Tension. High voltage. This is the state in which European gas markets have been operating for months. High prices continue to be a reality. In October, and especially in December last year, European gas hubs reached record prices of 180 euros per MWh (nearly $ 2,000 per 1,000 cubic meters). At that time, there were no fears of Russia's invasion of Ukraine.
Analysts cited an acceleration of the energy transition, the closure of coal-fired power plants and nuclear power plants in Germany. Politicians have justified themselves with the accelerated economic recovery after COVID-19. All European reports from the end of last year are unanimous - the Russian concern Gazprom is fulfilling its obligations under gas supply contracts.
To these factors must be added another - "Nord Stream 2". The pipeline proved to be a convenient weapon for exerting political pressure. Russia was the first to use it. Europe and the United States have benefited from its strategy.
Moreover, at a time when prices in Asian markets went down and prices in gas hubs in Europe proved to be extremely attractive to traders. The new factor also appeared in sync - the threat of Russia's invasion of Ukraine. There was also talk of the danger of disrupting Russian gas supplies. Moreover, at a time when Europe's underground gas storage facilities were half-empty and Russian gas supplies were reduced.
This was admitted in January by Gazprom chief Alexei Miller himself. According to him, the Russian gas concern Gazprom has exported 185 billion cubic meters of gas abroad in 2021, which is 5.8 billion cubic meters more than in 2020. In December 2021, however, supplies fell by 33% compared to December 2020 - up to 13.6 billion cubic meters. In November, the decrease was 25%, and in September - by 12%.
All this has changed European gas markets in recent months. And against the background of the recognition of European politicians - in Europe there is no crisis with gas supply.
The United States has increased liquefied natural gas (LNG) supplies to the European gas market. Still, there are about two months until the end of the heating season. This period is long enough, both to calm down and to aggravate the situation again, given Europe's empty gas storage facilities. More importantly, how the picture will change during the coming period of filling the gas storage.
Against this background, a little under pressure, Europe returned to its old plans to increase supplies from Azerbaijan, and the situation with the aggravation of relations between Russia and Ukraine is not to be underestimated.
Flexibility costs money
Natural gas accounts for about one-fifth of the primary energy used by Europe. In addition, about 20% of Europe's natural gas is used for electricity, heating and industry.
Russia is the largest supplier of natural gas pipelines in Europe, with the latest figures holding a share of about 40%. Russia is followed by Norway - by just over 22%, Algeria - by 18% and Azerbaijan - by 9%. Liquefied natural gas (LNG) is also supplied.
In recent months, according to preliminary data, imports of LNG from the United States and other countries reached a record 400 million cubic meters per day.
For example, in January, two-thirds of all US LNG exports went entirely to Europe. In December, these deliveries were only 16%. According to preliminary data from Refinitive, in January only 13% of US LNG exports went to Asia, compared to 25% in December. Shipments to Latin American countries were 9%.
In January, US LNG exports reached a record 7.3 million tonnes, although no final destinations have been identified at this stage. In December, US LNG shipments abroad were 7.14 million tons.
In January, Europe imported the largest volume of LNG in its history - 11.8 billion cubic meters. Almost 45% of these imports fall on the United States.
In December-January, the shortage of gas on the European market led to another rise in prices. "Gazprom" was named as the culprit, but in case of a finding - the supply contracts are being fulfilled. The conclusion suggests a more in-depth review of European policy.
In January, a batch of LNG in Europe rose to $ 30 per million Btu, exceeding the price of natural gas in the Asian market. This has led traders and other market participants to shift their LNG exports from Asia to Europe. Recently, shipowners have been warning that the cost of transporting liquefied natural gas cargo is starting to become unprofitable. New decline, according to Spark Cmmodities will be a signal for an already oversatisfied market. That is, a new factor is set, which the markets will in one way or another reflect in their prices.
Crises such as the current one are changing and will continue to change the supply of both pipeline and liquefied natural gas. Prices will also change. Markets have already experienced similar conditions. In 2009, when the conflict with Ukraine forced Russia to cut off supplies to Europe for 20 days, the number of regasification facilities was increased to 29. There is currently enough storage space at European regasification reception terminals. However, there is a problem - the capacity for LNG production is not endless. The second such crisis was observed in 2011 and at first glance is different - the accident at the Fukushima nuclear power plant, which led to the diversion of liquefied natural gas to Japan.
These two crisis situations, on the one hand, changed the strategy of LNG suppliers. On the other hand - prices. So it turns out that flexibility costs money. LNG has given the opportunity to be ready to compensate for the shortage in any part of the world. The result - up to 5-6 times higher prices. Gas consumption did not decrease during the first two crises. On the contrary. The current situation is different because it is also reflected in the electricity market.
And now where?
Despite the mild winter and record deliveries, stocks in Europe's underground gas storage facilities continue to decline. According to Platts' calculations, Europe's gas reserves are 19 billion cubic meters less than the five-year value at the beginning of February.
