Russian President Vladimir Putin needed a very cold winter. He didn’t get it. As a result, Europe’s gas storage tanks are at record-high levels and the price of gas has crashed on the Dutch TTF exchange to below pre-war levels. Putin has lost the winter battle in the energy war.
Yet it is too early to declare victory in the energy war with the Kremlin. Europe faces a second round in the energy crisis that could start this summer, when the underground gas storage (UGS) facilities must be refilled ahead of next winter.
Europe will last into the run-up to the next heating season, but the tanks are simply not big enough to ensure it can get through the next winter without blackouts and rationing, and it can’t be sure it can source enough gas this year to refill the tanks and ensure continuing imports in the cold months. Russian exports to Europe this year are going to be half what they were last year, and in 2022 they were already half of what they were the year before, the last “normal” year.
Unpredictable weather, growing demand for gas in Asia and the danger that the Kremlin cuts deliveries to Europe completely this year has led the International Energy Agency (IEA) and analysts interviewed by bne IntelliNews all to warn that this year’s energy crisis could be worse than last year’s.
Gas as a weapon, weather as an ally
This year it’s becoming increasingly clear that Europe has avoided the worst-case scenarios of rolling blackouts and emergency energy rationing. A combination of an exceptionally warm winter and record imports of LNG have been a body blow to Putin’s attempt to use gas as a cudgel to beat concessions out of the West in his showdown over the fate of Ukraine. Europe is now almost certain to get through this winter with adequate supplies of energy.
European gas prices slumped to their lowest level in the first week of the year since before Russia launched its invasion of Ukraine. The front-month TTF contract closed at €65 per MWh ($739 per 1,000 cubic metres) on January 4, representing its lowest level since mid-January last year. The UK NBP contract has seen a similar descent, bne IntelliNews’ sister publication Newsbase reports.
Prices have rallied since then on the back of a cold snap, but with Europe continuing to enjoy ample LNG supply and record volumes of gas in storage for the time of year – 83% of capacity as of January 7 – the worst seems to have passed.
The warm winter must be a big disappointment for Putin. The cost-of-living crisis has already caused a series of mass protests across Europe and on January 11 protesters clashed with police in the Germany town of Lützerath, protesting against the revival of coal as a fuel. A cold winter would have turned the screw on costs and led to more demonstrations, putting pressure on Western governments to seek an ending to the conflict.
The most powerful card in Putin’s hand is the ability to plunge Western Europe into darkness as the high prices and lack of gas have already led to numerous energy-intensive industries closing down across Europe, which leads to the industrial lobby also pushing for peace, which is also already apparent in Germany. And then there is the cost: European governments have also already been forced to spend €750bn on energy subsidies and support.
The energy card was always going to be the most effective during the first year it was played; but the EU response has been rapid and dramatic. Paying through the nose, the member states scrambled to secure alternative energy supplies, buying up LNG, but also restarting coal-fired power plants or delaying mothballing nuclear power plants (NPPs), as well as running public information campaigns extolling citizens to turn down the thermostat to save energy.
And it worked, helped by the warm winter, which has defeated Putin’s best efforts to make the crisis worse. UGS facilities in Europe were 83% full containing 90bn cubic metres of gas, as of January 1, which is 16.2pp higher than the 5-year average. Amazingly Germany, which is most exposed to gas shortages and home to Europe’s biggest USG tanks, managed to reverse the withdrawals over the holidays and has been adding to them for the last few weeks, bringing the total up to just over 90% full at the end of the second week of January.
Germany reversed gas flows over the holidays and has seen the amount in its storage tanks rise again to 90% full as of the end of the first week in January.
Gas pirces on the Dutch TTF spiked on August 19 to rise to twenty times their normal level when uncertainty over gas supplies for the winter reached their peak
Europe is on course to fill gas storage tanks to new all-time high record levels in 2023.
Russian budget to cope for now
The falling gas prices have been matched by the ballooning discount on oil export prices following the imposition of the oil price cap scheme* on December 5, which has blown out to 50% against the benchmark Brent blend of oil.
