European gas prices have risen sharply in the past two months, as EU nations strive to fill gas storage facilities ahead of the winter. The widening spread between the main EU benchmark, TTF, and the British price, NBP, reflects the lack of storage in Britain which means that the market can only absorb what it needs. As a result of its summer surplus, Britain has been exporting record volumes of gas to the Continent, and National Grid has in fact requested permission from the Joint Office of Gas Transporters to increase the pipeline pressure to allow even higher amounts of gas to be sent into EU storage facilities over the summer. However, this spread will narrow in winter when British gas demand rises and the surplus evaporates.
High levels of LNG supplies unlikely to continue into the Autumn as Asian demand rebounds
There continue to be concerns that EU gas storage targets may be missed going into the winter, despite LNG deliveries from the US to the EU looking set to exceed President Biden’s promise of an additional 15 bcm of gas.
The rate of US exports is likely to slow following a fire at Freeport LNG, which provides around 20% of the USA’s LNG processing capacity. A 700-foot section of pipe where LNG had become trapped exploded, releasing a cloud of gas that ignited in a fireball that lasted for 5 – 7 seconds, leaving a fire which burned for 30 minutes.
No injuries were reported from the explosion and fire, which consumed an estimated 1.6 million cubic feet of gas. Partial operations are not expected to resume until October at the earliest, with full operation not initially anticipated until the end of the year, however in an update last week the company said it expected to reach close to full operation in October, bringing much needed positive news to the market.
Buyers in Europe have managed to attract US LNG cargoes away from the Asian markets so far this year, driven by a need to build inventories, but with worries over Russian supplies falling further, Asian buyers are ramping up efforts to secure gas, hoping to secure winter shipments before a possible price spike.
Spot prices for gas in Europe and Asia are already trading at all-time highs for the time of year, with the Asian price discount to Europe shrinking in the last couple of weeks as utilities in Asia pay more to attract supply. This dynamic could be intensified should a covid-recovery in China result in an uptick in economic activity in the country which has yet to emerge from damaging covid-lockdowns. Either way, the global LNG market is expected to tighten again though as we move into the winter.
Worries have been expressed over the UK’s ability to attract gas this winter. Around 22% of Britain’s gas supplies are from LNG, and the country’s lack of storage means a just-in-time approach to procurement is taken. However, these concerns may be over-blown: Britain does not need to buy all of the available LNG in the global market, just enough for its needs, and as a relatively rich country, it has the ability to outbid many traditional LNG buyers. Prices, however, will be high.
“The really brutal and harsh reality is that Europe is pricing out large parts of the emerging markets. In the long term, this is not sustainable and it’s already causing energy shortages in south Asia,”
– Henning Gloystein, director of energy and climate at the Eurasia Group
Germany is also getting into the LNG game – from having no terminals at all due to its long-term partnership with Russia, the country is now hurrying to construct two permanent terminals which are expected to be operational in 2026, and five floating LNG facilities each with a maximum capacity in the region of 5 bcm are planned to be operational by the end of the year.
Floating LNG terminals use vessels known as floating storage and regasification units (“FSRUs”) which re-gasify gas from an LNG tanker and inject it directly into the gas grid. While these are positive developments for Germany, they can only replace a portion of the 56 bcm of gas the country imported from Russia in 2021.
EU gas reduction plan aims to offset Russian volumes
EU member states have agreed to a voluntary gas reduction plan, to cut gas demand by 15% to the end of March 2023 in an effort to save 45 billion cubic metres (bcm) of gas, although it is estimated it might only save around 30 bcm due to various exceptions and derogations. This arrangement comes as gas prices in the TTF prices reached their highest level since March, and could become binding in an emergency if a majority of EU countries agree.
The concerns driving both the EU demand reduction plan and the Asian buying activity relate to the prospect of further reductions in Russian supplies to Europe, after Gazprom reduced exports through Nord Stream 1 to around 20% of its capacity, a move it blamed on delays in the delivery of a serviced turbine from Siemens. Gazprom’s Deputy Chief Executive Vitaly Markelov told Rossiya 24 TV that the unit had been expected back in May, but has yet to arrive. According to Siemens, Gazprom has not provided the relevant customs documents.
Last week German Chancellor Olaf Scholz was photographed in front of the elusive turbine which is now in Germany, but the German government and Siemens on one hand, and Gazprom on the other, seem to disagree as to whether it can be re-installed, with Scholz saying there is nothing preventing Gazprom from shipping the turbine back to Russia for installation, while Gazprom says western sanctions make this impossible. Tom Marzec-Manser, an analyst at ICIS, told the FT that most people in the industry view the turbine issue as a Russian-manufactured distraction, with Gazprom indicating that volumes on Nord Stream 1 will not rise above 20% and could fall further.
