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TURBULENCE IN EUROPEAN GAS MARKETS: CURRENT PROBLEMS AND PROSPECTS
O.E. Kaneva, Graduate Student
V.I. Kapustkin, Candidate of Economic Sciences, Associate Professor Saint Petersburg State University (Russia, St. Petersburg)
DOI:10.24412/2411-0450-2022-12-1-146-152
Abstract. This paper examines the gas balance of Europe, its changes, as well as any consequences and the possibility of such a situation. The authors identified the main prospects for the development of the European gas market in the context of the international global energy revolution, as well as its prospects, taking into account the dependence of the EU countries on Russian gas. The main findings of the demand analysis suggest that the growing demand in Europe for a sample of streaming gas is entailing very sharp price increases, which is a real reminder of the fragility and fragility of the energy system during the current changes. The main question to be decided is whether the crisis will act as a catalyst for the transition to extreme energy or as a catalyst for rapid action in this implementation.
Keywords: natural gas, European gas balance, gas trading, liquified natural gas (LNG), prices on gas.
Every energy crisis has something similar with the fluctuations the past, and the severe tensions in the markets today can be compared to the acute energy disruptions in modern history of energy, especially the 1970s oil shocks. These times, alike current situation, there were undoubted geopolitical reasons of price increases, which resulted to high inflation and economic damage. Then, as now, the crises exposed some underlying weaknesses and dependencies in the energy system. These times, alike current situation, increased prices were driving force for economic incentives to react, and these incentives were backed up by consideration of firstly economic and secondly energy security.
But global energy crisis nowadays is much broader and more complicated than those of the past. The turmoil of the 1970s was oil-related to minor extant, and the challenge for politicians was relatively clear: to decrease dependence on oil and especially its imports. In contrast, the energy crisis today has several specific facets: natural gas as a main, but there are also oil, coal, electricity ones, and in addition food security and climate change as complicating factors. That is why the solutions are also all-encompassing. Ultimately, it is required not only to diversify energy production away from one type of energy re-
source, but also to transform the nature of the energy system, while maintaining the affordable and reliable provision of energy services.
These days we are evidencing global energy crisis, Europe here is the main theater where it is being played out and natural gas is the spotlight. Russian gas supplies to the European Union have decreased significantly compared to what it was in recent years. This, of course, created a huge pressure on the gas balance for Europe.
Its changes will be explored in this article, as well as what threats and opportunities can be met along the way. Each scenario is built on a various vision of how authorities can respond to current crisis. The Stated Policies Scenario (STEPS) explores how the energy system will develop if governments maintain the current policy settings. In the Announced Pledges Scenario (APS), authorities take advantage of the doubts. According to this scenario, their goals are met fully and on time. The trends in this scenario show the extent of the world's collective ambition in its current form to combat climate change and achieve other goals of sustainable development.
Both of these two scenarios address current energy security and climate challenges not in similar ways, but the beginning for today's policy makers is primarily different
from that faced by the counterparts in the 1970s. Climate and environmental issues are much severe due to the rise in emissions over half a century. Nevertheless, clean technology options today are also more mature and cost-competitive, providing opportunities for more efficient energy use and new types of storages.
The main question is how effective and quick they can be distributed alongside previous technologies, and then in their place. All the assumptions further are based on the Announced Pledges Scenario. The paper purpose is to evaluate turbulence in European gas markets, their current problems and prospects.
Analyses and results
Global market of natural gas started 2022 with expectations of moderate demand growth, but all changed after Russian "Special Military Operation" (SMO) in Ukraine on February. In addition to mass human tragedy, this milestone provoked a severe energy crisis with wide-ranging implications for the global economy and energy prospects.
Over the last decade, the dependence of EU countries on Russian gas has steadily increased. Natural gas consumption in the EU has not changed broadly during this period, though production has decreased by two-thirds since 2010, this gap has been fulfilled by increasing import. Dependence on Russian gas imports has risen despite all the crises and tensions, including supply cuts in 2009 and the reunion with Crimea (accession of Crimea by the Russian Federation due to EU and other West) in 2014. The share of Russian gas
meeting total EU demand has risen from 28% in 2009 up to 46% in 2019. High level of LNG inflows in 2020 on the back of a global supply glut reduced the Russian gas share to around 40%.