However, the Kremlin says that the collapse in the export price of its Urals blend is temporary and due to “increased logistics costs” as Russia’s crude exports can no longer go to nearby Europe, but must be sent half way around the world to customers in Asia.
It remains unclear what affect the fall in prices will have on Russia’s budget this year. The Ministry of Finance (MinFin) just reported that the federal budget deficit for 2022 came in at 2.3% of GDP (or 1.8% if special spending is counted out, according to Russian Finance Minister Anton Siluanov), which is more or less in line with the target set by MinFin in the early months of the war.
The current account surplus is set to fall from the extraordinary $270bn surplus achieved last year – more than double the previous all-time high of $120bn set in 2021 – but despite an expected reduction, the surplus this year is still expected to come in at around $100bn, according to Elina Ribakova, deputy chief economists at Institute of International Finance (IIF), thanks to continued elevated commodity prices due to the war.
The deficit this year is predicted to expand from earlier forecasts of 2% to around 3% of GDP in 2023, but MinFin says it can cover that with increased borrowing from the domestic bond market, where it is expecting to issue some RUB3.5 trillion ($51bn) of OFZ ruble bonds in 2023, tapping the National Welfare Fund (NWF) and special taxes on Russia’s biggest state-owned enterprises. The budget was kept in surplus in November thanks to a special circa RUB450bn tax payment by Gazprom and the government has already floated measures to introduce similar special taxes on other sectors and companies.
Do the gas maths
What happens next? To understand how the rest of the year could play out you have to do some gas maths.
Is the gas left in the tanks enough to get through the next winter too? That could be a problem. Analysts have been saying since the start of the crisis last year that the difficult year was not going to be 2022, which was bad enough, but the winter of 2023.
Europe typically requires around 470 bcm of gas a year, which accounts for almost a quarter (22%) of its total energy consumption, of which between 30-40% used to come from Russia.
But the Russian share in the energy mix has just dropped dramatically. In 2021 the EU imported 155 bcm of gas from Russia, which fell to 100 bcm in 2022. However, remember that Russia was sending the EU gas as normal for the first half of last year. It was only in July that Gazprom started having “technical difficulties” before gas flows dropped off to next to nothing after explosions destroyed the two main Nord Stream gas pipelines on September 26. This year analysts are expecting gas flows to halve again to only 50-60 bcm, almost entirely via Ukraine and Turkey.
As it turned out, Europe has managed to cope well. Anticipating a shortage, a raft of measures were rolled out, but the most important is that Europe aggressively bid on the international energy markets to secure huge volumes of LNG. A record 136 bcm of LNG arrived in Europe last year – almost as much as Russia used to send to Europe. This extra LNG has more than compensated for the missing Russian gas and led to the highest level of gas in storage in January for at least a decade.
But having full tanks is not enough to avoid another crisis this summer. There are still two challenges to overcome this year.
The first is to refill the tanks ahead of the next heating season. Europe’s tanks collectively hold a total of 108 bcm of gas, or between a quarter and a fifth of Europe’s total gas needs. That seems like a lot, but actually it's only just enough.
Because of the enormous cost of building pipelines and USG facilities (and the cost of holding gas unused for months at a time) the whole system has been constructed with very little redundancy, which is what makes the weather such an important factor. The pipeline system from Russia and elsewhere sends more gas than is needed during the summer, but not enough during the winter. The excess gas that arrives in the summer is stored for use during the shortfall in the winter.
Europe’s storage tanks are not big enough to cover gas demand for a whole winter. In most countries they are just enough to make up the deficit during the coldest months, and in many countries, like Germany, they don’t even hold that much, leaving Europe dependent on continued imports of gas throughout the winter. The tanks were built on the assumption those imports would be more or less regular, with things like French nuclear power stations or Scandinavian hydropower being swing suppliers that could cover shortfalls during very cold winters. Suddenly taking large amounts of Russian gas out of this finely balanced system has potentially catastrophic consequences – hence the traders' panic last August and the massive spike in prices.
