EU gas crisis and stocks

Nord Stream 1 shutdown. In May, Gazprom closed an important pipeline passing through Belarus and Poland, supplying gas to Germany and other European countries.

Then in June, it reduced gas delivery via Nord Stream 1 by 75% – from 170 million cubic meters of gas per day to roughly 40 million cubic meters.

Then in July it shut down Nord Stream 1 for 10 days, citing the need for maintenance.

Shortly after reopening, Gazprom reduced the quantity supplied to 20 million cubic meters, for what it called defective equipment.

 It has now completely stopped all gas supplies to Europe via the pipeline.

Russia has stopped the flow of gas to Europe via the Nord Stream 1 pipeline, citing the need for repairs in a move that raises an already sharp concern about the reliability of winter energy supplies. The maintenance was supposed to be done for 3 days from 31st August to 2nd September.

Gas flow has been reduced to 40% of expected levels in recent months. In July, the flow was stopped for scheduled maintenance and resumed 10 days later but at only 20% of capacity, with Moscow blaming Germany's failure to provide vital equipment due to sanctions imposed on Russia.

Since invading Ukraine, Russia has completely cut off gas supplies to Bulgaria, Denmark, Finland, the Netherlands and Poland and reduced gas flow from other pipelines.

European gas demand

-Real demand

A report by the Oxford Institute for Energy Research's Natural Gas Program concludes that European gas demand may not return to 2010 levels until around 2025. Dr Anouk Honoré has produced the most comprehensive independent study of European gas demand by country and sector:

The scenarios show that natural gas demand in 35 countries in the European region fell from 594 Bcm in 2010 to 564 Bcm in 2020 and then rose to 618 Bcm in 2030. Just 24 Bcm in twenty years might seem very pessimistic, but it doesn't have to. Forget the sharp decline in 2010-2013. Focusing on the 2013-2030 period, 88 Bcm of additional gas is expected to be consumed later.

Energy Resources in Europe. Its importance has increased in the EU, where gas is mostly used for energy production. Source: Eurostat, IMF, Gazprom

Gas Flows in the Reverse Scenario (BCM). Source: Bruegel (2022), IMF, ENTSOG, GIIGNL, GIE, NPD

 -Projected demand

EU: Weekly LNG Imports, 2022 actual and forecast (Billion cubic meters). Source: Bruegel (2022), IMF

 Britain, Ireland, Spain, Portugal, Sweden and Denmark: With little reliance on Russian gas, these countries can adapt to such a supply disruption. Given their low storage capacities, any inventory build-up or reduction in these countries will have little impact on the rest of Europe.

France, the Netherlands and Belgium: These countries are somewhat dependent on Russian gas, but they also have direct access to LNG import capacity and alternative pipeline supply routes and can also adapt. In these countries, stocks are reduced to minimum levels to help support 'protected consumption' in neighboring countries (Germany and Central and Eastern Europe).

Turkey: Turkey is a gas-intensive economy with a relatively high dependence on Russian gas (34% of total imports in 2020). However, it appears to have the import infrastructure to cover most of the deficit in Russia, particularly through LNG imports.

Finland, Latvia, Lithuania, Estonia: Although historically dependent on Russian gas, these countries have existing and soon-to-be-available alternative import capacity, which will allow them to adapt to and avoid physical shortages. Given the new floating LNG import terminal in Finland and the opening of a new pipeline to Estonia, these countries will be able to export another 2 billion cubic meters of gas to other countries.

Poland: While around half of natural gas is imported from Russia in 2020, the Polish economy is not particularly gas-intensive, with a greater historical dependence on coal. A new pipeline from Norway via Denmark will open in October and the initial import capacity will increase to 2 3 billion cm per year by January 2023. This, together with LNG imports from Lithuania, should allow for complete substitution of Russian gas.

Bulgaria, Romania, Croatia, Slovenia: This group of countries can also avoid shortcomings. In Bulgaria, while the share of Russian gas in total gas consumption is high, gas plays a less important role in the overall energy mix. It also has alternative supply routes through Greece and Turkey. Romania is an important domestic gas producer that can meet most of its domestic consumption needs. Croatia is not dependent on Russian gas and is assumed to support supplies to Slovenia, which also has a pipeline through Italy.

Germany and Austria: Both countries are highly dependent on Russian gas. Although they have relatively strong pipeline networks with neighboring countries, bottlenecks exist, including in Germany. We approximate non-Russian gas import flows based on analysis by ENTSOG (2022), taking into account bottlenecks with neighboring countries. Using this approach, a shortage of about 15% (15bcm) of consumption will occur.

Italy: Authorities have stated that they will only be able to exchange about two-fifths of Russian gas in the next 12 months and have agreed on new gas import agreements consistent with this. This assumption is also consistent with the implied import capacity implied in the simulations conducted by ENTSOG (2022). Taking this as a given and assuming that stocks are decreasing, a deficit of about 15% of annual consumption will remain.

