Europe Needs to Replenish Its Gas Storage, After a Close Shave With Pale Winter

Gas Storage Tank in Europe

Gas Storage Tank in Europe | Image: Pixabay

In the wake of the Russia-Ukraine conflict, it sanctioned Russia, its biggest natural gas supplier. This backfired in Europe’s face by wounding it with hyperinflation and gas shortages

Europe pulled out from the clutches of winter; fortunately, this time, it wasn’t as harsh as it used to be. It has glided through all-time low levels of gas reserves amidst a meek winter.

In the wake of the Russia-Ukraine conflict, it sanctioned Russia, its biggest natural gas supplier. This backfired in Europe’s face by wounding it with hyperinflation and gas shortages. 

Europe now needs to replenish its reserves back to normalcy, and this is going to be a costly affair. Gas prices have been piercing through the sky since the Russia-Ukraine conflict began in February last year. In recent times, further supply reduction by Russia has helped prices maintain a higher level.

In order to shield the nation from the next winter season, Europe needs to find a sustainable replacement for its dependence on Russian gas supplies. Simultaneously, it needs to skim through the volatility of the international markets and fill up its storage to avoid any kind of shortage in peak demand season. 

Europe is eagerly looking forward to nuclear power generation by its neighbor, France, and expects that the current storage levels and, thus, nuclear-generated power will fulfill its needs.

Jacob Mandel, a senior analyst at Aurora Energy Research, said that they are assuming an affordable gas filling storage this summer than it has been in the previous year. He also added, in a cautious tone, that companies relying only on the spot market supply to top up their reserves and not planning to hedge against price fluctuations might have to deal with costlier prices like the previous summer.

Mandel had estimated that it would cost 2-2.5 times more on a per unit basis than the previous shortage to buy gas in the upcoming summer months. He reminded us that the governments of European nations spent tens of billions of euros on buying gas supplies last year.

This expenditure was incurred at a time when they had plenty of storage available and had bought huge amounts of gases from the Russians under their long-term contracts. This was until the gas supply to Germany through the Nord Stream pipeline was shut down for scheduled maintenance by Moscow in August. The prices of European gas and liquified petroleum gas (LNG) skyrocketed after the shutting down of Nord Stream. 

Contracts in Tatters

Data from the European Commission showed that Europe imported 62 billion cubic meters (BCM) of Russian pipeline gas last year. These imports were substantially below the average of the past five years; data shows it was 60 percent below the average.

As per the industry sources, these previous imports are way less than the spot market prices, but the actual numbers are unknown to the public. The prices of these long-term Russian contracts were concluded by complex computation of various factors and were further mutually agreed upon by both nations.

According to forecasts from the International Energy Agency (IEA), it is assumed that the supply of Russian gas would fall to 25 billion cubic meters (bcm). Taking into account the flows from TurkStream pipelines and Ukraine.

Unpredictable situation

According to data from Gas Infrastructure Europe (GIE), the previous 96 percent gas storage levels in November last year have now fallen to 64 percent, and it may reduce more to 55 percent by the official beginning of summer on April 1.

In this month, the demand-supply differential contracted to 40 bcm from past estimates of 57 bcm. This could further be contracted by 37 bcm this year, with the rapid build-up of renewable energy supply chains and heat pumps.

This takes into account the absolutely zero supply of Russian gas that is still being delivered through some pipelines to Europe and also the demand revival from China, which is one of the largest consumers from Asia. This could further fuel gas prices in the international market and create supply-side issues for Europe.

Germany, one of the largest consumers of Russian gas, had no infrastructure for the import of liquefied natural gas. Astonishingly, it has built up six floating storage and regasification units (FRSUs), which are estimated to be completed by the end of this year.

Environmental activists and green politicians have started raising their voices to question the huge investments in such infrastructure that might be irrelevant in a low-carbon economy.

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