From the Editor: The European gas outlook brightens further, but vigilance must remain [Gas in Transition]

The TTF front-month gas price dipped to a two-year low on May 26, providing European consumers with some relief after a year and a half of exorbitant energy bills. Meanwhile, the continent continues to inject gas into its underground storage facilities at a healthy rate. As of May 27, the facilities were filled to nearly 68% of capacity – close to the top of the seven-year range. Avoiding any significant further market disruptions, the EU is very well-placed to reach its 90% storage utilisation target for November 1.

The broad consensus among experts is that high prices and an unusually mild winter were largely responsible for the market returning to something closer to the pre-COVID normal, and not policy. However, many do highlight the enforcing of storage requirements as an important factor, even though at times in the last year the scramble to inject as much gas as possible into underground facilities drove prices upwards.

Another consensus is that Europe must remain vigilant. There are many factors that could cause prices to soar once more. A strong economic recovery in Asia, particularly in China, would trigger a surge in LNG demand. Renewables could underperform, and next winter could be unusually cold. Russian pipeline gas flow has fallen to only 10-15% of the pre-war level, but that still represents a lot of gas. That flow currently averages 2bn m3/month, or 24bn m3 on an annualised basis, which is a sufficient amount to cause great market upset if it was removed.

Given the risks, it might be prudent for Europe to avoid making further efforts to reduce Russian gas imports. Proposals to curb Russian LNG imports to Europe, which soared by 50% last year even as pipeline flow collapsed, are gaining momentum. The latest EU sanctions package against Russia is also expected to include restrictions on the future use of Russian gas pipelines that are no longer operating – namely the Nord Stream and Yamal-Europe pipelines. The former, of course, were mostly rendered inoperable because of sabotage last autumn, while the latter route no longer flows gas westwards because of sanctions and counter-sanctions imposed by Poland and Russia.

Joint gas purchase platform “a remarkable success”

The European Commission on May 16 hailed its joint gas purchase platform launched earlier in the month as a “remarkable success.” The platform is designed to help consumers vulnerable to high gas prices and shortages secure enough supply to refill their storage facilities ahead of this winter. In the platform’s first tender, bidders placed orders for 11.6bn m3 of gas, while suppliers offered 13.4bn m3.

“This is nothing short of a remarkable success,” Maros Sefcovic, the commission’s vice president for institutional relations, commented after the first day of trading. “It shows that we were right to pool our demand, to use Europe’s collective pulling power, and to work together to fill our gas storage for next winter.”

Joint gas procurements are a logical move, as the EU should hopefully be able to use its collective buying clout to secure gas at a lower price. However, buyers and sellers now need to enter into negotiations, and only after those negotiations are concluded will it become clear how successful the tender was. Furthermore, it is yet to be determined how much extra gas the tender attracted to Europe, compared with supply that would have arrived in the continent anyway.

More difficulties ahead

For certain, the outlook for the European energy market has improved markedly over the past year. But it cannot be overstated that the continent is far from out of the woods just yet. Not only will next winter present further tests, but so too will the subsequent two or three winters until the next wave of global LNG supply arrives on the market.

And as many experts have noted, European governments should be doing more to encourage buyers to enter into long-term contracts with suppliers, to support greater investment in production and better ensure Europe’s energy security. Over the past year, final investment decisions on new liquefaction projects have mostly been underpinned by long-term contracts with Asia rather than European buyers. The latter have been seeking shorter-term contracts, and in some cases this appears to have resulted in them losing out on deals.

Part of the issue is that EU authorities envisage a rapid decline in natural gas demand over the next decade as Europe fulfils its climate ambitions. These projections rely heavily on a substantial increase in the use of renewables, biomethane and hydrogen. This view on the European energy outlook has led to a reluctance among some buyers to commit to long-term gas supply contracts, through fear that the gas will simply not be needed over such a long duration  of time.