15 May 2024 17:54

Europe fears cold winter and hot summer, every cubic meter of gas could count, European gas industry leaders say

MOSCOW. May 15 (Interfax) - The European gas market has replaced most of the Russian gas it used to receive with U.S. liquefied natural gas, but Europe has also been saved by extraordinarily mild winters, lower gas consumption by industry and increased use of renewable energy. However, European gas leaders believe the crisis is not over, and, faced by reduced supply flexibility and a recovery in consumption, infrastructure constraints and competition from Asia for LNG, as well as uncertainty over the continued transit of Russian gas through Ukraine, every cubic meter of gas could count in the event of a cold winter.

Greenhouse conditions

Cara MacDonald, head of LNG & Clean-Fuel Supply and Origination at RWE AG, said at the Flame gas conference at the end of April that Europe had been able to withstand the past two heating seasons thanks to mild weather and a demand side response. "Europe had much milder weather, especially in the winter of 2022-2023, which cooled consumption and allowed storage to fill up. Additionally, due to high gas prices, we have seen demand destruction in Europe, while in Asia, this meant more fuel switching," she said.

"But is the crisis over? Things could change in the coming winters, especially if there is no flexibility in LNG supplies. The only answer may be continued demand side response," MacDonald said, although she believes this might not save the situation.

"Yes, we coped by reducing demand, but can we do it again? When I look at demand side signals, I see that the market will become tighter," she said, adding that there was limited supply flexibility and any incident at an LNG plant could tighten the balance.

Glenn Vinvand Kviljo, head of trading at Equinor, also said the European market faced uncertainty in the coming winter after two mild winters: "Will there be another mild winter, or we will get back to the normal, cold winter? We cannot sit back and relax," he said.

Chief analyst at Uniper Energy, Gregor Pett, warned that despite the fact that the market has been more bearish in recent weeks and months, this was mainly associated with a weak economy, air temperatures, high storage and others. "But for most market participants, this is a fragile balance, and at any time the situation can turn around [...] and there could be a repeat of the crisis. It's not over, it's far from over," he said.

"It is difficult to foresee what will happen in terms of supply and demand. It depends on many things, including the weather. We can have a very mild winter, so gas demand in Europe will be low. If it's an extremely cold winter the demand will be higher than in the past two years and a lower supply could be a problem," a representative of a European gas trader told Interfax in an interview.

"If there was an outage of the production from Norway or hurricanes in the U.S. - there are many events which can happen and which can bring to a very tight situation in Europe where each Bcm of supply is important," the trader said, adding that a very hot summer could also cause demand to spike.

He said that current gas prices in Europe include a risk premium since all these factors were difficult to predict. "And each player has an own opinion if prices are fair or not. Currently the market is pricing in, I would say, a normal cold winter, but the winter can be different," the trader said.

Gas crunch

Europe has reduced gas consumption by about 20% over the past two years to approximately 330 billion cubic meters due to high gas prices (27 EU countries), as well as the energy transition drive, while some industrial demand for gas has been lost forever, some participants believe. However, there are signs of demand recovering.

Cheniere Energy said in a presentation that gas consumption in Europe was now below the 2017-2021 average. It fell 19% in the region's six biggest economies, with consumption in industry down 22% (between 18% and 23%), in energy - 14% (between 8% and 25%), in other sectors - 21% (between 17% and 28%).

Uniper Energy's Pett said Europe has lost a very large amount of industrial production due to high prices, but "we expect a lot of industrial demand to return to the market." However, most gas analysts were unable to say to what extent demand might return.

Gautam Mukherjee, head of gas analytics at BP, said it was necessary to look at sectors. For example, in industry, gas is being replaced by heat pumps; in the energy sector, on the one hand, there is more renewable energy, but on the other hand, coal is being replaced. Overall, he said, Europe has had very weak economic results over the past two years, so not only has demand for gas fallen, but demand for electricity has also been very low. And Europe's economy is expected to recover in the coming years, so demand for gas in both the power industry and other industry will increase.

