Europe can weather halt in Russian gas supplies

European gas prices remain volatile amid the risks of disruptions of Russian piped imports. As additional sanctions against Russia are under discussion, a complete halt of Russian piped imports into the EU remains a risk. But Europe is in a better position to cope without Russian piped gas now than it was a few months ago, analysts from Wood Mackenzie, a Verisk business (Nasdaq: VRSK) said.

Mild weather and sustained imports of liquefied natural gas (LNG) and Norwegian gas have improved the European storage position. If Russian flows continue uninterrupted, Europe (EU+UK) will end this winter with 27 billion cubic metres (bcm) of gas in storage – a level within the five-year range.

“If Russian flows stop in the middle of March, gas in store would be sufficient for the rest of this winter and summer, without demand curtailment,” Kateryna Filippenko, principal analyst on Wood Mackenzie’s Europe gas and LNG team said.

However, Europe will risk entering next winter with only around 10% of gas in store by the end of October 2022, unless some compensation measures are brokered.

Europe can pull some levers both on the demand and supply side, Filippenko said.

“Additional supply options include increased imports from Norway and Algeria, as well as higher production from Groningen – these could bring additional 15 bcm in April-October. Europe can also try to persuade Asian buyers to use more coal, which would free up more LNG into Europe – as much as 15 bcm between April and October,” Filippenko said.

On the demand side, bringing back some mothballed coal capacity and slowing the phase out, coupled with delaying maintenance shut-downs at nuclear plants could free up some gas in the power sector, perhaps as much as 13 bcm until the end of October.

However increased use of coal in Europe and Asia could be limited if Russian coal imports are also affected as there is limited global supply availability to substitute high-grade coal from Russia.

She added: “Europe can also consider energy conservation measures, although the impact over summer will be limited as the heating demand is naturally low, and commercial and industrial sectors are already relatively efficient. Over summer, these measures could save about 5 bcm of demand.

“If Europe is successful in brokering all these options, it might be able to lift storage levels to around 54% of capacity. Although all options would be politically and practically challenging and will take time to broker, storage levels will end up at a lower level.”

Filippenko said it is inevitable that Europe will face demand curtailments through winter 2022-2023. “Some demand reduction could be managed by turning down thermostats by 1-2°C and reducing energy waste in space heating, cooking and water heating. This could see a saving of 14bcm,” Filippenko added.   

Governments and utilities will have a major role to promote behavioural changes, but prices are already pushing consumers towards energy savings.

However, despite these energy conservation measures, and the additional demand and supply measures brokered through the summer, there would not be enough gas into storage to ensure the remaining demand is fully met.

“Europe has systems in place to shield residential and strategic consumers from supply cuts, but industrial demand may be curtailed by about 11 bcm, or 20% in the winter. But this will depend on the success of brokering additional compensation measures, which are still uncertain and are likely to be lower.”