Europe faces a series of disadvantages in winter gas supply

There are abundant gas reserves, but risks begin to stalk Europe when political instability emerges and the winter is likely to be harsh.

Earlier this week, Dutch and British wholesale gas prices rose after workers at Chevron's liquefied natural gas (LNG) facility voted to restart strikes. Along with that, the expected colder weather and tensions in the Middle East also increase pressure on this commodity.

According to data from the financial organization ICE, gas prices in Europe increased more than 5% in the October 10 trading session and for the first time since the end of August, rose above 500 USD per 1,000 m3. The November gas delivery contract at the TTF center in the Netherlands also increased to 508 USD per 1,000 m3, equivalent to 46.5 euros per MWh.

On October 9, Chevron stopped production at the Tamar gas field in the Mediterranean for safety reasons amid the escalating conflict between Palestine and Israel. Production shutdowns could lead to supply delays, including in Europe.

Furthermore, workers at two Chevron LNG facilities in Western Australia voted to restart strikes last weekend. The union accused the American corporation of reneging on an agreement reached to end the strike last month. Therefore, they decided to strike again from next week.

Analysts at Engie EnergyScan said that concerns about LNG from Australia have increased again, but are still not worrying. "We believe that the price increase is only temporary and currently prices are still within the market's fluctuation limits," the analysis team said.

But gas prices are also facing some other unfavorable developments. The conflict between Israel and Hamas has begun to stir up insecurity. And temperatures in the UK and northwestern Europe are expected to fall this weekend, which could increase heating demand.

In addition, the gas pipeline across the Baltic Sea between Finland and Estonia was closed on October 8 due to a suspected leak. Finnish gas system operator Gasgrid said repairs could take months or more if a puncture is confirmed.

LNG terminal in Wilhelmshaven, Germany, December 17, 2022. Photo: Reuters

In the fourth quarter, when winter begins, the European Union and the UK need about 118.3 billion cubic meters of gas, up 5.9% over the same period last year, according to S&P Global forecasts. This level is still lower than before the crisis. But any new disruptions or very cold winters still pose a risk of shortages.

First, gas consumption depends a lot on the weather. The unusually cold winter is likely to lead to additional residential and commercial demand in Europe of up to 30 billion cubic meters, according to estimates from the International Energy Agency.

Along with that, the threat of strikes in Australia's LNG sector and extended maintenance periods for facilities in Norway are signals that supply concerns continue. According to S&P Global, LNG imports into the EU and UK in the fourth quarter are expected to total 36.6 billion m3, down 8.9% over the same period last year. However, price competition with Asia may also be more intense, as spot LNG prices in Asia are currently higher.

And there remains a risk that gas imports from Russia will decline further. About 42 million m3 of Russian gas is still supplied to Europe every day through Sudzha - an import point on the border with Ukraine. Any escalation in hostilities could still disrupt exports there.

The European Union is also reconsidering buying gas from Azerbaijan, where it spent 15.6 billion euros to import in 2022, four times more than in 2021. Azerbaijan's market share in total imported gas supply in Europe is still modest but growing, from 2% in 2021 to 3% in 2022 and this year.

In July 2022, the EU signed an agreement with Azerbaijan to double gas purchases by 2027, to at least 20 billion m3 per year (compared to 8 billion m3 in 2021). But the deal is under criticism following Azerbaijan's attack in Nagorno-Karabakh. On October 5, the European Parliament passed a bill with a majority of votes demanding the "suspension" of the agreement and calling for "targeted sanctions" against Azerbaijan.

However, some other supply sources are still favorable. Flows through the TurkStream pipeline into Southern Europe reached a record high in August and are likely to continue in the fourth quarter, not least because that volume is mainly consumed in Hungary and Serbia, with which there are good relations. with Moscow.

Europe has also deployed new LNG import floating terminals and many of them will be ready for operation by the end of the year, including three facilities in Germany and warehouses in France and Greece.

As of September 25, Europe's gas reserves were 95.1% full, compared to 87.8% and 73.4% at the same time in 2022 and 2021. Head of the Energy Regulatory Authority German Klaus Müller said Germany was much better prepared for this winter than in 2022, but warned against complacency. "We can certainly be optimistic, but it's still too early to draw clear conclusions," he said.

On October 9, companies operating France's gas network said that the country should have enough supply even if this year's winter weather is harsh. But doing so will require significant imports of LNG and other sources from Spain, along with smart storage management and consumption levels as low as last year.