Uniper Energy's Pett said the difference in consumption in a mild and normal winter for northwestern Europe was 30 billion cubic meters, and last winter was "extraordinarily mild."

Leftover Russian gas

Given the demand and uncertainty over the weather, gas market participants are concerned about whether the contract for Russian gas transit through Ukraine will be extended, and if not, whether LNG can replace it. Europe has lost over 100 billion cubic meters of pipeline gas supplies from Russia over the past two years, but supplies through Ukraine and TurkStream continue to some extent.

Andrei Prokofiev, head of Division for Cooperation with Clients at Gas Transmission System Operator of Ukraine (GTSOU), said that both the transit deal and the agreement between Gazprom and GTSOU would expire at the end of the year. "As the Ukrainian authorities and European Commission have said many times, Ukraine is not going to negotiate with Russia on this matter - no direct agreements. What does this mean from a practical point of view? Not having an agreement between operators means we'll not be putting any capacity up for at auction," he said.

"This is like the situation on our border with Romania, where we have interconnectors - Tekovo, Mediesu Aurit. "There is infrastructure, a tariff, but we cannot come to an agreement with the Romanian TSO due to technical problems. And neither we nor Romania are offering capacity," Prokofiev said.

Come, LNG, come

Last year, Europe bought about 135 bcm of LNG, almost half of it from the United States. However, industry participants say that there will be a limited supply of LNG on the market in 2024-2026. Marco Saalfrank, head of trading for continental Europe at Axpo, estimates that the market will be tight in Europe in 2026-2027 because Europe will need to pay high prices to attract LNG. In addition, there will be high volatility in the market because Europe has lost its flexibility (for supply), he said.

There is an opinion that higher gas prices for Europe will become a new reality. Andrew Walker of Cheniere Marketing said that Europe, as the largest market for US LNG exports, has not traditionally been tied to spot prices in Asia, where the market is tight, as it relies on pipeline supplies. However, now Europe is more tied to Asian prices. "So now this is a bit of a new reality for Europe, so Europe will probably have to get used to higher prices," he said.

Patrick Dugas, head of LNG trading at TotalEnergies, said that before the conflict in Ukraine, Europe was a balancing market where any cargo could find a home. However, then the paradigm changed, and Europe became a premium market like Asia. "I think in the coming months and years we will see competition for LNG between the two basins, European and Asian," he said.

Dugas also said that the European market has become characterized by volatility and uncertainty. "Every time there is a supply problem, it creates volatility in the market [...] and to solve these two problems, we need flexibility," he said.

The TotalEnergies trader said not to forget about the recovery in China, which imported 20 million tonnes of LNG in the first quarter, which is 4 million tonnes more than the previous year. "So recovery in demand in China and possibly Europe will be the two main themes in the market over the next few years," he said.

"There really is a maximum amount of LNG on the market now. And if there is no increase in supply with growing demand in Asia, Europe will not be able to fill the balance with liquefied natural gas," a spokesperson from RWE said.

Think long-term

However, LNG sellers need assurances that their products will be in demand in the long term. Landon Larson, marketing director for American LNG producer Sempra Infrastructure, said that European companies are now buying LNG, but Europe has announced decarbonization goals, and this puts pressure on investment decisions for the second wave of LNG projects, raising questions about whether or not the projects will be able to sell their LNG, and about their financial sustainability. At the same time, many believe that Europe has set unrealistic goals for its energy transition, at least where timing is concerned.

Meanwhile, the administration of U.S. President Joe Biden has already suspended the issuance of new licenses for LNG exports, intending to assess the extent to which Europe is focused on LNG purchases, or if it will still move away from using fossil fuels.

Axpo's Saalfrank said that there are risks in signing long-term contracts. Therefore, Europe is going to reduce gas consumption; in addition, one cannot exclude "the risk that Russian gas will return to the European market in 10-20 years," he said.

