Ukraine: What's at Stake for European Gas?

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Europe's dependence on Russian gas has come under close scrutiny as tensions between Russia and the West over Ukraine spook an already tight energy market.

The EU consumed 394 billion cubic meters of natural gas in 2020 and imports accounted for about 83% of that total. Russia is the dominant source of pipeline imports with a share of around 43% in 2020.

The continent's gas storage levels have sunk to historic lows since last year as the result of an extended period of winter cold in 2020-21, lower LNG imports and limited incremental pipeline flows from Gazprom.

This has driven a sharp rise in gas and power prices, and the current standoff over Ukraine could exacerbate the problem.

Energy Intelligence looks at four possible supply scenarios and their implications for European energy markets below:

Complete Shutdown 

Historical precedent suggests that Russia will keep its gas flows to Europe — its main export market — more or less steady.

It's not in the best interests of either side for those flows to undergo a major disruption, and experts say such a scenario is highly unlikely outside of a full-scale war between Russia and the West.

Energy Intelligence conservatively forecasts that Gazprom could lose from around $200 million-$230 million per day in sales revenue if it were to shut down all pipeline gas deliveries to Europe. Penalties and fees would push the total higher.

Kremlin spokesman Dmitry Peskov said on Monday that such fears are "fake hysteria" and reiterated that Russia has always met its contractual obligations for gas supply.

European buyers, meanwhile, have little incentive to stop buying gas from Russia as they have few alternative sources of supply.

Western sanctions could target Russia's energy sector, but they are more likely to hit financial flows and future investments rather than current trade.

Nevertheless, under a full shutdown scenario, there's no doubt that Europe's natural gas prices would skyrocket.

Additional LNG cargoes would flow into the continent and countries would draw down already depleted storage.

From a technical point of view, Europe has enough LNG regasification capacity to compensate for the loss of Russian imports. But doing that in practice would be another matter.

Cutting Off Ukraine Transit

A cutoff of gas transit via Ukraine looks to be the most likely of any supply disruption scenarios if diplomatic talks fail. Flows via Ukraine could also be vulnerable to sabotage or damage if a conflict erupts.

The effect on Europe of such a move would be less acute than it was during the last major transit shutdown in 2009.

State-controlled Gazprom has already reduced Ukrainian transit flows significantly, which could be seen as a move to put more pressure on Kiev.

Low flows would limit the opportunities for Europe to send Russian gas back into Ukraine to help it out if it faces a winter fuel crisis.

Gazprom shipped an average of 50.3 MMcm/d via the Ukraine pipeline route from Jan. 1-22, down from 109 MMcm/d a month ago.

It has booked just under 110 MMcm/d of annual transit capacity in Ukraine for this year under a five-year deal signed in late 2019.

Most of that gas is shipped on to Slovakia, where it is then sent to Austria and Italy. Poland and Moldova also receive limited Ukrainian transit volumes.

Ukrainian transit flows could be redirected into the 33 Bcm/yr Yamal-Europe pipeline, which runs from Russia through Belarus and Poland and then into Germany.

The Yamal pipeline has been flowing gas eastward from Germany to Poland since Dec. 21, contrary to its usual westward flows from Poland to Germany, but Gazprom says that reflects customer nominations.

The Gazprom-controlled Nord Stream 1 and Turk Stream pipelines are both operating at full or close to full capacity and could not carry much additional gas.

Limited Gas Disruptions

Gazprom has been careful to avoid risking its reputation as a reliable supplier by allowing gas flows to Europe to dip below the minimum contractual volumes, but small declines in daily flows could be used as a tool to put more pressure on Europe.

Under such a scenario, European energy prices could surge again, particularly if such reductions coincided with cold weather or a rise in Asian demand that draws in additional LNG volumes.

But it's unclear how low Gazprom could go, given that it is already supplying close to the minimum contractual levels.

In the first 15 days of January, it exported only around 5 Bcm to Europe (including Turkey), down 44% versus the same period of last year, Energy Intelligence calculates based on data from the company.

Business as Usual

Based on recent flow trends, European gas prices could continue to seesaw because the market is highly illiquid, with players reluctant to step into such a volatile and expensive market.

But Russia's actions would be just one of several factors that set European gas prices, along with the prevailing temperatures, wind speeds (that impact renewable power generation) and competition with Asia for LNG cargoes.

The month-ahead Dutch TTF gas futures contract — the European benchmark — has remained fairly stable at €75-€79 per megawatt hour ($24.5-$25.9 per million Btu) recently — down from December peaks of nearly €180/MWh.

The retreat in prices since December reflects mild weather and a strong inflow of LNG into Europe.

However, prices rose to €93.50/MWh on Monday, with many market players pointing to the rising tensions around Ukraine as the primary factor.

Russian Gas Pipelines To Europe


Military Conflict, Sanctions, Gas Pipelines, Gas Prices, Gas Supply, Gas Futures and Derivatives
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