BE READY FOR WINTER IN SUMMER

Thanks to warm winter, austerity measures and adequate storage capacity Europe could safely survive the last winter in the midst of a gas war with Russia. This is a real achievement for the region so dependent on Russian gas supplies for many years. We will see if the same mechanism works in the upcoming season. But Brussels seems confident in yet another success and continues to buy liquefied natural gas (LNG) in record volumes, demonstrating its determination to halt exports from Russia.

The new European Commission recommendations called on EU countries to be prepared for a complete cessation of Russian gas deliveries.

Gas divorce

European natural gas consumers continue to enjoy the current spring season. The off-season, when the heating season is over and the air-conditioning season has not yet started, was marked by a serious drop in the price of natural gas. For the first time since May 20, 2021 the gas price in Europe dropped below $300 per thousand cubic metres. This would have been considered normal for the end of May, but not in the current geopolitical situation and with the ongoing gas war with Russia. It is believed that the price cut is due to the declining demand from industry, which is unable to ramp up production because of inflation and the gloomy outlook for economic growth. Other reasons include the high volumes of gas in European storage facilities, which is a good news, high LNG receipts and favourable weather conditions.

Back in 2022, Russian gas imports to Europe decreased by more than a half, to about 80bcm. Deliveries stopped via the main Nord Stream pipeline and the Yamal-Europe balancing route, while transit through Ukraine has also decreased threefold.

Reduced volumes of Russian gas is currently being supplied to Europe through one of two entry points into the Ukrainian gas transmission system and through Türkiye via the Turkish Stream and Blue Stream pipelines.

Gas shortages are compensated by LNG and pipeline gas from other sources, including also Azerbaijan.

Europe currently continues pumping gas into its storage facilities. The current reserve level is 66.71% - 18 percentage points above the average for the same period over the past five years, Gas Infrastructure Europe reports. The goal is to bring the reserve level to 90% by November 1. However, it is possible that all storage facilities will be full as early as August, well in advance of the start of the heating season.

LNG arrivals from terminals into Europe's transmission system in April reached an all-time high of 12.07bcm. The record LNG flows to Europe continue in May.

At the same time, Europe continues talks with gas suppliers and signing new contracts with them. As for Azerbaijani gas, according to President Ilham Aliyev the number of buyers will increase from 6 to 10 this year.

"Everyone sees how important the Azerbaijani gas is today. The geopolitical importance of our country has increased significantly. Azerbaijani gas is currently supplied to six countries. If everything goes according to plan, this number will increase to 10 within a year, which will expand the geography of Azerbaijani gas supplies," President Aliyev said.

Success factors

In short, Europe is preparing for the winter season as usual but under new circumstances. Meanwhile, Brussels expects that natural gas consumption in the EU will drop by 60bcm this year due to austerity measures, compared to the average of the past five years. According to an internal EC estimate, the dropoff will be greater than all expected Russian gas imports (!) to the EU in 2023. If this forecast comes true, it will lead to a supply surplus in Europe and a sharp drop in gas prices.

"The EU is no longer dependent on Russian fossil fuels. Over the past year, the EU has demonstrated it could stand up to Russia and its attempts to use energy sources as weapons. Russian coal imports to the EU have stopped, oil imports are a tiny fraction of what they were before the war, and Russian gas is rapidly disappearing from the EU market," European Commission spokesman Tim McPhee said at a briefing in Brussels on May 25.

Pipeline supplies of Russian gas historically accounted for around 45-50% of EU imports before the war between Russia and Ukraine. By March this year, that figure had already fallen to 8%.

Tim McPhee explained that this was made possible by three factors. Firstly, because of working with reliable suppliers, which collectively supplied to the EU 70bcm of gas in 2022. The main exporters were the United States and Norway. At the same time, the European Commission's efforts to find alternative partners continue.

The second factor was the collective efforts of citizens and businesses in the EU to save energy. At the beginning of the energy crisis, the European Commission proposed a 15% reduction of gas consumption, which actually was almost 18%. In total, the EU population and companies saved 50bcm of gas, "about a third of what we have historically imported annually from Russia," EC representative said.

Thirdly, it was possible due to renewable energy sources (RES). In 2022, the EU generated 16% more wind and solar power than a year earlier, replacing 11bcm of Russian gas.

Incidentally, some market participants expect that European gas prices can fall below zero this summer if sluggish demand does not equal rising gas supply. A similar situation, when producers actually pay consumers to take their gas, was last recorded in October 2006. Then, in the UK, daily rates fell briefly below zero after the opening of a new warm-weather supply pipeline.

According to Peder Berland, Vice President Gas Trading and Optimisation of Equinor (Norway), prices in selected regional gas markets in Europe can turn negative on hours or days with high levels of renewable energy generation.