“Russia is claiming that there is only one operable turbine left for NS1, which at some point in the near future will need (or be said to need) to come offline for its own maintenance. At that point flows on the line to Germany could drop to zero,”
– Tom Marzec-Manser, analyst at ICIS
While German gas storage levels are higher than they were this time last year, with the cuts to Nord Stream 1 flows, it is now virtually impossible that the storage targets for the winter will be met. The unusually hot summer weather is boosting cooling demand across Europe, putting further strain on the system. Analysts are concerned that the resulting drought with low water levels and higher water temperatures is having a negative effect on cooling systems for nuclear power plants (as is also happening in France) and reducing the capacity of coal barges, which have to run lighter in an effort to sit higher in the water. This is raising demand for gas in the power sector, and recent weeks have even seen some storage withdrawals. One in six Germany companies has had to scale back production in response to the crisis, with more expected to follow suit in the coming weeks.
Storage levels across the EU continue to rise despite current high prices, and various EU countries are responding both to the demand reduction targets and to concerns over high prices with new regulations, although the measures are not always meeting with public support. In Spain, which is taking the strongest action, new regulations forbid businesses from cooling their premises below 27oC or to heat them above 19oC under a decree which is set to remain in place until November 2023. The decree also prohibits the illumination of monuments, bans shops from lighting up their windows after 10pm, and requires shops to have an electronic display showing the inside temperature to passers-by. France, which expects to have fully filled its strategic gas storage facilities by 1 November, is considering rules to prohibit shops from leaving their doors open while air conditioning or heating are running, and banning illuminated advertising in all cities between 1am and 6 am.
As Western buyers turn away, Russia pivots to Asia
Looking to the longer term, while western buyers and their governments see the reduction in energy supplies from Russia as a permanent shift, Russia itself would like to pivot to Asia and in particular China and India.
In 2021, Russia sold around 33 bcm of gas to Asia, far below the typical annual exports to Europe of 160 – 200 bcm (of which about 20 bcm is LNG). Two-thirds of the gas Russia sent to Asia was LNG: 14 bcm from the Sakhalin-2 project, going to Japan, Korea, Taiwan, and China, and 8.5 bcm from Yamal, serving mostly China, but also Japan, Korea, Taiwan, and India (with smaller volumes going to Bangladesh, Indonesia, and Singapore). Russia also delivered 10 bcm to China through the Power of Siberia pipeline, which was launched in late 2019 and will eventually reach an annual capacity of 38 bcm. Russian LNG destined for Europe can only be diverted to Asia in the summer when the northern shipping routes are free of ice (although technically they could make the long voyage round Europe through Suez. Altogether, using existing infrastructure, Russia could supply 80 bcm of gas to Asia.
There are new projects being planned which could increase this amount: the Power of Siberia 2 pipeline would connect the Asian markets to the existing European pipeline infrastructure, allowing gas previously destined to Europe to be diverted to China and beyond. This pipeline, with a possible capacity of 50-80 bcm /year could enter operations in 2030 if it goes ahead – but that is a big “if” – while Russia would be understandably keen to be able to arbitrage the European and Asian markets, it would need financial support for the project, and may not get a good deal from China:
“The problem, however, is that China holds all the cards in the negotiations. And like the first Power of Siberia line, China will drive a hard bargain. What is unknowable at this point is whether China is ready to make a deal. Russia is likely to offer very attractive terms—if nothing else, due to its desperation. But will China accept them? Will they be tempted by the price, or will they think twice about expanding their dependence on Russia at this moment? How the Chinese will answer these questions is hard to know,”
– Nikos Tsafos, the James R. Schlesinger Chair in Energy and Geopolitics at the Energy Security and Climate Change Program at the Centre for Strategic and International Studies
Russia is also planning new LNG projects, in particular Arctic LNG 2, which would double the country’s Arctic LNG capacity if it is fully completed: of the three trains, the first is almost complete and should begin operations next year, the second about half-built and the third only in the early stages. However, with Western construction partners pulling out of the project, a recent production projection from the Russian Ministry of Economy suggests that only the first train will become operational.
While Russia would of course like to diversify away from European buyers, whose decision to shun the country’s energy is likely to be permanent, it is unlikely to be able to replace these volumes for years to come, and may struggle to sell on the same terms European buyers have accepted. While China will certainly drive a hard bargain, Russia may find it easier to deal with India and Pakistan, and other countries which are being priced out of the LNG markets by European and richer Asian buyers.
Great overview as usual . Seems to me despite loss of a large part of Russian piped gas to EU they are doing pretty well on filling storage and majority of countries on target for 80% by 1st Nov. Germany based on current trends could achieve that by end of August so may even achieve its over target 95% by 1st Nov.
