The beginning of 2022 saw the European gas market change irrevocably. The collapse of Russian gas exports to Europe has left the continent without sufficient supply – short over 100bcm of gas flow - and governments have been scrambling to find a way to keep the lights on and the heaters working for the 2022-23 winter.
Impending Shortfall
Despite continuing reductions to supply, short-term
efforts have largely succeeded, with high gas storage levels - above 95% in
early November - an unexpected abundance of LNG carrier vessels waiting
offshore Europe to restock terminals, and mild weather expected for the winter.
The process has not been cheap, costing an estimated US$50bn, but security of
supply has been achieved for the coming months.
However, the problem has not gone away, merely
shuffled to the back of the metaphorical mind while other concerns like oil
sanctions and gas price caps take centre stage. Supplying the 2023-24 winter will
be just as challenging, if not more so.
Last week, the European Commission confirmed its
intermediate gas targets to reach the 90% gas storage target expected by 1
November 2023. Intermediate targets for February, May, July and September 2023
have all been set on an individual basis, but of note is an EU aggregate
average target of at least 45% storage on 1 February, with expectations of 55%
storage capacity needing to refill if winter is not colder than average (it
shouldn’t be, according to meteorologists).
Winter’s Impacts
With the Russian withdrawal from gas supply leaving
a hole in the supply chain of 110bcm, equivalent to 83Mtpa of LNG, sourcing
sufficient gas will continue to be a challenge. Europe typically consumes 50%-70% of its ~1100TWh (76Mt) gas storage
capacity each winter. However, that is under ‘normal’ circumstances, one that
assumes a sufficient gas supply – a supply that is currently lacking.
Over the three months of winter, Russia’s shortfall will mean consumption
of an additional 22Mt from the storage capacity—effectively, Europe should
expect to consume an additional 20% from its storage this winter, all other
things being equal—putting total consumption expectations at nearly 75% of its
total storage, or 57Mt, on top of its inflated supply requirements.
In 2023, replacing Russia’s gas supply will require imports of around
83Mt of LNG. The US has
largely stepped up in 2022, supplying its European allies with an additional 29Mt
of LNG in 2022, and it can be presumed that barring any major domestic
disasters that supply will continue.

Some 7.5Mt total could come through the new Baltic
Pipe from Norway, and perhaps another 10Mt from increased flows through
Azerbaijan’s pipeline. Norway could supply roughly 4Mt with the restart of
Hammerfest LNG, combining to make a total of 21.5Mt. With US supply, 50Mt of
supply replacement looks feasible.
The equivalent of 32Mt of gas is effectively being
saved through the implementation of gas usage cuts between November 2022 and
March 2023, pushing Europe to scrape over the line. Next year, however, is not
so certain, as the painful impacts of these gas restrictions bite industrial
and retail users alike.
Unfortunately, natural disasters have cut supply
from the 22Mtpa Nigeria LNG and Malaysia’s 9.8Mtpa MLNG Dua for an unknown
period – potentially the entire year, given the wide-ranging and challenging
nature of the disasters. While Malaysia does not directly supply Europe,
increased pressure on the Asian market will drive higher prices through
competition for supply.
The Worst-Case Scenario
The worst-case scenario requires only two major
events: Russia cuts off the tattered remainder of its gas flows into Europe via
Ukraine, worth around 25Mt of LNG annually, and China returns to the major
growth paradigm of yesteryear, once more vacuuming up every scrap of spot LNG to
fuel its power stations, estimated at an additional 12Mt of LNG consumed.
Between the two the LNG trade would be trying to
supply another 10% of the global market with no lead time, a near-impossible
prospect. Fortunately, neither scenario is particularly likely, with the
Chinese government set on its covid-Zero policy and the Russian economy in dire
need of cash despite its ongoing war.
The European Commission is wary of a cut-off of the
last of the Russian gas, which represents the larger of the two risks. The
potential 25Mt shortfall represents around 8.4% of Europe’s gas needs (compared
to 2021), or 1.7% of total energy requirement. Such a shortfall, while not
exactly spelling doom for the continent, would significantly curtail usage in
the coldest periods next winter, and potentially requiring the return of gas
usage cuts.
The Cost of Doing Business
Finally, all of these hypotheticals also fail to
mention one significant stumbling block. Supply is difficult, but manageable.
It is also likely to be extremely expensive, returning to prices in the
US$50/MMBtu range from its current lull around US$30/MMBtu.
Historical gas prices have lingered in the
US$8-12/MMBtu range, and 2022 has seen a massive spike in LNG prices due to
shortages of supply that cannot really be avoided – the liquefaction capacity
simply doesn’t exist.

The cost of replacing the supply of gas will depend
heavily on competition from Asia and ensuring a sufficient security of the LNG
supply. AME forecasts an AME European Composite Gas price of US$47/MMBtu, which
would cost the European market US$191bn if its full LNG replacement was bought
entirely on the spot market. More likely, the figure will be closer to US$60bn.
The European governments will be able to obtain the
required gas supply if no further major disruptions emerge. The purchase of
this gas supply will be expensive and continue to underpin continued high gas
prices in the region. The high price for gas will continue to encourage imports
into the continent, but Russia’s involvement in the continent will be cast out
in favour of closer allies like the US.