However, he warned, negative prices are still a long way off and "a lot can happen along the way".

The CEO of Swiss trading firm MET International, György Varga, expects the price of gas in Europe to fall below €10 per MWh (about $113 per thousand cubic metres).

"In the short term, within a few days, if the gas storage facilities are full, we can see prices below €10," Varga said, explaining that this would be caused by a bottle-neck, or the lack of gas storage capacities.

No time to relax

Meanwhile, not everyone shares the EU's optimism about the coming winter.

This camp believes that a drop in gas prices during the off-season is a normal and short-term phenomenon. Therefore, the risk of a price spike in the EU remains, as gas consumption will also increase with the coming hot season. In addition, lower gas prices can trigger higher demand, thereby pushing prices upwards.

However, the price drop has not yet increased demand from the industry - some buyers are postponing gas purchases until market prices fall even further.

In addition, the supply of LNG to the European market is declining due to low prices. Many see risks for the EU countries amid the increasing gas consumption in Asian countries, especially in China. As a result, Europe will have to fight for this gas and possibly overpay.

Speaking at the Qatar Economic Forum, Qatari Energy Minister Saad al-Kaabi called on European countries to start negotiations with companies around the energy balance. Otherwise, a cold winter awaits the region, he believes.

"Europe has yet to face real challenges in terms of oil and gas shortages. If the global economy starts recovering in 2024, with a normal than a warm winter, I think the worst is yet to come unless they (Europe) realise this and sit down to negotiate with oil and gas producers instead of demonising them," al-Kaabi said.

According to the minister, otherwise, the only thing that can save the region is "a warm winter and a slowdown in the global economy".

Al-Kaabi underlined that the renewables, i.e., the trend Europe is currently promoting, cannot completely replace traditional energy sources. He accused politicians of populism who claim that green energy will solve all problems. He thinks this is not feasible.

"You can generate electricity with wind and solar, but you cannot produce plastic. And there are many other materials that require the use of petroleum products," Saad al-Kaabi believes.

Saad al-Kaabi and his Saudi counterpart Prince Abdulaziz bin Salman told the Qatar Economic Forum that the world faces an energy crisis amid a lack of investment in the oil and gas industry.

According to ANZ Bank strategists, yet another energy crisis in Europe is possible next winter.

"Our basecase scenario is that Europe will survive another winter without significant power outages. However, we believe there is a 30% probability of the worst-case scenario materialising, a risk that we believe the market is underestimating," the bank's analysts said.

New customers

Going back to Europe's first victory during the 2022 energy crisis, we can mention once again Azerbaijan's contribution to this accomplishment.

According to the European Commission, EU countries spent €13.2 billion on gas purchases from Azerbaijan last year. This may be a small figure on a European scale, but these volumes played an important role in supplying gas to Bulgaria, Italy and Greece - primarily by helping to reduce household gas prices for consumers. That is one of the reasons why Romania decided to join the "club" of buyers of the Azerbaijani gas. There is a number of other Southeast European countries waiting for the local gas as well.

Meanwhile, President Ilham Aliyev reaffirmed Azerbaijan's intentions to increase gas exports to European markets and expand the geography of supplies.

"Azerbaijan is taking very serious steps to transport natural gas to European markets. The volume of exported gas is growing every year and will continue to grow," President Aliyev said after a meeting with his Lithuanian counterpart Gitanas Nausseda in Vilnius on May 22, 2023.

Meanwhile, Baku and Budapest have agreed on gas supplies to Hungary this year. "As a consequence of the political agreement with Azerbaijan, our trade negotiations have resulted in a small success. In 2023, natural gas from Azerbaijan will start flowing to Hungary," said Hungarian Foreign Minister Peter Szijjarto.

According to him, Hungary should receive the first 100mcm of Azerbaijani gas by the end of 2023. Budapest believes that these deliveries will be the first step towards concluding a long-term contract with Azerbaijan to supply several billion cubic metres of gas.

Forecasting may prove to be in vain these days, especially when it comes to oil and gas, as the situation in these markets can change dramatically for non-economic reasons, such as the COVID-19 pandemic and the Russian-Ukrainian war. Nevertheless, the EU proved that unity and organisation in decision-making is the right path to success. Today we can say that the relations between the EU and Gazprom are a thing of the past. Following the first year of reduced Russian energy supplies and with a taste of freedom, albeit partial, from Russian fuel, the EU will certainly be reluctant to turn back to the previous supply scheme and will do its best to ensure this.

It is therefore difficult to predict the price of gas under the new circumstances. Gas is a commodity that is highly dependent on various factors, including the weather, which even weather forecasters cannot always predict accurately. However, experts believe that there will not be a sharp increase in gas prices in the near future, as there are no prerequisites for it.