In 2021, Russian gas share remained at the same level driven by Gazprom's strategy to reduce short-term sales, despite the availability of spare capacity and high revenue potential in export markets. The artificial deficit created by Gazprom has further tightened the EU gas market, pushing prices to record levels and leading to several price hikes during the 2021-2022 heating season. Despite reduced pipeline deliveries, the EU accounted for 60% of Russian gas exports and about 70% of gas export earnings in 2021, emphasizing robust interdependence. The fall in pipeline supplies from Russia continued in the first half of 2022, dropping by 30% compared to the same period last year. Unilateral cuts in deliveries by Gazprom to several EU members in the second quarter further provided to lower transfers and intensified uncertainty in the market.
The company drastically decreased gas supply by Nord Stream in June. Assumed the flow structure remains the same, Russian pipeline gas imports to the EU in 2022 will fall by more than 45% to less than 80 billion cubic meters (bcm), but Russian LNG inflows are projected to remain above last year levels. Russian gas share in EU demand is expected to fall to 24% in 2022 (Figure 1), the minimum level over the last two decades.
Figure 1. The European Union's reliance on Russian gas in 2001-2022
Sources: IEA analysis based on IEA Energy Data Centre and various external sources.
These supply cuts have thrown the European Union's gas sector into disarray. Shipments from Russia to the EU have already fallen by almost 40% in the first half of 2022 as Russia terminated supply contracts for several EU countries owing to the buyer's rejection to allow a unilateral payment system change. Exports to former Gazprom subsidiaries in Germany have stopped, and major importers including Germany and Italy plan to phase out Russian gas during this decade. With its RePowerEU plan, the EU is launching a process to eliminate the structural dependence on energy imports from Russia that
has developed over that period. In the coming winter, the volume of Russian gas supplies to Europe can be caused by Russian political goals, rather than European energy policy, which increases the risk of a possible shortage of supplies and rationing. However, in further part we will explore longer-term issues and uncertainties for the European Union as it seeks to reduce the role of natural gas in the energy mix when diversifying its supply. A huge role of natural gas and, more essential, the level of dependence on Russian gas, varies substantially across the EU (Table 1).
Table 1. Share of Russian gas in total natural gas demand and share of gas in sectoral demand
by European Union member states and the United Kingdom, 2021
Market size Country Russian share
>20 bcm Germany* 46%
United Kingdom 3%
Italy 41%
France* 20%
Netherlands** 36%
Spain 11%
10-20 bcm Poland** 46%
Belgium 7%
Romania 6%
5-10 bcm Hungary 78%
Austria* 74%
Czech Republic* 67%
Portugal 10%
<5 bcm Slovak Republic* 76%
Ireland 5%
Denmark** 60%
Greece 39%
Bulgaria** 100%
Croatia 4%
Finland** 68%
Lithuania** 50%
Latvia* 100%
Sweden 14%
Slovenia 12%
Luxembourg 25%
Estonia** 46%
Sources: Share of Russia in total natural gas demand calculated using trade data from ACER (2022); Cedigaz (2022); Eurostat (2022).
Asterisks in this table denote countries that stopped receiving natural gas from Russia in 2022. One * denotes a partial cut, ** denotes a full cut. Table is ordered from highest to lowest natural gas demand. Natural gas currently provides about 40% of the European Union's total residential and water heating needs, as well as 30% of cooking fuel needs. Gas also provides 20% of total electricity generation and 25% of industrial energy de-
mand, playing a big role in some industries such as chemical, textile and food processing. Natural gas replacement options are a critical factor in the ability of the European Union to adjust to potential supply shortfalls in the short term. The use of natural gas is embodied in the goods and services produced by various industries, which means that the effects of supply cuts can affect various industrial and service value chains. This fact makes it diffi-
cult to assess substitutability in an uncomplicated way.
