Europe

DIDIER HOLLEAUX President Eurogas, Executive Vice President Engie and IGU Regional Coordinator.

A generally mild winter, very high levels of storage and significant demand reduction, particularly in industry, have caused prices to ease back considerably in Europe.

» European gas prices stabilised at €50-60 per MWh in January and February, and have seen further decline since then.

» This is despite record low Russian pipeline supply – around 25 bcma on an annualised basis since October 2022, or a sixth of the volume in 2021. Russian pipeline gas now only arrives in Europe via Ukraine and the TurkStream.

» The European decision to apply a price cap on TTF gas may have had a psychological impact that caused prices to relax, even if the cap (€180 per MWh) is far higher than market prices since the adoption of the regulation on December 22, 2022, and the conditions for the price cap to apply are quite restrictive.

» Current prices may be far lower than those extreme ones seen during the summer, which regularly exceeded €100 per MWh, and peaked at €350 per MWh. But they are still two times higher than the €20-30 per MWh price range that was considered normal in the years prior to the COVID-19 pandemic.

» As a result of lower prices, and some network congestion, some spot LNG cargoes have been reallocated to other destinations – namely Asia – since the end of last year.

Attention shifts to the summer injection period, as authorities prepare to meet gas storage obligations ahead of next winter.

» In Western Europe, the race to install new regasification capacities is ongoing, and two new floating terminals have been put in operations in Germany in Wilhelmshaven and Lubmin, and a third in Brunsbüttel is undergoing commissioning. A number more terminals are anticipated to start up in France, Estonia, Greece, Italy and Turkey, as well as an additional two or three in Germany. This will allow Europe to import as much LNG as is available on the world spot market for the years to come and to bring this LNG as close to where the demand is as possible.

» In Eastern Europe, countries that were historically very dependent on Russian gas have reached agreements with neighbours to import LNG. Bulgaria has signed a deal to receive LNG from Turkish terminals, and several countries are assisting with alternative supply for Moldova.

» Nevertheless, new long-term supply contracts signed in 2022 and clearly dedicated to Europe amounted only to circa 15 bcma of gas, which is less than a fifth of the missing pipe gas supply from Russia, which amounted to 142 bcm in 2021. This means Europe will rely heavily on the LNG spot market to balance its gas market in 2026-27. It also means that European buyers did not trigger by themselves any new supply investment, with one US liquefaction project as the only exception.

» The European Council and Commission are still working on creating an appropriate framework for European players to jointly purchase the additional gas they need: it is not yet clear if this initiative will have a significant impact either in the short term (gas purchases to fill up the storages in 2023 are already well underway) or in the long term (will the conditions allowing European players to share a long-term contract be met?). The European Commission has announced that the “aggregation tool” designed to facilitate these joint purchases by gathering all quantities which could be bought together will be available in March.

» The domestic production of renewable gas (biomethane, landfill gas, etc.) is now viewed very positively, both for security of supply and for the environment, and its cost is now also considered acceptable (in comparison to the price of natural gas last summer). As a consequence, many countries in Europe are developing more ambitious policies and the output target proposed by the commission (35 bcma in 2030, in REPowerEU ) is generally seen as achievable. demand will not return.

» High prices have cut industrial gas demand in Europe as a whole by around 26%, and in some countries the reduction has been as much as 40%. These declines are the result of energy efficiency, fuel switching and demand destruction, as some plants have simply halted production because they or their customers cannot afford the high cost of energy.

» S&P Global estimates that 27% of this demand destruction (i.e. 7% of the European industrial gas demand) will not come back. We know from experience that energy efficiency cannot achieve more than a 3% demand reduction on average per year. This means that 2022 alone has seen the destruction of roughly 4% of the industrial gas demand (plants closed down indefinitely or relocated outside Europe), because of the energy crisis. The rest of the demand is expected to be restored, as there is fuel switching in the opposite direction, and plants temporarily closed are restarted.

» In the residential sector, even if most of the countries have put in place protection measures to avoid households to pay very extreme prices, the combination of high prices and strong incentives to save energy has led to a significant reduction of gas demand.

» As far as gas-to-power is concerned, the situation has been very different across Europe, as gas-fired power plants have generally been the balancing tool of the power market, and therefore very active when and where hydro, wind and nuclear output has been low.

Unfortunately, the crisis is far from over and the supply security of Europe could be jeopardised by any major incident in the LNG supply chain worldwide.

» The situation will remain critical for at least the next three winters, and re-establishing the security of supply after 2026 will require Europe to make new long-term commitments for gas supply.

» To contribute to its energy security, but also to its external trade position, Europe must also develop its potential for biomethane and renewable H2. In that regard, the 35 bcm of biomethane proposed by the European Commission and now endorsed by the European parliament for 2030 should be considered only as a minimum. As far as renewable and low-carbon hydrogen is concerned, the Delegated Act published by the Commission on February 21 provides a framework that should allow concrete projects to be developed.