last year for a voluntary reduction of 15%.

That could be tricky as the fall in gas prices this year has reduced the incentive to avoid the fuel.

One of the reasons for less gas use last year was increased use of coal, which was cheaper, although bad for carbon emissions.

James Waddell, head of European Gas and global LNG at Energy Aspects, said gas was becoming competitive against coal in the power sector and other industry, which switched to alternative fuels to gas, may also switch back.

“If you’re pricing somewhere below 60 euros/MWh and you move down to 40 euros/MWh, you get quite a lot of that gas coming back into the industrial sector,” he said.

More French nuclear production will help Europe’s overall situation as output rises to about 310 Terwatt-hours (TWh) from 280 TWh last year, Waddell said.

But he said it was still lower than the five-year average and the gain would be eroded by losses elsewhere, notably in Germany.

Industry analysts say eventually the solution to the gas shortfall needs to be more renewable energy as the EU seeks to achieve its goal of zero net greenhouse emissions by 2050 and that the energy crisis will accelerate progress.

Until then, even full storages are no guarantee, Helge Haugane, head of gas and power trading at Equinor EQNR.OL, Europe’s biggest gas supplier, said.

As long as global supplies remain tight, he said, the market would be very vulnerable to any disruptions or “weather events”.


After a Herculean EU effort, gas storages were 96% full at last year’s November peak.

They have dropped to 64%, according to Gas Infrastructure Europe (GIE) data. Analysts forecast a further fall to around 55% by the end of the official heating season, on March 31.

Levels have held up following a mild winter that, combined with reduced demand, led the IEA to lower its forecast for the EU gas shortfall.

Earlier this month, it put the supply-demand gap at 40 bcm this year, down from its previous estimate of 57 bcm.

It said energy efficiency and speedy deployment of renewable energy and heat pumps could help plug 37 bcm of that gap in 2023, while warning of an “unusually wide range of uncertainties and exogenous risk factors”.

These include the possible complete halt of Russian gas through the pipelines still supplying Europe and a post-lockdown demand recovery in China that could increase competition on the international LNG market, making it harder for Europe to buy there.

The IEA said European LNG imports could provide an extra 11 bcm to 140 bcm this year, in addition to an additional 55 bcm in 2022.

As one of Russia’s most loyal gas customers until last year’s invasion of Ukraine, Germany previously had no import capacity for LNG. Now at a record pace, it is bringing online six floating storage and regasification units (FSRUs) by the end of this year.

The industry says this needs to be matched with more terminals to liquefy and ship LNG, but strong global demand means that will be difficult to achieve over the next 24 months, Luke Cottell, senior analyst at Timera Energy consultancy, said.

Other European countries are also increasing their LNG capacity, while environmental campaigners and green politicians question the amounts being invested in the infrastructure that should become irrelevant in a low-carbon economy.

Germany has also been at the forefront of demand for heat pumps, which do not rely on fossil fuel to heat buildings, although their installation last year was still outpaced by gas-based systems.

Source: Nasdaq.com

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