Reshuffling the global gas market

April 4, 2022 - 5 minutes

Can Europe deal without Russian gas flows? We examine how the Russia-Ukraine war is impacting global gas supply, and what options exist to continue to meet supply and demand.

Exterior shot of a liquid natural gas processing plant.
The current war in Ukraine has highlighted Europe's overdependence on Russian natural gas supplies, and world leaders are looking for a solution to this overdependence problem. The European Union's REPowerEU plan, sanctions disrupting global trade, and the risk of Russia halting gas flows, are all risk factors that can drastically alter the global gas landscape

A large component of their plan focuses on turning to the global Liquified Natural Gas (LNG) market. However, there are constraints in the LNG market which can limit the feasibility of such plans in the near-term. Issues spanning Europe's import capacity, to global suppliers' ability to increase or re-route supplies suggests Europe will have a hard time immediately offsetting Russian supply and are likely to face structurally higher prices that could persist for years.

Notably, price action in North American markets has been more muted in response to the ongoing war and growing supply risks. With LNG feedgas demand already being maxed out, the follow-through mechanism from global prices into the U.S. has already largely run its course. But Europe shifting away from Russia and toward more global LNG supply can certainly create a more favourable landscape in the U.S. for additional LNG export capacity down the road.

Can Europe deal without Russian flows?

The amount of gas Europe is receiving from Russia has not drastically changed since prior to the war from a fundamental gas flow perspective. However, there are many risks.

Firstly, flows on the Yamal-Europe pipeline (from Russia through Poland and into Germany at the Mallnow entry) have been mostly at 0 since mid-December. While these flows have been shut for months, the longer these flows remain halted, the more pressing it becomes for Europe to find an offset to prevent even further tightening of market balances. At the same time, the sanctions and indefinite halting of Nord Stream 2 had no impact on immediate flows as the pipeline had regulatory setbacks that meant flows were unlikely until Q2 or Q3 2022. But the sanctions do have implications on supply expectations from the summer onward as that supply was baked into analyst forecasts.

Conversely, Nord Stream 1 has remained operational as normal throughout the conflict, although Former Russian Minister of Energy and acting Deputy Prime Minister Alexander Novak has threatened the halting of these flows.

Finally, flows through Ukraine to the Velke-Kapusany entry point in Slovakia have held up thus far, but we view these flows as the greatest risk to disruption, particularly considering the potential for damages as war rages on in the country.

With that said, the EU's plan calls for a 50 Bcm (roughly 6.5 Bcf/d) increase in LNG imports by the end of 2022 to offset Russian imports. Furthermore, based on recent pipeline flow data, if Russia were to retaliate and halt all flows from the previously mentioned Mallnow, Nord Stream 1 and Velke Kapusany pipelines, the number to offset would be closer to 9 Bcf/d.

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Will LNG's import capacity be enough to offset Russian supply?

In terms of import capacity, Europe has nearly 20 billion cubic feet per day (Bcf/d) worth of regasification capacity across Northwest Europe, Italy and Spain. The current LNG imports for those regions sit at around 12 Bcf/d, leaving 8 Bcf/d of theoretical spare capacity. But nearly 4 Bcf/d worth of this spare capacity sits in Spain, Europe's largest LNG importer. The country has a notable constraint on pipeline interconnectivity to the rest of Europe, greatly reducing their viability to offset Russian supply. With that said, looking purely at Northwest Europe and Italy, the import capacity falls to roughly 13.5 Bcf/d, with current imports at near 9 Bcf/d (over 11.5 Bcf/d in January 2022). This leaves a much smaller spare capacity gap, which would be unable to offset a complete shutdown of Russian flows and would likely struggle to meet the EU's 50 Bcm target. Good news is it should be enough to offset a disruption to flow in Ukraine should that happen.

The other issue is the actual availability of supply for Europe to import. Strong appetite from Europe during the winter saw U.S. exports running at near full capacity while U.S. LNG export capacity expanded in the early months of the year as new projects came online.

Furthermore, Europe already purchased some 60% of U.S. LNG. The remaining shipments are tied to long-term contracts to buyers with less price sensitivity, suggesting little flexibility for more shipments. Qatar and other suppliers have also noted difficulties in increasing or re-routing shipments in the immediate term. Over 70% of LNG supply is tied up in long-term contracts to Asia, the Middle East and elsewhere to ensure their own domestic demands are met. Europe can only price itself into contention to attract un-contracted and divertible LNG supply. Even then, the LNG that is available is not guaranteed to find its way to Europe as there will be fierce competition with Asia for supplies.

Near-term pain for long-term gain?

As far as European inventories are concerned gas storage is currently at 26%, topping 90% only four times in the last ten years. Given supplies are already being crunched, and the noted constraints to offsetting Russian supply with LNG, we do not expect inventories would be able to reach EU's 90% target for next winter without some extremely mild weather along the way, or substantially higher prices.

While we are not optimistic about Russian supply being offset in the near-term, the proposal could work on a multi-year horizon. For example, the U.S. LNG expansion in recent years has allowed Europe's reliance on Russian gas to fall from 50% in 2019 to around 25% today. Certainly, expansion of regasification and pipeline capacity in Europe combined with an additional wave of U.S. LNG export capacity would make the task more manageable. However, even with timelines brought forward and an attractive market, these projects would not be in operation until 2024-25, which suggests disruptions to Russia supply are likely to see gas prices remain elevated, if not spike higher still.

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Headshot of Ryan McKay

Commodity Strategist, TD Securities

Headshot of Ryan McKay

Commodity Strategist, TD Securities

Headshot of Ryan McKay

Commodity Strategist, TD Securities

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