Geopolitical developments following Russia’s invasion of Ukraine in February have drastically changed gas supply, demand and price dynamics across Europe. European pipeline imports from Russia, which made up 31pc of overall supply in 2021, had plummeted to only a 6pc share by October, after dropping throughout the year.
This pushed companies that had contracts with Russian producer Gazprom to look for alternative supplies, while the EU approved a series of regulatory changes and recommendations to allow countries to reduce their dependence on Russian gas as soon as possible while maintaining security of supply. As a result, flows from alternative sources increased throughout the year, with
LNG imports ramping up the most and covering most of the gap left by Russian flows.
By October, LNG send-out accounted for 35pc of European supply. Comparatively, its share across all of 2021 was only 18pc. In outright terms, Europe had imported 116bn m³ of LNG between January–November 2022 at the time of writing, compared with 59bn m³ of imports in the same period last year and 83bn m³ of LNG deliveries in the whole of 2021, ICIS data shows.
A much higher reliance on LNG made Europe the premium market and price-maker for global spot LNG, with the European benchmark TTF becoming a key reference against which to price spot LNG. Asian LNG consumption fell to keep the market balanced.
Looking ahead, forward-curve price data shows Europe is likely to remain the premium market at least in the first nine months of 2023, as lower Russian flows during the summer will mean an even higher reliance on LNG volumes, while increased regasification capacity will allow the continent to absorb more global supply than ever before.
Despite the European Commission drafting guidelines shortly after Russia’s invasion of Ukraine to push companies to reduce their reliance on Russian gas, the drop in Russian flows to Europe was mostly dependent on changes in Russian regulation and damage to infrastructure. At the end of March, Russian president Vladimir Putin signed a decree demanding that foreign buyers of Russian gas open bank accounts with Gazprom Bank and pay directly or indirectly in roubles.
The first big drops in Russian volumes came in the second quarter as key companies holding long-term contracts with Gazprom refused to comply with the new payment terms, which were unilaterally changed. The second step lower came due to what Russia claimed were infrastructure issues affecting capacity on the 55bn m³/yr Nord Stream pipeline, which first caused a reduction in flows and then, in late August, a complete halt.
The pipeline and its twin, Nord Stream 2, were subsequently damaged by explosions, and while the extent of the damage has yet to be confirmed, neither pipeline is expected to come online in the next year.
Russian flows through other routes are also expected to be severely limited due to investment and new contracts that have been inked by former offtakers to push for diversification of supply sources. These include deals and memorandums of understanding to increase supply to Europe from Algeria and Azerbaijan and infrastructure investment to increase regasification capacity.
European LNG imports are expected to remain at least as strong in 2023 as they have done so far in 2022, when they hit a record high. This is due, on the European side, to anticipation of high demand for heating during winter and for injection into storage sites during summer to prepare for the winter of 2023.
Despite industrial demand decreasing in 2022 due to high energy prices and Europe’s attempts to maximise power production from sources other than gas, it is unlikely that a significant reduction of demand linked to heating and power generation during the winters ahead will be seen.
This is unless there is a shortage of gas in the system itself, as there is little that Europe can do in the short term to pivot domestic infrastructure away from gas and replace the large gas-to-power generation capacity that was in action in summer 2022.
Another big factor pushing demand up in Europe in summer 2023 will be new storage regulations mandating that EU countries fill up storage sites to 90pc of capacity by 1 November. While this was achieved in summer 2022, not only did it contribute to elevated prices, it was also done while some Russian volumes were still flowing into Europe, which is unlikely to be the case over the summer ahead.
On the demand side, Asia has recorded a big decrease in LNG demand in 2022, owing mostly to high European gas prices pushing Asian buyers out of the market. In China, the zero-Covid policy also limited consumption to an extent. This is expected to continue in 2023, which should mean ample LNG supply for Europe, unless weather-driven Asian demand significantly increases.
On the infrastructure side, European regasification capacity is expected to climb by the end of next year. Considering plans to install new floating storage and regasification units and to expand capacity at existing terminals, ICIS data shows that regasification capacity in EU countries could increase to c.217bn m³/yr, up by around 60bn m³/yr, by the end of 2023 compared with c.157bn m³/yr at the beginning of 2022.
Due to climbing European demand for LNG, Europe established itself as a driver of global prices and kept a high correlation with Asian LNG prices—Asia being the main competitor on the demand side. An analysis of the correlation between the ICIS European TTF benchmark and the ICIS East Asia Index for LNG imports shows that the correlation coefficient between the two in January–October 2022 was 0.85.
This shows a high correlation considering European spikes due to sudden changes in supply were not replicated in Asia.
This has also translated into the pricing of spot LNG cargoes. Market participants said that even spot LNG directed towards Asia was being priced based against the TTF plus a discount throughout 2022. The correlation is expected to remain strong in 2023, as European markets will have to maintain a significant premium over Asian prices to attract the LNG they need.
Alice Casagni is the editor of the European Spot Gas Market report at the intelligence services company, ICIS
This article is part of our special Outlook 2023 report, which features predictions and expectations from the energy industry on key trends in the year ahead. Click here to read the full report.