Europe has already started the New Year’s rise in gas prices. They have reached new records – more than 2.5 thousand dollars per thousand cubic meters. Gazprom believes that in winter they will even grow to 4 thousand dollars, and this winter will not be easy for Europe. But is it worth expecting that someday gas prices will return to their old values, and Gazprom will restore supplies to Europe in the same volumes?
New gas record in Europe. The cost of gas at the spot rose to $2.5 thousand per thousand cubic meters. The previous record, set in March, has been broken. Gazprom believes that $2.5 thousand per thousand cubic meters is only the beginning. According to the monopoly’s estimates, if this continues, prices in Europe in winter will exceed $4,000 per thousand cubic meters. And this is still a conservative forecast.
“The main fundamental factor that remains is the global gas shortage. This is due to underinvestment in gas production in previous years against the backdrop of growing demand around the world. Europe itself stimulated investments only in renewable energy,” explains Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund.
At the same time, Europe created exchange trading in gas, which now played against itself. It is the exchange trade in gas that reacts so sensitively to any market changes. The shortage of gas immediately leads to an increase in the price of it, the expert adds.
In addition, the weather played a cruel joke on Europe. Summer heat and drought led not only to an increase in air conditioning, but also made it difficult to deliver coal (an alternative to scarce gas) along shallow rivers. In addition, sanctions came into force on August 10, prohibiting the purchase of Russian coal by Europeans. Now it has to be delivered from South Africa, the USA, Australia, Indonesia, Colombia.
“Many nuclear power plants shut down because the water is too warm for the cooling system. Hydro stations also produce less energy due to drought. It is far and expensive,” adds the interlocutor.
In addition, gas supplies from Norway decreased due to scheduled repairs at production assets. “Another factor that has influenced gas prices in recent days is the shutdown of production at the Shah Deniz-2 field for preventive maintenance. It is the main resource base for filling the TAP-TANAP system, that is, the supply of Azerbaijani gas to Europe,” adds Yushkov.
It turns out that three of the four pipeline suppliers – Russia, Norway and Azerbaijan – have reduced gas supplies to Europe. Only Algeria is still holding out, and even then with varying degrees of success.
At the end of July, supplies via Nord Stream 1 were reduced due to technical reasons. And when they will recover is a big question. “The market is concerned about the issue of Nord Stream 1, because the parties cannot agree on the return of the repaired turbine and the repair of the remaining turbines.
If the situation is not resolved, then Nord Stream 1 may completely stop at any time due to the exhaustion of the resource of the remaining turbine. Probably, the market expects that Russian gas supplies will decrease even more in September-October and the deficit will become even larger. Because other suppliers do not have more gas, ”says an expert from the National Energy Security Fund.
Europeans are actively preparing for winter, and the occupancy of European underground storage facilities is already close to the planned 80%. This required the Europeans to fork out heavily. But UGS occupancy still does not give a full guarantee that Europe will be able to go through the heating season normally, even if Russian gas exports remain at the current level, and not decrease, Yushkov says. It all depends on how cold the winter is. But even an average winter temperature creates big risks, the expert believes.
The crisis passage of the heating season will require the shutdown of a number of industrial consumers and factories. But, of course, the European authorities will try to the last to maintain energy supply to the population and social facilities.
Another important question: will Asia begin to actively compete with Europe for LNG? While the Europeans were lucky – in China at first there was a pandemic and a decline in energy consumption, now the Chinese are actively burning coal, as climate problems have faded into the background. However, there are also Japan and South Korea – and these are large LNG consumers, which can buy up LNG in the winter and provoke an even greater gas shortage in Europe.
“Until the end of the 2022-2023 heating season, gas prices will remain high. Most likely, the Europeans will leave the heating season with empty UGSFs. This means that they will have to actively fill the storage for the next season. Therefore, demand and gas prices will remain high,” Igor Yushkov expects.
In his opinion, it is likely that the global economy will enter a recession in the first half of 2023. This will somewhat reduce gas consumption, but new volumes of fuel will not appear on the market, so the shortage is unlikely to disappear.
“The most positive scenario is the signing of a global agreement between Russia and Europe on new rules of the game and a new world order. In exchange for the lifting of a number of sanctions against Russia, they would also agree on the normalization of relations in the energy sector,” Yushkov believes.
Ideally, Polish and Russian sanctions are lifted from the Yamal-Europe gas pipeline, to which Ukrainian transit flows are transferred. The key moment for Russia, both politically and economically, is the launch of Nord Stream 2. Finally, the problem with the turbines for Nord Stream 1 is resolved.
Another thing is that the European political elites are not yet ready for this. Especially those who advocate the development of renewable energy. After all, the cost of it now at a price of 2.5 thousand dollars per thousand cubic meters of gas and 120 dollars per barrel does not look so high. So far, it looks more realistic to solve problems with the repair and supply of turbines for Nord Stream 1, with the restoration of gas pumping volumes through it, Yushkov believes.
He does not expect the situation to change in 2023. But in 2024, progress may begin if Europe, which has gone into crisis, realizes that sanctions are hitting everyone on both sides and a compromise solution is needed. But the United States, of course, will actively dissuade the Europeans from compromising with Moscow. “Russia believes that time is on our side in the energy sector. Let the Europeans buy expensive gas, freeze, lose their comfortable European life and plunge into recession,” says Yushkov.
According to Sinara’s baseline forecast, in 2024 Gazprom and the EU will solve all current problems, while Gazprom will once again become a desirable supplier. Gazprom deliveries to the EU in 2024 are restored to 145 billion cubic meters per year, as it was in 2021.
Then it was 35% of the 412 billion cubic meters – the total gas demand in the EU.
But in 2022 and 2023, Gazprom will sell much less to Europeans – 66 billion cubic meters per year. However, high gas prices will allow the Russian company to make good money all these years of “waiting”. With the price of gas on the TTF exchange in the second half of 2022 at $2,000 per thousand cubic meters, Gazprom receives $1,100 in revenue from every thousand cubic meters of exports to non-CIS countries, which should lead to an increase in EBITDA for 2022 by 45% – up to 5.4 trillion rubles, despite the reduction in sales and the announced increase in the mineral extraction tax by 1.2 trillion rubles, calculated in the Sinara information bank. Analysts expect that in 2022 Gazprom will receive more than 13 trillion rubles in revenue from the sale of 66 billion cubic meters of gas at an average price of $963 per thousand cubic meters. This is a calculation based on the fact that the cost of gas on the European stock exchange is $2,000. If the exchange price soars to $4,000 per 1,000 cubic meters, then Gazprom could earn 15 trillion rubles as the cost of Russian gas under contracts will rise to $1,278.
According to the forecast of analysts of the IB Sinara, in 2022-2023 Gazprom’s gas for non-CIS countries will cost 963 and 898 dollars, that is, in the region of 900-1000 dollars per thousand cubic meters. However, already in 2024, the price will be halved to $484, that is, less than $500, with a significant increase in export volumes. In 2025-2026, the price of Russian gas will drop to $377 and $267 per thousand cubic meters. That is, it will return to the level of 2019 and 2021 ($210 and $315).
“In the most extreme case, the EU achieves its stated goal of stopping Russian energy imports by 2027. However, such a move requires the construction of a strong infrastructure in Europe and the development of production projects abroad to replace the volumes supplied by Gazprom,” the analysts conclude.