Europe remains delicately balanced in energy markets, as gas traders bid into longer-term contracts with a view that fuel demand will remain elevated well into the 2030s and the renewables transition continues.
Just five years ago, the top energy goal for Europe was to increase the speed and scale of its green transition in order to meet its ambitious net-zero targets. But today, the picture is very different, after Russia’s invasion of Ukraine impacted energy supplies and pushed energy security up the agenda.
While Europe’s push towards renewables continues, the instability due to the war in Ukraine means that gas traders remain convinced that demand for gas and LNG will remain high for another decade.[1] The Intercontinental Exchange Inc. registered its first trade of Dutch gas futures for 2033 in August, a spokesperson told Bloomberg.[2]
Balancing supply and demand
A succession of mild winters since the invasion quelled fears of brown- and blackouts on the continent and subsequent investment in storage has put the continent in a good position. But every winter presents its own challenges, not least of which is the weather.
The Ukraine-Russia gas transit agreement is due to expire at the end of 2024 and Ukrainian authorities have indicated they won't renew it. According to a report from the European Union Agency for the Cooperation of Energy Regulators (ACER), by July 2024, EU imports from Ukraine totalled 7.8 bcm (+14% YoY), primarily serving the Austrian and Slovak markets and possibly neighbouring hubs.[3]
ACER said: “Impacted Member States are implementing contingency plans, and security of supply should be guaranteed amid large storage stocks, modest demand, and alternative import options, mainly LNG. However, a full supply disruption would likely tighten Central East markets and push regional prices upwards. Moreover, while additional LNG supplies can offset the potential drop, they are likely to be costlier, incur higher transmission costs, and face some bottlenecks. Finally, specialised media and selected stakeholders have referred to alternatives like European companies booking transit capacity. Yet, they may face technical constraints and seem uncertain.”[4]
There has been a substantial expansion of supply, particularly in LNG, that puts Europe in a position to be using fossil fuels well into the 2050s. Both Total and Shell have signed long-term deals with Qatar Energy for supply into France and the Netherlands, respectively. [5][6] ACER cited a variety of elements that were already increasing supply security heading into winter 2024, including high storage levels (currently slightly above 80%), persistent low demand (over 20% below the 2018-2022 average), well-developed supply infrastructure, advancing diversification of gas supply from neighbouring Member States and access to integrated and liquid gas markets.[7]
“In all but the worst-case scenario (high domestic consumption and high transit-flows to eastern neighbours), no gas shortages are expected after the expiry of the Ukraine-transit,” ACER added.[8] Storage minimums
However, ACER said that prices and storage could yet be affected, a view shared by the European Network of Transmission System Operators for Gas (ENTSOG). While current projections show that Europe should be able to enter and exit the winter with stock levels at the target 59%, “full disruption of Russian supplies and low LNG availability” could “risk the winter preparedness of EU countries to reach at least the 90% target by the end of summer 2025.”[9]
It is these considerations, as well as the current pace of the green transition and the existing gas contracts, that increase the likelihood of gas demand continuing to be strong for Europe for many more years.
However, the clock that’s ticking for the continent is its European Green Deal, which aims to fully decarbonize the gas sector by 2050. According to an ACER factsheet, the EU aims to shift into low-carbon gases whilst reducing its total gas consumption by around 25% by 2050.[10] The continent hopes that biogas and hydrogen can help manage the shift. Squaring this circle will be difficult and it appears that traders are betting that an environment of continued geopolitical volatility will keep energy security higher on the agenda than the green transition.
Bibliography
[4]https://www.acer.europa.eu/monitoring/MMR/gas_key_developments_2024#:~:text=2024%2 0Market%20Monitoring%20Report&text=Gas%20hub%20price%20convergence%20improved,to%20record%20highs%20in%202022 [5] https://www.reuters.com/markets/commodities/qatarenergy-totalenergies-sign-27-year-lng-supply-agreement-2023-10-11/
[6] https://www.qatarenergy.qa/en/MediaCenter/Pages/newsdetails.aspx?ItemId=3776
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