The amount of gas demand covered by Europe’s tanks varies widely from country to country, as detailed by bne IntelliNews. The biggest tanks, in terms of their ability to meet demand, are in Czechia, Slovak Republic and Austria that can nearly cover the whole winter, but everyone else’s tanks hold between one and four months’ worth of gas. Germany is amongst the most exposed, as it is almost entirely dependent on Russian gas imports and also holds gas for countries like Italy, which is a big net importer, relying on German reserves to get through the winter.
Despite having by far the largest storage tanks in Europe, Germany’s demand for gas is equally large and its tanks only hold 108 days of consumption. The EU as a whole is in the same position with an average storage capacity of 98 days (three months) of consumption. If no new gas arrives during the winter, Europe runs out of gas in January.
European leaders have been slack in ensuring their energy security. Italy is in a particularly poor situation, as it closed its last two NPPs in 1990 and never replaced them, leaving it with an energy deficit. Likewise, Germany has phased out its six NPPs last year and has also failed to replace their capacity. The plan was to use Russian gas over the next decade to bridge the gap as it invested into alternative sources of renewable energy. That plan has now had to be put on a crash drive, and as a stopgap measure it has leased six floating LNG (FLNG) terminals, the first of which went into operation in December.
The exception of full gas tanks this year will soften the blow. So just how much gas will be left in the tanks at the end of the heating season on March 31? The last time Europe had a very mild winter was in 2020, when the tank storage ended the heating season 54% full (58 bcm), but it seems likely that this year, the EU will end the season with significantly more. Some analysts have forecast tanks will end the season 70% (75 bcm) full.
In these two scenarios of a mild winter and an exceptionally warm winter, the amount of gas needed to refill the tanks would be 50 bcm and 33 bcm respectively.
On the face of it the circa 60 bcm that Russia should sell Europe this year should be enough to fill the tanks again. But there are two problems. Of that gas, Ukraine should be transiting 42 bcm under the terms of the renewed 1999 gas transit deal, but since the war started the volumes have dropped to an estimated 18 bcm. Moreover, last week Gazprom reduced the flow by another 10%, so maybe only 15 bcm will come via Ukraine this year, or less.
The second problem is of the 32 bcm that transits Turkey via the TurkStream pipeline, 16 bcm is dedicated to Turkey’s use, leaving only 16 bcm available to service all of Europe.
That makes a total of around 30 bcm expected from Russia this year – less than is needed to fill the tanks in both scenarios – and this all the gas that is imported from Russia can be used to fill tanks; Europe still uses gas in industry and the power sector throughout the summer, so it will need at least this 30 bcm for day to day operations. The bottom line is Russia’s 30 bcm is not even enough to meet the summer demand and little will be left over for filling tanks this summer.
It is already clear that there will be some sort of shortfall this year. The International Energy Agency (IEA) reiterated in a report last week that it expects Europe to suffer from at least a 30 bcm deficit in the upcoming heating season. In other words, even if the tanks are 70% full in March, prices will still spike over the summer like last year, as governments scramble to find spare gas to pump into the USG facilities.
“Despite spells of milder-than-usual weather this winter, the European Union faces a risk of natural gas shortages in winter 2023-24 – but this can be avoided through stronger efforts to improve energy efficiency, deploy renewables, install heat pumps, promote energy savings and secure additional gas supplies,” the IEA said in its report.
LNG to the rescue
In the old system LNG was also supposed to be a swing provider; a very expensive extra source of gas to cover shortfalls in very cold winters. What changed in 2022 is that it is now a major mainstream source of energy for much of Europe. The top 40 energy corps of US, Canada & Europe earned more than $3.6 trillion in 2022, up 48% y/y from the $2.4 trillion spent the year before. Between January and October last year the US alone sold 48 bcm of LNG to the EU, which is expected to rise to 50 bcm this year.
The Russian-inspired energy crisis has been driving reluctant European energy companies to sign more and more long-term LNG supply contracts in 2022 that are undermining the Europe Green Deal that aims to reduce emissions to zero by 2050. A year before, Brussels was expecting to phase gas use out completely in the coming decade as part of its plans to transition to carbon-zero by 2050.
The EU became the world leader in LNG import in 2022, overtaking the previous leaders of China, Japan and South Korea, according to data from Refinitiv. Imports were up by 58% to a total of 137 bcm (101mn tonnes), up from 78.6mt a year earlier, with the US imports rising to 52.1mt in 2022 from 21.5mt in 2021.