Data from the Association of European Gas Storage Operators show that for the first 10 days of February the decline was about 3%. In particular, if on 31 January European gas storage facilities were filled to 37.68% or 420.6241 TWh, then on 10 February the volume of stored gas fell to 34.41% or 304.1058 TWh.
At this rate of fuel withdrawal, gas storage facilities in Europe may be at the lowest level in their history by the end of the heating season. Moreover, regardless of gas supplies from Russia and record volumes of LNG. So far, neither has stopped. At this rate of consumption, storage facilities may be less than 30% full before the new pumping season. In the case of meteorological surprises, this may be a very optimistic figure.
According to WoodMackenzie experts, European governments are unlikely to approve a blockade of Russian imports, even if there is a full-scale invasion of Ukraine. "It will be impossible to find alternative volumes to meet 28% of annual demand. If all gas flows were stopped today, the existing gas storage facilities would be depleted in six weeks," they said. At the same time, they emphasize that the current situation is proof of how dependent Europe has become on Russian gas.
A picture emerges in which the need for new gas flows will be extremely high. At the same time, the filling of the gas storage facilities in the new pumping season will start at prices much higher than last year. For example, last year TTF futures at the beginning of the boost period were just over € 25 per MWh. The current price is just over 77 euros per MWh, futures for June remain at around 75 euros per MWh. Previously, there was hope for prices of 40 euros per MWh. There is another question - how much blue fuel will be able to inject European customers, so that next season is guaranteed, so as not to repeat the situation this year.
WoodMackenzie experts are skeptical about prices. According to them, "easing military tensions would quickly lead to lower prices by the end of winter, although it is difficult to imagine that the market could return to pre-crisis levels without a risk premium after all that has happened. Any other scenario and the initial reaction will lead to high prices. "Europe is likely to face higher prices than a year ago and for several years, until new supplies, mainly from Qatar and the United States, become available in the middle of the decade."
They also remind that despite Russia's strong position, it also has something to lose - not least its reputation as a reliable gas supplier. As well as the Nord Stream 2 gas pipeline. "If Europe decides to give up Russian gas, it will be a signal to liquefied natural gas developers in the United States, Qatar and beyond." Uncertainty of supply and rising prices will have an impact not only on gas demand in Europe, but in the world as a whole.
The growth of the global market in the long run is linked to Asia, where gas is displacing coal to meet growing energy demand and reduce emissions. High prices and instability do no good to the cause.
However, the conclusion is clear - LNG imports have increased, but Europe will still have to rely on a third of the supplies on Russian gas. In the future, the situation will change and this share will decrease, not only because of the new regasification terminals, but also because of the entry of biomethane.
According to European gas storage operators, 87% of biomethane plants operating in Europe are connected to the gas network and it will play an increasing role as a renewable fuel. In addition, the future development of gas infrastructure must consider adapting it to allow for the injection of a higher share of biomethane in the distribution. On track to achieve production of 1000 TWh by 2050
Today, there are around 20,000 units in Europe (total number of biogas and biomethane plants).
Where is Bulgaria?
The Bulgarian gas market is not isolated. It is going through strong turbulence, but not so much because of gas prices, but for political reasons. Despite the claim that the prices of natural gas on the Bulgarian market are lower, more and more consumers are giving up. The debt of one of the largest consumers - "Sofia District Heating" is already chasing a billion levs. The current contract for the supply of Azeri gas at lower volumes than the original contract is until the end of June.
Against this background, negotiations are forthcoming on the one hand with the Azeri company, on the other - with Gazprom.
With regard to gas from Azerbaijan, it is now clear that an agreement on lower prices than the current ones will be impossible. The reason is that the formation of the price is tied to that of oil. In recent days, the price of Brent has jumped to $ 95 per barrel. International agencies are rapidly changing their forecasts and currently the expectation is for an average price for 2022 in the range of 71 to 75 dollars per barrel. In February last year, Brent cost about $ 57 to $ 58 a barrel. Of course, everything is a matter of negotiations, but if the gas connection with Greece is not ready and we agree on a full volume of supplies over a 200 km route, this will be reflected in the bills.
As for Gazprom, the latest negotiations with neighboring countries on the extension of supply contracts have proved - the Russian company adheres to the formula - 80% of the delivered quantities are carried out at spot prices. However, this is also a matter of negotiations.
So much for the prices. It's time for expectations. The government has signaled that Bulgargaz will have to step down as a trader and will only have to remain a public supplier. There are a few details. The first is who will sit at the negotiating table with Gazprom. The second concerns the Gas Release Program and the Gas Release Program Agreement. When the details are clarified against the background of the new expected role of Bulgargaz as a public supplier, it will become clear who and what role will play in the natural gas market in Bulgaria. And in what quantities. Moreover, with prices that at first reading will be much higher.