Another risk relates to price: gas purchases tied to oil or linked to Henry Hub spot pricing is sold at a TTF price in Europe, so such price risks are not easily hedged in long-term contracts. In addition, the trader said, there is a regulatory risk (on carbon regulation). "So, 3-4 years ago, Ireland and France refused to buy American LNG because it is produced in shale deposits," he said.

Nicola Duffin, head of LNG supply at Ineos Energy Trading, said that Ineos had the advantage of being a private company and is not under pressure from shareholders to divest from fossil fuels. "We are realistic and understand that we will need gas for the next 20 years. Other companies may agree with this, but they are not allowed to," she noted. In order to enter into a long-term agreement for the purchase of LNG, you need to be "relatively large and have a huge amount of money," Duffin said. It is difficult for small companies to operate in the LNG market.

Gulfstream LNG CEO Vivek Chandra said that traders help grow the LNG business by becoming intermediaries, for example, with countries like Sri Lanka that cannot enter into long-term contracts. Asia, especially China and India, are much more active in purchasing LNG, as they consider it a transition fuel, he said. In addition, we should not forget about the Middle East; for example, Kuwait has become an active buyer, as well as African countries.


But infrastructure is no less of a risk. Laurent Hamou of Gas Infrastructure Europe (GIE) said the gas infrastructure utilization in Europe has been at record levels over the past two years and this means that "in the coming years we cannot afford any disruptions. Any problem will be very noticeable, and we have a limited number of suppliers and less flexibility."

"Everyone says that everything is fine - there's spare capacity at LNG terminals in Europe. But I believe that, on the contrary, we need to increase capacity and give the market more flexibility. Let's see what happens in the next two years. Our contract for gas through Ukraine might come to an end, there might be some recovery in demand, and I'm sure we'll need more LNG terminals," he said.

Hamou said there was a regional discrepancy in Europe in this regard - for example, Spanish terminals were operating at normal levels, while infrastructure in south-eastern Europe, for example, the terminal in Greece, as well as infrastructure in Germany, were operating at a totally unusual level.

Halting gas transit through Ukraine will result in even bigger restrictions, but we need to think about all European consumers. "If French consumers paid the German price for gas like in 2022, they would be paying 5 billion euros more. This is a lot of money. You need geographical flexibility, time flexibility and supply flexibility. Any accident will affect prices," Hamou said.

Hungary is heavily reliant on Ukrainian transit. "Yes, some new infrastructure is being built, but it is not yet clear how it will work. There is a lot of infrastructure in the north and south, but gas needs to be delivered to the center," he said.

Thomas Thorkildsen, chief commercial officer at Hoegh LNG, in his presentation cited the degree of exposure of some European countries to Russian gas. Croatia gets 81% of its gas from Russia (1.4 bcm), Austria - 75% (5.6 bcm), Hungary - 62% (6.2 bcm), Slovakia - 57% (2.4 bcm), Serbia - 61% (2.1 bcm) Greece - 39% (2 bcm) and the Czech Republic - 35% (2.6 bcm).

Half of this gas enters the EU through Ukraine, the transit agreement ends at the end of 2024, and this must be borne in mind, he said.

A trader at Hungary's MVM CEEnergy told Interfax that the company was now buying 10-11 LNG cargoes, equivalent to 1 bcm of gas, at the Krk terminal in Croatia. The capacity booking contract is valid until 2027, and the company plans to bid at auctions for new capacity. But any increase in purchases will depend how LNG competes with pipeline supplies. Hungary is also counting on potentially higher production within the EU, in particular the Neptun project offshore Romania, which ExxonMobil could put on line in 2026-2027.

But the MVM CEEnergy trader said that although there is enough regasification capacity, pipeline tariffs across Europe might be too high to justify buying LNG.

GTSOU's Prokofiev echoed this. He said European markets were highly segmented and it was difficult to transport LNG from Greece to Slovakia, Austria or Germany. The issue of capacity can be resolved, for example, there is capacity in Ukraine. "But due to the tariff policies of some countries, this sometimes does not make economic sense. For example, the cost of storage in Germany, likewise in Austria, the anticipated increase in tariffs in Slovakia, make the problem more difficult. And this needs to be resolved, at least at the government level," he said, adding that since everyone protected their own market, perhaps a decision at the level of the European Commission is needed.

