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“Winter is coming, and the night is full of terrors.” Game of Thrones’ most famous quote would serve well as a morning greeting for gas marketers when they walk into work.
Russia has drastically cut gas supplies to its European customers in recent weeks, raising the specter of another, even worse, gas crisis this winter. As the war in Ukraine began in March, the EU ordered underground storage tanks to be 80% full by October 1. It is now unclear whether this goal will be achieved.
Russia’s Gazprom announced on June 14 that it was cutting gas flow through the Nord Stream 1 pipeline by 60%, accusing Siemens of failing to return compressors that had been sent in for repairs in time, along with other difficulties techniques on the Portovaya compressor. station.
Dutch first-month gas futures, the European benchmark, rose 7.7% to a one-week high of €137 ($144) per MWh in Amsterdam. Contracts have gained more than 50% since Gazprom cut flows, reports Bloomberg.
Previously, Gazprom had already cut off Bulgaria, Denmark, Finland, the Netherlands and Poland after refusing to pay for natural gas in rubles, as demanded by the Russian government.
Germany alarmed
Germany is becoming very alarmed and has called the reduction in gas flows an “attack”.
“Cutting gas supplies through the Nord Stream 1 pipeline is an attack on us, an economic attack on us,” Economy Minister Robert Habeck said in a June 21 speech and accused Gazprom of cutting supplies. for political reasons.
He went on to say that if Russia completely cuts off power to Europe, it threatens a “Lehman Brothers moment” that could see global energy markets completely collapse.
“Whether [energy company losses] becomes so big that they can no longer carry it, the whole market is in danger of collapsing at some point,” Habeck told a press conference in Berlin. “So a Lehman effect in the energy system.”
The country has already managed to reduce the share of its natural gas supplied by Russia from 55% before the invasion to around 35%, but there are not many easy cuts left.
German Vice-Chancellor Robert Habeck put the country on energy alert on June 10 and ordered coal-fired power plants that were due to be shut down, along with Austria and the Netherlands, to be put on standby. Ten other EU countries have issued “early warning” notices of an impending energy crisis, European Union climate chief Frans Timmermans said in a speech to the European Parliament.
Germany’s gas emergency plan is based on 2017 EU regulations with three levels of escalation: warning, alert and emergency levels.
The early warning is triggered if there are “concrete, serious and reliable indications of the occurrence of an event likely to cause a significant deterioration in the gas supply situation and likely to trigger the alarm or the phase emergency”.
The alert phase kicks in when these dangers lead a government to actively prepare for a crisis and allow it to enact legislation that will pass on the cost spike to the consumer. In the emergency phase, the government intervenes in the market to distribute supplies limited by rationing.
Habeck said he was withholding price adjustments for now to see how the market reacts. “It will be a difficult road that we will have to travel as a country,” he said. “Even if we don’t feel it yet, we are in a gas crisis.”
To gain more room for maneuver Germany has also launched the “80mn together for energy change” plan (reference to the size of the German population) to encourage citizens to save energy in order to reduce demand. Industry is preparing for the possible introduction of energy rationing.
Habeck called for the “diversification” of raw material and energy suppliers to achieve “a bit of independence from the malevolent intentions of the dictators of the world”.
Germany has by far the largest storage reservoirs in the EU and doubles as a gas hub for other member states. Currently, its reservoirs are 58% full, but that’s only enough to cover 2-3 cold months and not enough to get through the winter, according to the Federal Grid Agency. Gazprom has cut gas supplies to 40% of average and at this rate Germany will run out of gas at the start of the heating season. The record for the lowest level of gas in storage on October 1 was set last year when European reservoirs were 77.3% full and this fueled a major gas crisis that sent prices 20 times higher at their peak .
half full cup
Europe is actually ahead of the game this year. EU-wide storage reservoirs were 55% full as of June 20, as the graph shows, and the rate of injection remains well above the past two years as well as the average for the past five years , according bne IntelliNews calculations.
Europe has raced to fill its reservoirs at record rates since the very beginning of this year, when record amounts of gas were added in the first days of January, amounting to more than 3,000 GWh per day. Since then, injection rates have declined, but remained well above the average rates of recent years, as shown in the graph.
The rapid filling of tanks is due to record LNG deliveries, particularly by the United States which has supported its ally in its efforts to prepare for exactly the type of crisis that is beginning to unfold. LNG has a maximum technical limit of 140 TWh/month, or 10-15% of total demand, due to terminal capacity limits in Europe, and cannot on its own cover all of the current shortfall, as Europe has need a total average of 400 TWh / month.
And it is a very expensive solution. Injecting about 700 TWh into EU storage before next winter (about two months of gas deliveries) at current prices would cost at least 70 billion euros, consultancy Bruegel estimates, compared to 12 billion euros. euros in previous years.
Injection rates into European gas reservoirs have increased slowly in recent years from around 1000 GWh/day to over 2500 GWh/day, but fell more recently in 2000 to less than 2000 GWh/ day when Europe was suffering from a glut of gas. This gave way to gas shortages the following year, but this year saw unprecedented increases in the rate of injection.
Reservoir injection rates have clearly started to decline after hitting a record high of over 5,000 GWh/day in May, but are currently on par with the five-year average rate of just under 4,000 GWh/day, which is typical for this period. of the year.
What is different is that gas injections generally remain stable at around 4,000 GWh/day throughout June, July and August, after which the cold sets in and gas begins to come out of the reservoirs. .
In addition to “technical problems” with Nord Stream 1, Gazprom announced that TurkStream which supplies South Eastern Europe will be closed for repairs for a week this month, and Nord Stream 1 is expected to be closed again for a week. at the end of July for its annual repairs.
It is not clear now that the gas flows via Nord Stream 1 have been reduced, they will be increased again once the maintenance work is completed.
Scenarios
This year, injection rates are already plunging deeply and are expected to fall even faster. The injection rate halved on June 22 to its lowest level since early June, according to figures from the German network regulator, Bundesnetzagentur (BNetzA).
But even at this rate, Europe will probably avoid a generalized crisis. It will take more than 100 days to reach the 80% target, which is September 30 – just like the traditional heating season starts on October 1.
If injection rates return to pre-June 14 levels, the 80% target will be reached around August 21, well ahead of schedule, allowing for the planned 10 days of annual maintenance work.
But if Gazprom cuts supply completely, Europe will miss the 80% target and be forced to seek alternatives like LNG and coal as well as introduce industry gas rationing. This will in turn lead to an economic slowdown and could trigger a global recession or even an energy market crash.
“Even record non-Russian imports would not be enough to sufficiently fill the storage before next winter. Europe should reduce its demand by at least 400 TWh (ie 10 to 15% of annual demand). It’s possible. An exceptional options portfolio could reduce by at least 800 TWh,” energy consultant Bruegel said in a note.
Some, none, normal – these are the scenarios that have currently captured most talk of the impending gas crisis, but analysts Ben Mcwilliams, Giovanni Sgaravatti, Simone Tagliapietra and Georg Zachmann have raised a fourth scenario: Gazprom squeezes the market this summer to sow panic and drive up prices, but then lifts the restrictions and floods the market at the end of the summer.
“Just imagine what would happen if by summer European gas companies managed to amass nearly 1,000 TWh and Gazprom suddenly decided it was time to release the volumes it held back last year. “, speculate analysts. “Prices would fall dramatically, leaving everyone storing gas – helping Europe prepare for winter – with huge losses. It’s a catch-22 scenario.
