Ukraine Invasion: What This Means for the European Gas Market

• The invasion of Ukraine by Russian forces has led to sharp rises in gas prices in Europe and around the world with real concerns about the possible curtailment of gas flows from Russia to Europe.
• Pipeline imports from Russia began falling in the last quarter of 2021 and declined even further in January and most of February 2022. Gazprom are seemingly only meeting the nominations under long-term contracts and not offering any volumes on their Electronic Sales Platforms. European buyers significantly reduced their nominations in January and most of February as the monthly prices under their contracts with Gazprom were much higher than the day-ahead hub prices, reducing the incentive to take contract volumes. As soon as the invasion began, day-ahead prices jumped sharply making the price under the monthly contracts look very attractive. As a consequence, European buyers increased their nominations, especially on the Ukraine route.
• LNG imports into Europe have surged in the last three months, but they largely offset the lower Russian flows in the same period so overall supply to the market was relatively stable, hence the firm prices in the market.
• As a consequence, pressure on gas storage stocks was maintained and the poor injection rates in the summer of 2021 meant that stocks are at historically low levels, although not as low as they might have been if we had had a cold winter.
• Under a scenario where Russian flows on Nord Stream 1, the Yamal-Europe pipeline, and the Ukraine routes are stopped for the period between April 1 2022 and March 31 2023, the ability of Europe to refill its storage is severely compromised. Europe might just about be able to get through the summer by emptying what remains of its stocks in storage, but that would lead to significant demand destruction in the winter. In the absence of any mitigation measure some 40 per cent of Central and Western Europe winter demand could be lost.
• There is the potential for some mitigation, through diversions of LNG to Europe from other countries, more production from Groningen in the Netherlands and additional pipeline imports from Norway, North Africa and Azerbaijan. Together with some demand side responses, including more nuclear power, as suggested in the IEA’s Ten Point Plan, these could maybe reduce the impact by half, but this still leaves a substantial amount of unmet demand in the power and industrial sectors, if the heating load is to be protected.
• While the impact of shortages would mainly be felt in Central and Western Europe, gas prices would clearly be extremely high, leading to further large increases in end-consumers’ bills all over Europe and in many other countries around the world who rely on imported gas.

By: Mike Fulwood , Jack Sharples , James Henderson