Jump in gas prices highlights Europe’s vulnerability to energy supply shocks


The surge in European gas prices this week underscores how the region’s success in weaning itself off Russian energy has left it more vulnerable to volatile global energy markets.

Europe managed to avert an energy crisis last year by rapidly increasing imports of liquefied natural gas.

The seaborne fuel replaced the flow from Russian pipelines after the Kremlin cut off the majority of supplies in an escalating energy confrontation following its full-scale invasion of Ukraine.

But the dependence on LNG has left European energy prices more sensitive to global supply disruptions.

European natural gas prices surged nearly 40 per cent on Wednesday as the prospect of strikes at multiple large Australian LNG projects — collectively providing about 10 per cent of global seaborne gas supplies — sent panic through markets.

“The potential for strike action at LNG export plants in Australia once again highlights the fact that we are now clearly in a globalised gas market,” said Tom Marzec-Manser at energy consultancy ICIS. “Europe has understandably backfilled Russian pipeline supply with versatile LNG. But that versatility leads to increased price volatility.”

Goldman Sachs warned European prices could double this winter.

Before the war in Ukraine, what hap-pened in Asian gas markets only had a limited impact in Europe, where plentiful Russian pipeline gas meant the continent was only a minor buyer of LNG.

In 2021, the super-chilled fuel only accounted for about 20 per cent of the EU’s overall gas imports, data from think-tank Bruegel showed. Russian gas accounted for 40 per cent.

But the war has shifted the balance. LNG made up 34 per cent of the EU’s gas imports last year and that is expected to rise again in 2023 to 40 per cent.

LNG from Australia rarely makes it directly to European shores due to high shipping costs but, if buyers of Australian gas in Asia need to hunt for alterna-tives, it will pitch them directly into competition with Europe. “A lot of US volume . . . which are currently being sent to Europe, could be taken to Asia, raising the risk of an interregional bidding war,” said Kaushal Ramesh, head of LNG analytics at Rystad Energy.

Prices on the Title Transfer Facility, the European gas benchmark, fell 7.5 per cent to €36.6 per megawatt hour ($11.7 per million British thermal units) on Thursday.

Storage, which is critical for meeting winter demand, is close to 90 per cent full and could reach capacity in the next month or so, analysts have predicted — weeks before the heating season starts.

While Europe sits on a comfortable level of reserves now, “the market remains unstable as this winter could still turn out severe and rapidly deplete storage”, Ramesh said.

Goldman Sachs analyst Samantha Dart said that, if the Australian strikes go ahead, it would require “much less of a weather impact to take storage below average by the end of March 2024”.

Aug 13, 2023 12:10
Financial TimesMiddleEast |


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