Prokofiev also said that last year about 2.5 billion cubic meters of gas were pumped into Ukrainian underground gas storage facilities by non-residents and another 0.6-0.7 bcm remained there. At the same time, the capacity of Ukrainian underground gas storage facilities is more than 10 bcm, which could cover a potential interruption of gas supplies to Europe.

More flexibility

Market participants believe that even more LNG terminals need to be built. Ineos Energy Trading's Duffin said Europe needed a huge amount of imported capacity by 2028. She said Northwestern Europe, under normal weather conditions, would have to import an additional 46 bcm of gas as LNG - demand is growing due to the switch from coal to gas, and internal production is falling.

But demand might also fall, so it might make more sense to use floating storage regasification units. But Duffin said it should be remembered that FSRUs are more expensive, do not last forever and they do not have operational flexibility. "So if governments put an end to subsidies and companies stop paying, they will go to other countries where they are needed more quickly. And I see that in Europe people soon forgot about this and are perhaps not taking it as seriously as they should," she said.

Hoegh LNG's Thorkildsen said the company currently owned 10 FSRUs, and a further three LNG tankers that can be converted into FSRUs, which usually takes up to 18 months, but there have been precedents where this happened within five months. He said a new FSRU costs about $500 million and that all shipyards were now booked until 2028.

Hoegh LNG estimates that in 2022 the order for new LNG vessels broke all records and amounted to 145 units, with 68 in 2023 and 44 tankers in 2024. At the same time, 10 gas carriers have already been built in 2024, another 60 are expected, with plans to build 86 tankers in 2025, 84 in 2026, 73 in 2027 and 26 in 2028.The LNG fleet is currently about 600 tankers, excluding FSRUs, which are mainly used as terminals.

The company's FSRUs operate under long-term contracts - half of them in Europe (three in Germany and one in each of France and Lithuania). But Thorkildsen said China was the only market that plans to increase regasification capacity to 200 bcm from the current 100 bcm. Other growing markets, such as Italy, Malaysia, Germany, India, Indonesia, Thailand and Bangladesh, where LNG demand is forecast to grow, are not making decisions to build regasification facilities.

He said Germany was the exception among European countries. But given the announced growth in imports and planned commissioning of regasification capacities, their utilization will reach 63% in 2025-2028 and 82% by 2029, which corresponds to the situation with capacity utilization in north-west Europe in 2022, when there was chaos and high prices. Utilization of LNG terminals in Germany will exceed 90% after 2030, reaching 95% in 2033.

In Italy it is even worse - utilization of its regasification capacity will reach 94% in 2024, and this will no longer be enough from 2027, given the planned import of LNG. "This doesn't look like energy security," Thorkildsen said.

According to Hoegh LNG, 40% of gas consumed in Europe in 2024 will be LNG - about 175 bcm of approximately 420 bcm consumed, while 119 bcm will be supplied by gas pipelines from Norway, 22 bcm by the gas pipeline from Russia, and 67 bcm will be produced in the EU and the UK.

A drop in Russian gas supplies is expected after 2024 as the transit contract with Ukraine expire; supplies from North Africa and Azerbaijan will remain largely at the same level; imports from Norway will decrease from 108 bcm in 2029 to 81 bcm in 2034 and 58 bcm in 2039; and Europe's own production will decrease to 60 bcm.

LNG supplies are expected to increase initially to 203 bcm in 2029, accounting for half of consumption, but as consumption falls to approximately 330 bcm in 2039, LNG purchases will also fall, to 157 bcm, Hoegh LNG says in its presentation.

The European Union is currently discussing a ban on imports of Russian LNG. Last year, Europe purchased about 18 bcm of LNG from Russia, with about 1 bcm of this redirected to Asian markets.

However, market participants believe European politicians will most likely postpone the embargo until 2027, when new LNG projects go on line for world markets.