I do hope that given UK has had the two gas i/c’s running at max export capacity for months now we will be able to buy back from EU if we need to deal with peak demand. Last time there was a gas crunch (2018) CCGTs were switched off to protect domestic demand and the coal stations left on the system had their last hurragh for several days we don’t have that luxury now however much money Kwarteng wants to chuck at the power station owners because his fellow politcians were only too happy to seem them demolished before the boilers had gone cold. At least German still has them even if getting coal to some of them maybe challenged by Rhine river levels currently. Furthermore we can’t guarantee importing at will over the electrical i/c’s either so we are now utterly dependant on the CCGTs if we get into a 2-3 day blocking high situation over northern Europe. I know you have drawn out attention to this and the fact the ESO has yet to show how it believes we can deal with this scenario.
That said what doesn’t seem to get much attention is how much demand destruction is going to happen off the back of these high prices. I for one have dropped the shower back a couple of degrees already and there is no way heating is going on before 1st November at its earliest. So i was interested to hear what Spain and France are doing and i know the anti nanny state of our politicians wouldn’t take such approach but ought to at least be offering out public information advice. If i was a business owner i would be telling staff the office we will be set one degree lower this year so wear appropriate clothes. Of course demand destruction won’t happen if govt continue to subsidise the cost and remove an incentive to do anything about economising.
Thanks Nicholas – my son wrote this post and is happy with the feedback!
I suspect we will continue to export to the EU during the winter – it looks as if TTF prices will continue to trade above NBP and that’s what determines flows. In an emergency situation we might be able to reduce or even reverse the flows, but the new “normal” this winter will probably be exports (instead of imports which is more typical in winter).
If we had a gas shortage coinciding with low wind generation we would be in really big trouble. However, I don’t think we will have a problem getting the gas we need, absent some infrastructure problem. Shutting down CCGTs really isn’t an option because we rely on them to meet electricity demand. We would need to shut down industrial gas consumption instead.
I think we are seeing some demand destruction as a result of higher prices, but I think we will need more in winter to balance against low wind. If We have low wind at the same time as Germany it will be even worse as both of us will be trying to import at the same time. I agree there is a lot of energy waste and that more affluent people should be encouraged to manage their consumption more, eg wearing more than just t-shirts indoors in winter. But people in fuel poverty are already cutting use to the bone and will need proper financial support to get through the winter…
I checked back over the last gas Winter Outlook. The peak day supply assumed 78mcm/d from BBZ and 47 mcm/ day from BBL. Replace that with 90mcm of export, and I think you have an impossible situation. Generation demand is likely to remain high with interconnector exports whenever we can manage them, so I would include 97mcm/d for electricity gen demand, even on a normal cold day with Dunkelflaute: French baseload power is still 1,000 €/MWh for the winter. We are not going to cut off the Irish. Much depends on how much gas the Norwegians can rustle up.
In any event I think it will be mostly very hard to keep export lines full, which is what has led to the TTF-NBP spread widening out during the summer, as no further export can be made to arbitrage it away. Once the pipes have spare capacity you will get arbitrage pricing and convergence and a bidding war for supply. In fact the spread for the winter months is already at parity: Dec NBP at 537p/th is (/2.93, to £/MWh, x1.18 to €/MWh) is 216€/MWh cf Dec TTF at 213€/MWh.
It’s going to be a nasty ride.
Well researched and informative article. It is getting a bit harder to understand what is happening with Russian LNG, given the tendency to switch off AIS much of the time. I found a useful summary of 2021 and earlier shipments here
and the page has a link to shipments in March through first half of May. However, apparent European destinations can be misleading. Transhipment in the Barents Sea off Russia and Norway was almost certainly for onward delivery to Asia in low or zero ice class vessels via Suez until it started to be used to mask Russian origin in countries running embargoes. When the arbitrage was open last year there were also many reloads out of Montoir, and some from Zeebrugge and Dunkerque and even Grain, also for Asian destination. I noted the other day that LNGSHIPS Manhattan headed from Dragon to Montoir. Its draught reveals it reloaded, and it is now headed to FEAST via Suez. Almost certainly Russian gas, because other gas would simply have taken the direct route.
I think the Reuters headline is a bit misleading about German FSRU terminals. They will struggle to get first landing of any before the end of this year, and the rest of the programme will take another year or more.
Chinese LNG purchases have exploded on the back of a massive increase in LNG terminal capacity. To some extent it is probably strategic: Chinese coal consumption continues unabated and is much cheaper (including large imports from Russia), but LNG purchases have made things awkward for the competition in Asia and Europe, and involves no military effort. Whether the Russians can persuaded that purchases might get scaled back if China is not granted good enough terms is an interesting question. I think you are right that the geopolitical judgements are key, which is why it is so important to develop alternative supply outside the Russo-Chinese orbit, just as it was to develop non-OPEC oil 40 years ago. That can defuse their geopolitical leverage.
Most of the charts are excellent, but I think the one from Refinitiv that uses percentages is rather misleading. With a little more effort you could have downloaded the data from the EIA here
and created your own chart based on volumes which would have been more meaningful.
Outstanding article, Adam. Great work!