A Look at European Gas Supplies and Pricing

The European natural gas market has been rocked by the Russia-Ukraine war and the ensuing sanctions imposed on Russia by the West. What were the effects of the turmoil, and where is the market headed? To find out, GLG’s Sam Stopps hosted a teleconference with energy industry veteran Robert Hull. Highlights of that event, edited for brevity, follow.

How did the events of 2022 change gas pricing, and which specific events led to fluctuations?

The turbulence in 2022 began in 2021. Prices started going up that summer, driven largely by the recovery from COVID and the mismatch between supply and demand. Going into Christmas, prices were significantly higher than expected. In the U.K., several electricity and gas suppliers got into trouble because they hadn’t hedged their positions and were facing big shortfalls.

In early 2022, things were starting to settle down and then Russia invaded Ukraine and prices spiked, going up over €200 a megawatt hour. Prices jumped again in the summer with the reduction in imports from Russia and the Nord Stream pipeline being out of service. September saw the peak in prices as utilities topped off their storage facilities, and outages at several French nuclear facilities drove additional demand for gas at a time when prices already were very high. It wasn’t until the last quarter of 2022 that prices started to decline.

Were the warm winter and the ability to fill storage facilities to capacity simply fortunate one-time events, or has Europe solved its supply problem long-term?

The big problem with gas is not insufficient supply — there are many sources other than Russia. The challenge is transporting it from where it’s produced to where it’s needed. What we saw last year were fleets of LNG tankers hovering along the coast of Europe waiting for the prices to go up so they could unload their cargo at the maximum price.

The other side of the issue involves demand. Actions taken by EU countries to reduce demand are working, and while demand from China is increasing, that doesn’t seem to be making a huge difference in global gas prices. High prices for LNG in Europe are attracting supplies, and China isn’t pulling that away.

What about next winter? Has Europe prepared adequately to refill its gas storage reserves?

The issue of reserves is enough of a priority among utilities, politicians, and customers that reserves shouldn’t be a problem next winter. When the war started, storage levels were very low — around 40% — in Germany, Italy, and the Netherlands, where the bulk of the storage is located. Coming out of the winter, storage was at about 60% of capacity, so there should be no problem topping it off over the summer.

Has Europe been able to reduce its reliance on Russian gas?

While there is still some Russian gas flowing through pipelines in Eastern Europe, Germany has almost entirely removed its reliance on Russian gas. Europe used to receive something like 40% of its gas from Russia, about 160 billion cubic meters per year. That level of consumption has dropped between 10% and 20%. German gas utilities quickly built LNG terminals that have allowed liquefied natural gas from the U.S., Algeria, and other places to replace the Russian gas. Norway’s pipelines also provide much more gas than before, including from Lithuania to Poland via a new pipeline. Italy has gas pipelines from Northern Africa as well as several LNG terminals enabling it to buy gas from elsewhere in the world.

What is Russia doing with the gas it formerly exported to Europe?

We understand that China and India are big consumers of Russian gas, but how are they getting it to those places? Pipeline networks to those two countries don’t appear to be robust, and building the infrastructure to deliver liquefied Russian natural gas will be costly and take some time. Current gas prices probably would make that investment economic, but in a world of lower gas prices, that might not be the case.

How much room is there for Europe to reduce its energy usage, and how effective has it been so far?

The warm 2022-23 winter certainly has made gauging the success of Europe’s conservation efforts more difficult. But there are many steps Europe has taken and will continue to take that will cut consumption. The simplest ones involve energy efficiency, including improving insulation and using gas more efficiently for electrical generation. The other main area involves a transition to electricity and using alternate sources of electrical generation. In that area, the growing use of heat pumps across Europe will make quite a difference, as will the use of wind and solar to generate electricity. These things are all coming, and some faster than others.

Any final thoughts?

Having adequate gas supplies long has been considered a market issue. The market has worked well for decades. We are now in a place where energy security has become a top government issue, and politicians are paying attention to how it is working. With economic uncertainty so prevalent and energy prices such a political hot button, not to mention concerns about global warming, it seems that politics, not the market, will continue to dominate gas supply issues for the foreseeable future.

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About Robert Hull

A longtime executive in the energy industry, Robert Hull has been Managing Director of Riverswan Energy Advisory since he founded the firm in 2017. He also has served as a Director at Intelligent Land Investments since 2017. Earlier, he was a Director at KPMG (2015-2017), a Managing Director at Ofgem (2005-2015), and Head of Business Development, Energy, Transport & Infrastructure at SNR Denton (2003-2005). He also spent many years at National Grid, where he was International Investment Director (1996-2002) and Strategy Manager (1990-1995).

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This energy industry article is adapted from the GLG Teleconference “European Gas Supplies and Pricing.” If you would like access to this event or would like to speak with energy industry experts like Robert Hull, or any of our approximately 1 million industry experts, please contact us.

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Questions Asked During the Teleconference:

• How did gas pricing change and fluctuate in 2022, and what key events led to the fluctuations?
• Were warm weather and maintaining high storage levels the only reasons Europe avoided a natural gas crisis over the past winter?
• Is Europe preparing adequately to refill its gas storage capacity ahead of the winter of 2023-24?
• How successful has Europe been in cutting its reliance on Russian gas? How much Russian gas do you expect will flow into Europe in 2023?
• Where has the Russian gas that formerly flowed into Europe gone? Has it been diverted to China or India?
• What countries did Europe rely on for gas imports in 2022?
• How did last year’s pipeline explosions affect the market for gas? Were the effects long-term or short-term?
• Is there further room for Europe to reduce its energy use and conserve supplies? How effective has Europe been at cutting its gas usage?
• What is your view of residential energy costs in 2023, particularly in the U.K.? Is there any place where you expect prices to fall?