Nevertheless, Russian LNG exports to the EU also hit a record high of 15.95mt in 2022, up from 13.46mt in 2021, even as piped gas plummeted.
Total global LNG imports rose to 409mn tonnes last year from 386.5mn tonnes in 2021, according to data from Refinitiv, while figures from commodity analysts Kpler showed a slightly lower 400.5mn tonnes, up from 379.6mn tonnes.
After supplies from Russia halved to 60 bcm, the EU imported 24% of total global LNG deliveries, Japan 17% (73.6mt), China 15% and South Korea 11%. India imported 20mt of LNG in 2022, down from 24mt the year before. The share of liquefied gas in Europe's consumption increased 1.75 times, from 20% to 35%, while the share of Russian gas fell to a third of its previous level, from 40% to 15%.
Can Europe repeat that trick in 2023?
Prices for gas peaked in the middle of last August, hitting twenty times more than pre-war prices. Europe was prepared to simply outbid Asian buyers and pay any prices to prevent the threatened blackouts.
Brussels was helped in this effort by China’s economic woes, which sharply depressed the demand for gas. Beijing was happy to resell Russian LNG it had ordered back to Europe. At its high point “Chinese” LNG was accounting for 7% of all Europe’s gas imports.
This year China’s economy is anticipated to bounce back after Beijing began to wind down its “no-COVID” restrictions. Demand for gas in China will rise again, taking much of its LNG off the market.
The weather will also play a role, as there is no guarantee of another mild winter at the end of this one. Even another hot summer like that of 2022 will cause problems, by driving up power consumption and hence gas consumption for power generation.
Another risk is that after Russian deliveries were halved twice in the last two years by Kremlin machinations, it is not impossible that Russia will cut the transit of gas Ukraine completely, taking another 20 bcm off the table.
Gas prices were back to normal in January, but gas prices are an unusual commodity in so much as they are determined on the day by a combination of current demand and how much physical storage space is available, not a discount on expected future supplies. Warm weather drives down the demand, but as tanks fill to 90% of capacity it starts to become physically difficult to store any more gas, so tank owners are forced to stop buying it even if they want more, pushing prices down.
Gas prices will come under natural pressure to rise as the summer wears on and uncertainty over how cold the next winter will be returns; there will be plenty of spare capacity this year but as the heating season approaches fears will form that there is not enough time to fill them again due to the even lower Russian deliveries.
There is still time to prepare for the next energy crisis, but there are still no easy fixes and plenty of uncertainty over how energy needs in Europe will play out over the coming year.
Going into the next cycle there are a lot of unknowns. What is not clear is whether Russia will continue to send gas through Ukraine to Europe. Also unknown is how much LNG will be available, given China’s expected economic recovery. European companies are signing those long-term contracts with the US to try to lock in reliable supplies and so reduce the amount of gas they have to buy from the open, swing suppliers and replace the formerly reliable Russian piped gas.
The availability of alternative sources of energy will make a difference too. France is racing to repair its NPPs, but that is reportedly going slowly. Germany has restarted many of its coal-fired power stations, but sourcing coal, which Europe used to be even more reliant on Russia for than gas, is also a problem. Plus the demonstrations this week in German show there are political problems with ramping up the use of coal too much.
Investment into renewables and reducing consumption through cuts and better energy efficiency can be tossed into the pot and the IEA and other NGOs are strongly pushing for these sorts of measures as amongst the most effective and environmentally friends.
And finally the weather will play an extremely important role: how cold will the remainder of the winter be? How hot the coming the summer? And will the winter be bitter or balmy? All of which can have a major impact on gas in storage at every stage of the year.
The IEA set out a series of practical actions that Europe can take to build on the impressive progress that has already been made in 2022 in reducing reliance on Russian gas supplies and filling gas storage. But its report also warns that the 2023 energy crisis could yet prove to be an “even sterner test” for Europe than last year because Russian supplies could fall further, global supplies of LNG will be tight and the weather outlook remains uncertain.