In the APS, the EU targets in the "Fit for 55 package" are completely met. Acceleration of main measures, such as the rapid introduction of renewable sources in the energy sector and energy efficiency improvements, means that targets to reduce greenhouse gas (GHG)
emissions will be met, and Russian natural gas imports to the EU will stop well until 2030. This is the key challenge REPowerEU plan (Figure 2). Combination of supply-side and demand-side measures required the EU will reduce dependence on Russian gas to zero by 2030.
Figure 2. Drivers of reduced natural gas supply from Russia to the EU in the APS
Source: World Energy Outlook 2022. IEA. CC BY 4.0
Demand for natural gas in the EU from 2021 to 2030 is expected to reduce by 180 billion cubic meters in the APS, average decrease - 6% per year. The use of gas in the energy sector over this time is declining at faster rate than coal consumption in the EU from 2010 to 2020. In parallel, there is a scaling up of renewable energy sources, especially wind and solar power, which are increasing by 600 gigawatts (GW) until 2030, while coal will be reduced by 100 GW. Industrial demand for natural gas is falling by about 4 billion cubic meters per year, faster than the decrease witnessed in 2020 after the start of the Covid-19 collapse. Much of this is in energy-intensive industries including chemical industries and steel, offset by heightened rates of electrification.
From the supply side, Russian deliveries expected to fall gradually to zero until 2030 in APS. Simultaneously, EU gas buyers are maximizing LNG supplies to current facilities as well as developing new LNG import facilities (announced plans are for an additional 120 bcm/y of new capacity, of which about 40 bcm/y is in floating storage/regasification facilities). LNG imports are expected 140
bcm per year over the next five years, meeting almost 60% of the EU non-Russian import requirements. Approximately 40 bcm per year of LNG on medium is imported from the USA. Importing gas from Norway fall to about 60 billion cubic meters per year. There are also additional pipeline deliveries from Algeria and Azerbaijan.
Part of the European Union supply during the summer is used to increase storage capacity. In APS, the volumes required for the injection and withdrawal cycle of gas from EU storage facilities are decreasing as seasonal fluctuations in demand decrease and as LNG meets a higher share of demand: in winter 2030, 40 bcm are withdrawn from APS. compared to an average net withdrawal of 65 bcm between 2016 and 2021 (Figure 3). However, the share of gas stored and ultimately withdrawn in 2030 is similar to the share of remaining gas demand as it was in 2021, meaning that storage still plays a vital role in securing supply. And unexpected events can still cause problems. For example, colder-than-expected winters or the failure to achieve targeted reductions in demand for natural gas in buildings will increase the seasonality of de-
mand: in the absence of proper storage, this will increase reliance on LNG, which is likely to drive up prices. Russian gas is step by step phased out in favor of LNG. The seasonality
of gas demand in the EU is declining, but gas storage remains a critical asset for securing supplies.
10 ^^U^w Producti°n
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Figure 3. European Union monthly natural gas supply balance in the APS
Source: World Energy Outlook 2022. IEA. CC BY 4.0
In 2021, more than 260 billion cubic meters were burned, dumped or lost due to leaks. Around 210 billion cubic meters could be made accessible to gas markets by a global endeavor to exclude non-emergency flaring and reduce emissions from oil and gas operations. This would make a double dividend: relief for very tight gas markets along with a reduction in greenhouse gas emissions. Since the intensity of burning oil imported by the European Union is five and a half times higher than that produced in the region, the European Union has a clear incentive to act. Reducing imports from Russia will reduce this intensity, as Russia flares more gas than any other country, and the total volume of gas is estimated to exceed 20 bcm in 2021.
If the countries that are operative or potential gas exporters in the EU would implement methane and flaring reduction measures, it could increase gas exports by more than 53 billion cubic meters due to these savings, using the available and installed infrastructure. This is equal to about 1/3 capacity of Russian gas exports to the European Union in 2021, or the full annual capacity of the Nord Stream 1 gas pipeline (Figure 4). Quick actions to develop all available flare and methane technologies during the 10 years can have the same impact on global temperature increase before mid-century as the immediate elimination of the GHG emissions from all of the world's trucks cars, and buses.
