European Gas Prices Soar on Disruption Concerns

European natural gas prices skyrocketed Thursday amid concerns that Russia's invasion of Ukraine could disrupt Russian gas transit flows to Europe.

Russian gas volumes via Ukraine remained unaffected through Thursday, but traders fear that they could be hit by an explosion along the pipeline or by a possible retaliatory move by Russia in response to Western sanctions.

The month-ahead Dutch TTF gas futures contract spiked 60% to a high of €144 per megawatt hour ($47.80 per million Btu) before settling with a gain of around €30 at €118.5/MWh — the highest settlement since mid-December.

Amid the uncertainty over the war in Ukraine, European buyers increased their gas offtake from Russia.

Ukrainian gas grid operator GTSOU confirmed that transit operations remained normal but added that the grid was operating in "increased security mode."

Volumes on the key transit route via Ukraine to Slovakia rose to around 2.55 million cubic meters per hour, or 61.2 MMcm/d, from 35.1 MMcm/d on Wednesday.

Gazprom's total nominated Ukraine transit flows for Thursday were 84 MMcm, up from around 60 MMcm on Wednesday, according to GTSOU.

Gazprom nominated 107.7 MMcm for Friday, close to the 110 MMcm/d booked under the five-year transit deal with Ukraine signed in late 2019.

Flows via Gazprom's Nord Stream 1 pipeline under the Baltic Sea to Germany remained above the line's 151 MMcm/d nameplate capacity.

Westward flows via the Yamal-Europe pipeline across Poland and into Germany have been zero since Dec. 21, 2021.

Limited Short-Term Vulnerability

With slightly more than a month left of the traditional winter heating season, European leaders have been growing more confident that a disruption of Russian gas transit flows would be manageable albeit expensive.

German Economy Minister Robert Habeck told German media he was confident that sufficient oil, gas and coal supplies can be procured from other countries if Russian imports are interrupted. Germany is Europe's biggest gas market.

Timm Kehler, head of German gas industry association Zukunft Gas, said Germany's gas supplies are secure in the short-term.

Total EU gas stocks were 336.6 terawatt hours (32 Bcm), or just 30.4% of available storage capacity, as of Feb. 22, which was 20% below the year-ago level and 27% below the five-year average, according to data from Gas Infrastructure Europe.

German gas inventories were 3% down year on year at 73.3 TWh, or 30.4% of capacity.

While an accidental or intentional disruption of Ukrainian transit flows is still possible, Europe is less exposed to a disruption along that transit corridor than before 2019, when the Ukrainian route accounted for over 80% of Russian gas flows to Europe.

Morningstar said in a research note Thursday that the loss of supplies through Ukraine for two weeks would add up to less than 2 Bcm of gas, which could be offset by LNG supplies and storage withdrawals.

An experienced market observer said it's unlikely that Russia would halt flows via its offshore pipelines — Nord Stream, Turk Stream and Blue Stream — because this would bankrupt Gazprom, which relies heavily on revenues from sales to Europe.

The Kiel Institute for the World Economy said a Russian threat to suspend oil and gas supplies would "not [be] very credible" as it would hurt Russia more than Europe, which could replace the missing imports with supplies from elsewhere.

The institute calculates that an embargo that blocked Russian gas exports to Europe would cause Russia's GDP to decline by 2.9%, while Germany's GDP would actually increase by 0.1% and the EU's would rise slightly.

Damaged Relationship

Russia's attack on Ukraine will likely prompt Europe to step up its efforts to diversify its sources of energy imports and Western sanctions could result in European energy companies withdrawing from Russia or freezing operations and investments there.

"This latest military escalation also shakes the economic cooperation between Russia and Europe that has been built up over decades," said Mario Mehren, the CEO of German oil and gas producer Wintershall Dea.

"That will have far-reaching consequences,” he added. "To what extent cannot yet be foreseen."

Wintershall Dea has a long-term business relationship with Gazprom and is one of relatively few foreign companies that have been permitted to participate in upstream oil and gas development in Russia.

It is also one of five European companies that helped finance the controversial Nord Stream 2 gas pipeline.

The company canceled its annual earnings press conference on Thursday because of the war in Ukraine, saying that "today is not a day to talk about financial results."

Russian Gas Pipelines to Europe