Gas markets see ‘notable firsts’ amid energy crisis exacerbated by Russia’s war in Ukraine

European natural gas markets witnessed a number of ‘notable firsts,’ ranging from expanding infrastructure to skyrocketing prices as Russia’s war in Ukraine deepened the energy crisis in its first year.

Gas prices in Europe started to rise in the summer of 2021 with an increase in the supply-demand imbalance following the recovery from COVID-19. Over the same period, Russia lowered gas flow to contract-based customers in Europe.

The European benchmark for natural gas prices, TTF, which stood at €30 per megawatt-hour in September 2021, reached over €300 per megawatt-hour for the first time in August last year, after a sustained rise following the war.

‘This is a 10- to 15-fold increase vis-à-vis historic levels. As a consequence, for the first time, refilling gas storage sites in the EU cost almost €100 billion in the refilling season of 2021-2022, versus an average of €12 billion in the previous 10 years,’ Giovanni Sgaravatti, a research analyst at Brussels-based policy research think tank Bruegel, told Anadolu.

‘With Russia’s invasion of Ukraine, it became clear that Europe’s dependency on energy imports from Russia is not a theoretical issue but a grave strategic liability. Russia tried to exploit this vulnerability by emptying EU storage sites over the summer of 2021, leaving the EU in need of an extra 33 billion cubic meters to refill its storage facilities,’ he said.

Russia, with 155 billion cubic meters of gas in 2021, accounted for over 40% of the European Union’s (EU) gas imports.

According to Sgaravatti, Russia reduced its gas imports to the EU by 76% year on year in 2022, and the EU responded by reducing gas demand by more than 10% and nearly doubling its LNG imports.

– EU’s LNG imports from US and Russian up by 143% and 12%, respectively

Milder weather played a role in reducing gas demand, and the EU’s gas consumption fell by 19.3% in the period from August last year to January this year, compared with the average gas consumption for the same months between 2017 and 2022, according to Eurostat.

‘Even though a reduction in gas consumption in Europe in 2022 was achieved, it was not enough to make up for declining Russian gas supplies. And as a consequence, Europe increased LNG imports by 60%, driving global LNG spot prices to record highs and squeezing the volumes of LNG available to developing economies,’ Ana Maria Jaller-Makarewicz, an energy analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), told Anadolu.

The EU’s LNG imports from the US and Qatar grew by 143% and 23%, respectively, and those from Russia by 12%.

Jaller-Makarewicz said as Russian piped gas flows to the EU dropped last year, some countries continued LNG imports from Russia, ‘working against a commonly agreed goal of ensuring energy security and cutting dependence on Russian sources.’

France, Spain and Belgium’s Russian LNG imports rose by 55% in total, she said, while those in Croatia, Lithuania, Portugal, Sweden and the UK sharply reduced their Russian LNG imports last year.

The UK’s Foreign, Commonwealth and Development Office announced on Jan. 1 that the country would halt imports of Russian LNG.

‘Global LNG supply suffered maintenance and disruption issues, which also affected the price. LNG has now been referred to as a global expensive, risky and volatile industry,’ Jaller-Makarewicz noted.

– List of countries with new LNG infrastructure plans grows

Supply security concerns and the objective of cutting gas reliance on Russia led to the expansion of LNG infrastructure in some EU countries.

‘It was the first time we have seen such an extent of investment in LNG infrastructure across Europe concentrated in such a short time span,’ Sgaravatti said.

According to Jaller-Makarewicz, Germany is planning three onshore LNG terminal projects and has accelerated six floating storage and regasification unit (FSRU) projects, while Snam is developing two FSRU projects in Italy, in addition to new onshore terminals and capacity expansion of the existing terminal.

As Finland and Estonia agreed on a joint project to rapidly develop a FSRU project, France, the Netherlands and Greece also joined the list of countries with new FSRU plans.

Germany’s first floating LNG terminal in Wilhelmshaven came into operation in December 2022 with 7.5 billion cubic meters of capacity, while the Netherlands developed a new 8 billion cubic meter floating LNG terminal in Eemshaven, which has been operational since September 2022.

Croatia announced its decision to increase the capacity of its Krk LNG terminal from 2.6 billion cubic meters per year to 6.1 billion cubic meters per year.

‘But there is a great risk that all these new LNG terminals will not be needed in the future, and they could become stranded assets,’ Jaller-Makarewicz warned.

‘Assuming the RePowerEU targets are achieved and that gas consumption in Türkiye does not fall, then total European demand for LNG would only be approximately 150 billion cubic meters in 2030, down from roughly 175 billion cubic meters in 2022, implying that the utilization rate of Europe’s LNG terminals would fall below 40%.’

– EU’s dependency on Russia drop to 14%

The LNG market shows the vulnerability to factors that impact the global supply and demand and thus increase volatility, instead of stabilizing the prices, she said.

‘The more LNG is traded globally, the more its prices are affected by geo-political issues, weather, the state of the economy in different nations, the prices of other fuels, increases in renewable generation, gas storage levels, and war,’ she said.

With the increase in LNG supplies and drop in demand, the EU’s dependence on Russian gas has largely disappeared.

‘Comparing January 2021 and January 2023, the EU’s dependency on Russia decreased from 51% to 14%, as EU imports of Russian gas decreased by 76%,’ Sgaravatti noted.

He also warned that as gas prices in the EU have stabilized due to a number of factors, from mild weather to strong LNG supplies, they could rise again in the next refilling season before further decreasing next year.

The gas storage facilities in the EU were 63.7% full as of Feb. 20, while they were 54.9% full in the UK.

• European natural gas