Main logic:
The european gas crisis has been ongoing since mid-June. Now Gazprom said that due to "technical problems" at Nord Stream 1, the supply of natural gas destined for Europe will be cut in half again from July 27, to 20% of the normal level. This caused European gas prices to rise sharply by 12% on July 25 and another 14.75% on July 26. Is Europe's gas crisis bound to happen this winter? We have found the following points through our research:
First, Russia is less important. Since 2021, Europe has been forced or consciously reducing its dependence on Russian gas supplies. Russia's gas supply for the full year of 2021 still accounts for 40% of European consumption, so by May-June 2022, this proportion has dropped to 13.40%. The corresponding increase is more LNG imports.
Second, natural gas demand has begun to decline in the power and industrial sectors. Higher natural gas prices have triggered the choice of raw materials for the electricity market. Coal became the cheapest alternative.
Third, we see the European Commission proposing voluntary measures by member states over the next eight months to reduce gas use by more than 15% compared to the average for the same period in the previous five years.
In summary, we believe that if European countries strive to reduce demand by 15%, even if Russia completely cuts off gas, it will not affect the demand for residential and commercial gas. Europe accounts for 83% of Russia's pipeline gas exports, and with limited LNG production capacity, there are not many places where Russian pipeline gas can go. We don't think Russia is likely to stay out of Europe for long. Therefore, we believe that the gas crisis in Europe this winter is not conclusive, and that countries' initiative to reduce demand will be the key point.
The european gas crisis has been ongoing since mid-June. First, the freeport port, which accounts for 18% of the total LNG exports in the United States, caught fire and exploded, and then the gas transmission volume of Nord Stream One fell to 40% of the production capacity, followed by the maintenance of Nord Stream One, and on July 21, Nord Stream One was officially operated after a ten-day overhaul, with a gas transmission capacity of 40% of the production capacity. Now Gazprom said that due to "technical problems" at Nord Stream 1, the supply of natural gas destined for Europe will be cut in half again from July 27, to 20% of the normal level. This caused European gas prices to rise sharply by 12% on July 25 and another 14.75% on July 26.
1. What is the trend of natural gas prices in Europe?
European gas prices have seen three waves of increases in the past two years. The first wave is the gas crisis in the winter of 2021, and Russia hopes that Nord Stream II can be put into operation. The second wave was a supply crisis caused by the Russian-Ukrainian conflict in March 2022, when Europe sought more LNG from its U.S. allies and prices fell. The third wave is now, driven by the Freeport fire explosion and the North Stream One gas delivery reduction brought about by soaring prices.
Looking at the price of power generation fuel per joule, and considering that the power generation efficiency of natural gas is 50%, the efficiency of coal and oil is 33%, the cost of power generation of LNG is the highest at each crisis, followed by diesel, coal and fuel oil with the lowest cost of power generation. Even taking into account the carbon price factor, in Germany, for example, the ignition price spread of power plants is the profit of coal power generation and the loss of natural gas power generation.
2. How important is Russia to the European gas market?
Russia's gas supply used to be crucial to Europe. In 2021, the EU will import more than 380 million cubic meters (mcm) of natural gas from Russia via pipelines per day, or about 140 billion cubic meters (bcm) per year. In addition to this, about 15 bcm was delivered in the form of liquefied natural gas (LNG). The total 155bcm imported from Russia will account for around 45% of the EU's gas imports in 2021 and nearly 40% of its total gas consumption.
Since 2021, Europe has been forced or consciously reducing its dependence on Russian gas supplies. Russia's gas supply for the full year of 2021 still accounts for 40% of European consumption, so by May-June 2022, this proportion has dropped to 13.40%. The corresponding increase is more LNG imports, and the Russian-Ukrainian conflict has only accelerated LNG imports.
Nord Stream 1's gas supply has declined again since July, and even in terms of the ratio from May 1 to June 25, Russia's supply of natural gas to Europe is only 13.40%.
3. What has changed in Europe's natural gas demand?
Europe's natural gas demand mainly has three such blocks, the largest proportion is LDZ, that is, residential and commercial gas, the second is industrial gas, and the third is natural gas power generation.
LDZ gas is rigid, industrial gas also continues to decline due to high prices, and more changes are made in electricity gas.
Higher natural gas prices have triggered the choice of raw materials for the electricity market. Coal has become the cheapest alternative, with wind energy in renewables generally holding steady in 2022 and solar power generation on record.
4) Will Europe's gas crisis continue into winter?
Natural gas is a typical seasonal variety, reserves in the off-season, and consumed in the high season. Nearly 65 percent of Europe's underground gas storage holes are currently filled with gas, and the European Commission recommends that each member state increase its filling rate to 80 percent by November 1 this year, while Germany has set itself a target of 80 percent on October 1 and 90 percent on November 1.
European governments have taken several steps to reduce their dependence on Russian gas. European governments and utilities purchase LNG from the United States by shipping; Efforts are being made to get more gas through pipeline lines in Norway and Azerbaijan. Germany, which lacks LNG terminals, plans to build four floating stations, two of which will be operational this year.
On 20 July, the European Commission proposed that, from 1 August 2022 to 31 March 2023, member states take voluntary measures to reduce gas use by more than 15% compared to the average for the same period in the previous five years. In the event of a shortage of natural gas supply, the EU will take enforcement measures to achieve this goal. The European Commission said that the plan to reduce the use of natural gas is mainly focused on areas such as industry, and households, hospitals, schools, etc. are not affected by the measure, but unnecessary use should also be reduced to avoid energy waste.
We see that the demand reduction advocated by the EU is comparable to the current supply ratio in Russia, and if each country achieves a 15% reduction in demand, even if Russia completely cuts off gas, it will not affect the demand for domestic and commercial gas. On another level, Europe accounts for 83% of Russia's pipeline gas exports, and with limited LNG production capacity, there are not many places where Russian pipeline gas can go. We don't think Russia is likely to stay out of Europe for long. Therefore, we believe that the gas crisis in Europe this winter is not conclusive, and that countries' initiative to reduce demand will be the key point.
This article is derived from the CFC Energy Chemicals Study