Figure 4. Potential for flaring and methane abatement to satisfy EU gas import demand compared with the capacity of Nord Stream I
Source: World Energy Outlook 2022. IEA. CC BY 4.0
Some of the biggest opportunities to reduce flaring are in North Africa, with Algeria and Egypt losing about 12 bcm of natural gas from its production assets in 2021 as a result of flaring and associated losses due to inefficiency. About 80% of flaring in Algeria and Egypt occurs within 20 km of existing gas pipelines with easy access to an existing LNG export pipeline or terminal, according to satellite imagery analysis by analytical firm Capterio. Most of the flares operate constantly and many of them are applicants for cost-effective economical mitigation options.
An increasing number of countries have set goals to reduce methane and flaring emissions. Achieving the targets will depend on governments developing plans to flare and reduce methane emissions, backed by transparent and reliable data. Authorities could strengthen the investment climate by modifying current commercial contracts to encourage operators to take actions, for example by giving them ownership of gas. For this target, the EU could encourage suppliers to act by providing concessional financing for flaring control and related infrastructure to help overcome the logistical and economic obstacles associated with these emission lowering opportunities, or by contracting for saved gas.
Conclusion
The world is surviving a global crisis in energy sector of extraordinary complexity and depth. This has long-term implications for the entire economy, many businesses and households, pushing a range of short-term measures from governments as well as a deepened debate about how to avoid similar disruptions in future. Market pressure preceded Russian SMO in Ukraine, and these actions have turned a robust post-pandemic recovery -
strong enough to overwhelm weakened supply chains and manufacturing capacity - into full-scale energy market turmoil that has severely damaged the global economy.
Europe's growing demand for LNG to replace pipeline gas supplies from Russia has resulted in an extraordinarily narrow global market. The highest gas prices in Europe have convert the continent into an extra charge market for LNG, attracting supplies from other new regions, causing supply strains and destroying demand in different markets.
As energy market remains tremendously vulnerable, nowadays shocks in energy are real reminder of the unsustainability and fragility of the energy system during current changes. The main question for policy makers is if the crisis will act as an impediment to the transition to clean energy or as a catalyst for rapid action. Crisis draws attention of authorities on how they respond. In addition to short-term measures, most of the governments start to implement longer-term measures: some seek to rise or diversify gas supplies; many seek to accelerate structural change.
Two scenarios considered in the World Energy Review differ primarily in the assumptions made about public policy. The Policy Stated Scenario (STEPS) shows the trajectory implied by today's policy settings. The pledged commitment scenario (APS) assumes that all desired targets announced by governments are met on time and in full, including their long-term targets for zero emissions and energy access. But it is almost impossible to predict which scenario will be more likely for the European Union, since the sector under consideration is very complex and recent changes in the gas industry are too severe to be confident about one of the scenarios.
References
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ТУРБУЛЕНТНОСТЬ НА ЕВРОПЕЙСКИХ ГАЗОВЫХ РЫНКАХ: АКТУАЛЬНЫЕ
ПРОБЛЕМЫ И ПЕРСПЕКТИВЫ
О.Е. Канева, магистрант В.И. Капусткин, канд. экон. наук, доцент Санкт-Петербургский государственный университет (Россия, г. Санкт-Петербург)
Аннотация. В данной работе рассмотрен газовый баланс Европы, его изменения, а также какие угрозы и возможности могут встретиться на этом пути. Авторами выявлены основные тенденции развития Европейского рынка газа в условиях текущего глобального кризиса в энергетике, а также его перспективы с учетом сильной зависимости стран ЕС от российского газа. Основные результаты анализа говорят о том, что растущий спрос Европы на СПГ для замены поставок трубопроводного газа влечет за собой очень резкий рост цен, что является реальным напоминанием о неустойчивости и хрупкости энергетической системы во время текущих изменений. Главный вопрос заключается в том, будет ли данный кризис действовать как препятствие для перехода к возобновляемой энергии или как катализатор для быстрых действий в этом направлении.
Ключевые слова: природный газ, европейский газовый баланс, торговля газом, сжиженный природный газ (СПГ), цены на газ.
