Europe Has Left Russian Pipeline Gas Behind, But Global Gas Market Volatility Remains a Winter Risk

Eighteen months after Russia's invasion of Ukraine, Europe's gas storage tanks are close to full. They reached 90% of capacity three months ahead of the November target, and could touch 100% in September. Energy prices have fallen steadily through 2023, and Germany's energy minister, Robert Habeck, has said the worst of the energy crisis is over. Michael Bradshaw, Professor of Global Energy at Warwick Business School, thinks that confidence is a little early.

The case for relief is real. When the invasion cut off much of Russia's gas, there were fears the continent's energy system would not survive winter 2022-23 and that economies would crumble. A mild winter, together with the EU's gradual rollout of a plan to cut consumption and buy from other suppliers, got Europe through shaken but intact. Germany, Italy and other gas-reliant countries moved away from Russian dependence without major electricity shortages.

The cost was a new kind of exposure. Russia's share of EU piped gas imports fell from 39% to 17% between early 2022 and early 2023. To fill the gap, the EU leaned much harder on liquefied natural gas. LNG's share of EU gas imports rose from 19% in 2021 to around 39% in 2022, while infrastructure upgrades aim to expand LNG capacity by a third between 2021 and 2024. Even so, 13% of the LNG entering the EU still comes from Russia, whose shipments have risen since the invasion.

The trouble is how that LNG is bought. About 70% of it is purchased at short notice, rather than under the long-term oil-indexed contracts common in Asia, which leaves European buyers at the mercy of a volatile global market. Bradshaw points to recent weeks, when the benchmark European gas price crept up on worries about strikes at Australian LNG plants. The European Commission has created the EU Energy Platform, an IT system to help companies in member states buy fuel jointly, but it is untested, and the industry fears state intervention could undermine how the market works.

Pipeline gas carries its own strain. Norway has overtaken Russia as Europe's leading supplier, providing 46% of the requirement in early 2023, up from 38% a year earlier. The extra load has stressed Norwegian infrastructure: delayed maintenance in May and June slowed flows and pushed prices up. Bradshaw considers further obstructions from extended maintenance distinctly possible. Meanwhile the EU still expects to buy about 22 billion cubic metres from Russia this year, roughly 11% of the pipeline gas the bloc used in 2022. Much of it travels through Ukraine, under a transit agreement unlikely to be renewed when it expires in 2024.

Demand restraint may also weaken. The EU cut gas consumption by 13% in 2022, according to the International Energy Agency, short of a 15% target. Bradshaw warns that war-weary states may do worse this time, since prices have dropped and some countries did not carry their share last winter. Only 14 of 27 member states introduced mandatory reduction policies, and Poland, Romania and Bulgaria did little to cut use. If physical shortages hit continental Europe this winter, that could erode calls for solidarity.

Prices remain about 50% above their pre-invasion long-run average, hurting households and businesses. That matters especially in Germany, where automotive and chemical industries are energy-intensive, and where there are growing fears that high costs could push industry elsewhere. For at least two or three more winters, Bradshaw argues, Europe must hope for mild weather across the northern hemisphere and no major disruption to global LNG supply if it is to avoid significant price spikes.

Relief is expected from the mid-2020s, when significant new LNG supply comes online in the US and Qatar and the market rebalances. The EU's energy reduction plan envisages gas demand falling 40% by 2030, and there is talk of a supply glut by the decade's end, if renewables accelerate and a new generation of nuclear plants arrives. That depends on coordination. Bradshaw recalls France supplying gas to Germany after the invasion, and Germany later sending electricity to French cities during nuclear maintenance outages. Decarbonisation is harder: France is seeking support for nuclear modernisation, while the German-led Friends of Renewals group, which backs only renewables, opposes it. Unless Europe cuts its gas demand sharply, Bradshaw concludes, it stays exposed to global price swings.