Czechia, Slovakia, Hungary: These countries are highly dependent on Russian gas and the main alternative supply routes pass through restricted countries (Germany, Austria, Italy). This will limit their entry. Significant famines are likely to occur and the price required to clear this regional market is extremely high.

Europe's gas and LNG stock capacity. The table below shows the EU gas import capacity in 2021.

EU Gas Import Capacity and Supply by Source 2021. Source: Bruegel (2022), IMF, ENTSOG, GIIGNL, GIE, NPD

 The figure below shows the countries' total storage capacity and its share relative to the EU's total capacity.

EU storage capacity (TWh and share). Source: European Commission

According to the European Commission, the current total EU gas storage capacity is 1110.7 TWh (equivalent to around 113.7 bcm), which is less than the total annual gas imports from Russia. Storage capacity is not evenly distributed across the EU, with five countries accounting for almost three-quarters of the total (Germany, Italy, France, Netherlands and Austria), while around a third of the smaller EU member states do not have storage capacity. They do not have their own storage capacity, although some have regulations on access to stored gas in neighboring countries.

Natural gas stocks in the EU ended July at 69% full despite decreasing Russian inflows, and are on track to meet the new 80% EU-wide target for November 1st following the invasion of Ukraine.

Gas tanks across the EU contained 73 billion cm3 on 31 July, 13 billion cm higher year-over-year and 1% below the five-year average, the smallest gap since the beginning of 2022, according to GIE AGSI data.

According to European Gas Infrastructure data, the block's total gas storage capacity of 113 billion cubic meters (bcm) is 80% full.

Even though the EU reached this level two months before its self-imposed November 1st date, its total gas storage capacity could only cover slightly more than 25% of the block's total gas consumption of around 400 bcm per year.

Even if gas storage facilities could be fully filled, this would suffice for a maximum of three months for European countries and even less in large economies such as Germany, where industrial gas use and household consumption are higher than in other members.

Growth problems arising from the gas crisis. Europe – and Germany in particular – has historically been very dependent on Russian gas to meet its energy needs.

When Russia announced its intention to restrict supply in July, it had increased the wholesale price of gas in Europe by 10% in one day.

Although the UK imports very little gas from Russia, gas prices are set globally and are now about 450% higher than at this time last year.

'The market is so tight right now that any interruption in supply is causing further increases in gas prices,' said Carole Nakhle, CEO of analyst Crystol Energy. 'This could slow down European economies and accelerate the road to recession.'

The European Commission said that a complete shutdown of Russia's gas supply to Europe, coupled with a cold winter, could reduce the average EU gross domestic product by up to 1.5% if countries do not prepare in advance.

What is Europe doing? Europe has listed all the alternative sources of gas it can make: LNG shipments by ship from the United States and more pipeline gas from Norway and Azerbaijan. But LNG is much more expensive than pipeline gas.

Germany is keeping its coal plants operating, which it will shut down to reduce greenhouse gas emissions. It also retains the option to reactivate the two nuclear power plants it will shut down.

The 27-nation EU has approved a plan to reduce gas use by 15% by next March. However, these protection measures are optional in member states for now.

National governments have approved a number of measures: bailouts for utilities that have to pay exorbitant prices for Russian gas, cash and tax breaks for distressed households.

Germany, for example, has approved a third consumer support package of 65 billion euros ($64.3 billion). Such spending will increase national deficits, but will also soften the recession economists had predicted for the end of this year and the beginning of next year.

Conclusion? The EU is the world's largest natural gas importer. Diversification of supply sources is therefore crucial for both energy security and competitiveness. Providing access to the liquid gas markets of all member states is the main objective of the EU Energy Union. LNG cargoes are available from a wide variety of different supplier countries around the world; LNG can give a real boost to the EU's gas supply diversification and thereby greatly improve energy security.

Today, countries with access to LNG import terminals and liquefied gas markets in Western Europe are much more resilient to potential supply disruptions than those that depend on a single gas supplier. The global LNG market is experiencing a dynamic development with the entry of new suppliers such as the US or Australia.

The EU's current gas demand is around 400 billion cubic meters (bcm) and is expected to remain relatively stable in the coming years, based on currently adopted policies. It should be noted that the expected decline in domestic gas production also affected natural gas imports. However, other policies designed to meet the 2030 energy and climate targets could lead to reductions in gas use, particularly due to energy efficiency improvements in heating and industry.

EU member states agreed on 26 July to voluntarily reduce their natural gas demand by 15% this winter compared to their average consumption over the past five years, in order to save natural gas before the winter season and prepare for the possible new situation due to interruptions in gas supply from Russia.

According to the Council of Europe, some of the measures include reducing gas consumption in the electricity sector, promoting fuel switching in some industries, adopting national awareness campaigns and implementing obligations to reduce heating and cooling.

Now, whether Europe survives the approaching winter depends on how the continent can get more gas from Russia via Nord Stream 1, how it can buy it in the form of liquefied natural gas from other suppliers, how severe the weather conditions will be this winter, and how much gas European countries can get.

Kaynak:Tera Yatırım-Enver Erkan
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