Since 24 February, we have been forced to live in a new reality, when the European gas market has faced serious challenges, because historically Russia has been one of the largest suppliers of natural gas. Over the past year, Russian gas supplies to Europe have continuously decreased, and there are fears of a complete cut-off of Russian gas supplies. Gas consumption in Europe is seasonal and is significantly higher in the cold winter period than in the summer, so the question is, what to expect this winter.
In order to gain an understanding of possible events, it is necessary to look at European natural gas supply channels, infrastructure and consumption trends.
How does the natural gas get to Europe?
Europe mainly has five sources of natural gas supply – domestic production, gas pipelines from Russia, North African countries and Azerbaijan, as well as liquefied natural gas (LNG) ship deliveries from various parts of the world.
Europe's annual gas consumption is around 4,800 terawatt hours (TWh).
Historically, the largest share has been for local production, which accounted for more than 40% of total deliveries. The share of pipeline gas from Russia has been ~35% and the share of LNG ~10-15%.
Compared to 2019, the volume of Russian gas flow has decreased by more than two-thirds. The share of Russian gas, based on current volumes, has fallen to around 10% of the total European volume, while the share of LNG has risen sharply to ~30% of the volume. Importantly, since the end of February, LNG supplies have been close to maximum receiving capacity.
In the case of the interruption of gas supply from Russian pipelines, it is necessary to find solutions for how the gas would flow differently to that which the existing infrastructure provides.
Infrastructure and needs
There are regions in Europe with fairly good LNG storage capacity, such as Spain and the UK, but the infrastructure in these countries is mainly used for domestic purposes, not for transporting gas to other countries. Accordingly, European cross-border connections are the weak spot and there are currently regions where the situation is difficult due to non-existent infrastructure.
This cannot be applied to the Baltic states and Finland, because there is currently a large supply channel - the Klaipeda liquefied natural gas terminal with an annual capacity of 39 TWh.
Consumption trends and gas reserves
Natural gas has three main consumer groups: industry, energy and private consumers.
A very significant part of the gas is used for the production of electricity and thermal energy, as it is possible to burn it with high efficiency.
This means that consumption varies from season to season. In summer, gas consumption in Europe averaged 8 TWh per day, while in winter it was 22 TWh per day. Consequently, ~35% of gas consumed throughout the year is directly related to Europe's needs in winter.
This winter, the actual need for energy consumption will largely depend on what the air temperature will be.
Looking at the gas consumption data for the first half of 2022, it can be seen that the consumption decreased by ~8% on average compared to the average indicator of 2017-2021.
The largest percentage drop in consumption is in the Baltics (-16% in Estonia, -33% in Latvia and -27% in Lithuania) and the Nordic countries (about -50% in Finland and about -36% in the combined Denmark/Sweden region).
This can be explained by low consumption volumes in the mentioned markets. The Baltic states and Finland account for approximately 1.4% of the total amount of natural gas consumed in Europe.
As the table shows, the decrease in percentage was smaller for the large consumers, or an increase was even observed, while the decrease in German consumption was the largest in terms of volume, i.e., 32 TWh. For comparison, the annual consumption of the entire Baltic region has been within 67 TWh.
The main purpose of the European gas reserve infrastructure is to serve as a safety cushion and smooth out seasonality. Consequently, the existing capacities are not designed to replace long-term supplies. This year, the European Commission has set a goal of filling 80% of the storage capacity by 1 November.
Looking at the historical data, it can be concluded that the 80% level of reserves is an achievable goal; however, the amount of gas flowing into Europe in the coming winter will probably be less than usual and the reserves will start to deplete faster than before.
Forecasts for the upcoming winter
Forecasting the availability of gas and reserves for next winter is a difficult task as there are many variables; however, the main factors are the volume of supplies from Russia and LNG storage capacity.
Analysts predict that it will be necessary to reduce gas consumption by 14.7% compared to the 2017-2021 average, if supplies from Russia are completely cut off. On the other hand, if Russian supplies are stopped, but LNG and local production are increased, gas consumption will need to be reduced by 7%.
Taking into account the state of supply channels, consumption trends and reserves, it can be concluded that next winter will be more difficult than usual for natural gas consumers. Declining gas supplies and global competition for LNG are clearly putting pressure on prices. Also, gas prices have a significant impact on electricity prices as well, which has a significant impact on price development in general.
Despite the existing challenges, European countries will be able to get through this winter by implementing energy saving measures and maximising LNG supplies, but many residents will have to reconsider their daily spending as utility bills will be higher than usual.
The long-term situation will promote the use of renewable energy resources and the improvement of energy efficiency, which will promote the sustainability of the European region and reduce dependence on fossil energy sources.