In the twelve months before Russia’s invasion, Russian gas supply via Yamal and Nord Stream accounted for 28.2% of Northwest Europe’s gas supply with LNG providing 16.8%, while in the twelve months to February 2023 the share of Russian gas fell to 11.3% and LNG increased to 36.2%. But while LNG has increased 87.2% year-on-year it has only displaced 79.6% of lost Russian gas, which fell 65.3% year-on-year. To replace the full-year loss of Russian gas in 2023, and assuming that other gas imports (mainly from Norway and the UK), indigenous production, and demand reduction are stable, Northwest Europe LNG will have to increase by almost a quarter in 2023-24.
While Germany was most directly dependent on Russian gas, which accounted for 85.7% of actual domestic consumption in the period March 2021 – February 2022, Russian gas also enabled Germany to export 5068 GWh of gas within Europe over the 12-month period. Removing Russian gas has had a domino effect on Northwest Europe’s gas balance. In the 12-months ending February 2023 Germany has switched from net exports of 5068 GWh to net imports of 8168 GWh, France has switched from net imports of 1891 GWh to net exports of 3604 GWh, and Belgium’s net exports have increased from 2139 GWh to 10 532 GWh.
Within Northwest Europe the greatest annual increase in LNG has been in Belgium, rising from 1356 GWh in 2021/22 to 4185 GWh in 2022/23 or 208.8% higher, while Dutch LNG has increased 89% year-on-year with the addition of the Eemshaven terminal, and the French send-out has increased by 61.5%.
Aside from the growth in LNG and the rebalancing of intra-Europe gas flows, the other major change has been gas consumption. Indeed, without lower gas demand Europe would have faced a gas supply shortage in the past year. Collectively, Northwest Europe gas consumption has declined by 15.5% year-on-year. In Germany, demand has fallen 8.7% with French demand 11.5% lower, Belgian demand is 20.1% lower and Dutch demand 22.4% lower.
While higher gas prices removed some industrial demand, most of the reduction has been in the residential/local distribution zone (LDZ) sectors. In France, residential/LDZ demand fell by 19.4% and industrial demand by 12.9%, In Belgium residential/LDZ fell 20.5% and industrial 16.6%, and in the Netherlands LDZ fell 22.8% and non-LDZ was 17% lower.
In the near-term Europe faces two potential risks: rising gas demand and/or reduced LNG supply growth.
With demand destruction driven by surging gas prices in 2022 there is a risk that lower gas prices in 2023 will stimulate a partial demand reversal. But while prompt TTF (Title Transfer Facility) prices have fallen by 84% since the August peak, prices are still almost 200% higher than in March 2022 and appear to be finding a price floor around €45-50/MWh. Without subsidies these prices make a significant demand recovery unlikely, but rising carbon prices could stimulate gas demand growth. The EU benchmark Dec-23 EU carbon contract breached €100/t for the first time in February, and if prices were able to consolidate above €100/t it could make coal-burn less economical even at low coal prices, and stimulate coal to gas switching.
The potential LNG risk is presented by China, with LNG imports falling by 19.5% year-on-year in 2022 as the country remained locked down by strict Covid restrictions. With China’s economy forecast to rebound in 2023 its LNG imports will increase and could account for as much as 80% of the new liquefaction capacity expected to come online this year. With emerging Asia LNG demand centres in Thailand and the Philippines augmenting demand from established LNG markets in India, Japan, and South Korea, there is a risk that Europe will struggle to meet its LNG growth requirement in 2023 if there are outages in the USA and Middle East. But even if there are no outages, China demand growth would be expected to push Asia LNG prices higher.
Demand and LNG are concatenated. If gas demand destruction is maintained or increased it reduces the pressure on LNG demand growth, assuming other supply sources are stable. This concatenation also feeds into prices. To prevent demand growth stimulation further price erosion needs to be limited, while if Europe has to compete with China/Asia for LNG cargoes the gas price will increase.
With winter successfully navigated and aggregate Europe gas storage at 55% full and at a 12-year high, some may have thought further summer price erosion likely, but there is a gut feeling that TTF is currently undervalued. The reasoning being that further price erosion will likely stimulate stronger industrial demand recovery, while the expected rise in LNG prices over the summer as Asia restocks will require higher European prices to attract cargoes to Europe. Also, while robust storage will help offset the full-year loss of Russian gas via Nord Stream the market will remain vulnerable to supply shocks, and in March France’s unions duly provided the strike action that disrupted LNG send-out and power production, and delayed maintenance at several nuclear reactors, while the discovery of more corrosion again raised French nuclear reliability concerns.
After Russia, Europe has a less diverse gas supply market, has a greater exposure to LNG supply security, is more reliant on demand destruction and balancing intra-Europe gas flows, has a greater exposure to supply shocks and a greater propensity for price volatility, and this comes with a necessarily higher price. Over time the market will become more sanguine, prices will erode, and volatility will reduce as investment in hydrogen and rising renewable generation reduce gas demand. But in the near-term Europe has to adapt to, and pay the cost of, a market that was not of its making but was always a possibility.
Author: Jeremy Wilcox, managing director of the Energy Partnership, an independent Thailand-based energy and environment consulting firm
