Will Europe freeze?

Questions remain about the continent’s energy supplies amidst volatile markets and reduced gas imports from Russia

Questions of Europe’s energy security have plagued the continent since the start of Russia’s full-scale invasion of Ukraine. Before the war, Europe sourced about 45 percent of its gas from Russia. Despite steps to reduce dependence on Russian fossil fuels, the E.U. still gets around 15 percent of its supply from Russia. Adding to future concerns, Ukraine plans to allow its contract to transport Russian gas through its territory expire at the end of 2024. For now, Europe’s stockpiles are almost full, aided by warm weather last winter — but the continent can only store part of what it needs, and there’s no guarantee that conditions won’t quickly change. Amid growing geopolitical turmoil, unpredictable weather, and threats of sabotage, a stable supply is far from certain. Europeans may face a gas shortage or rising prices this winter; or, maybe there’s not any cause for concern at all.

A large reserve

European underground gas storage facilities have reached a record 99-percent capacity. And they’re still filling up, even though the winter gas season has officially begun. Some countries, such as Denmark, Bulgaria, and Latvia, have started gradually withdrawing gas from storage, but unusually warm weather across Europe is still allowing for continued injections. Europe achieved its goal of filling storage facilities up to 90 percent by November 2023 two and a half months ahead of schedule. A lot of this is due to usage over the past year — around 56 percent of the previous year’s reserves are still in storage due to an unexpectedly warm winter. There was also an average 15-20 percent drop in gas demand last season. Additionally, Europe has increased its capacity for receiving liquefied natural gas (LNG), with new terminals%20of%20natural%20gas)) built in Germany, Finland, the Netherlands, Spain, and France.

Germany and Italy boast Europe’s largest gas reserves, storing 25.8 and 19.8 billion cubic meters (about 911 and 700 billion cubic feet) respectively, with an additional three billion cubic meters (about 105 billion cubic feet), purchased by European traders in anticipation of winter, and stored in underground facilities in Ukraine.

Not a guarantee

Underground gas storage facilities typically cover only 25-30 percent of winter demand. The rest is provided by gas suppliers. In addition to its own gas production, Europe has five sources of supply: liquefied natural gas (LNG) and four sources of imports via pipelines — Norway, Algeria, Russia, and Azerbaijan. However, with the reduction of Russian gas in the European market, countries have less flexibility. A gas trader from a major Western company explains:

Imagine that before, you could go to a supermarket and buy whatever you wanted, at any time. But now the shelves are emptier — this is certainly not a complete shortage, and you will have something to make for dinner, but the choice is limited, and any interruptions in supply or surge in demand can affect both the price and your ability to purchase the necessary goods.

Consulting company Timera Energy identified five main risks to the European gas market that may materialize this winter: cold weather, higher demand due to low summer gas prices, interruptions in LNG supplies, LNG being diverted to Asia if prices there become more attractive than in Europe, and cessation of Russian gas supply. There are also geopolitical risks, such as a prolonged war in the Middle East affecting tanker routes, or potential sabotage of gas transportation infrastructure.

Steep prices

Despite all these risk factors, it’s still unlikely Europe will suffer a gas shortage. The European Network of Transmission System Operators for Gas (ENTSOG) believes a shortage could only occur if there is both an unseasonably cold winter and a halt in Russian exports. In this case, reserves could drop to a critical 9 percent. However, with normal winter temperatures, up to 56 percent of reserves could remain in underground storage facilities by the end of the season, and gas demand could be fully met even if Russia cuts off supply.

“The E.U. is unlikely to face a serious supply crisis this winter, but any disruptions will be felt by consumers through rising prices,” say experts at the Bruegel think tank. They estimate that even in the worst-case scenario, Europe will have 20 percent of gas reserves left in underground storage facilities by the end of the winter season. If demand remains the same as in winter 2022, Bruegel expects the level of reserves to be above 40 percent.

Researchers at the Oxford Institute for Energy Studies (OIES) in the U.K. even predict that Europe will be left with around 60 percent of its underground reserves by April 1. “As long as demand in Europe remains low, even in the event of a cold winter, storage facilities will not be completely emptied, though refilling them in the summer of 2024 will be significantly more challenging,” says Jack Sharples, a senior research fellow at OIES.

Sharing with neighbors

Not all European countries have gas storage facilities, and not every country has access to the sea and, consequently, to LNG terminals. For some countries, such as Austria, Slovakia, Slovenia, and Hungary, the risk of gas no longer traveling from Russia through Ukraine appears significant, while for others, such as Poland or Lithuania, it plays almost no role.

To address access issues and varying storage capacities across the E.U., specific regulations have been implemented to ensure stability and mutual support among member states. Countries without gas storage facilities are mandated by the European Commission to store gas amounting to a minimum of 15 percent of their annual consumption in other European countries. There’s also a “solidarity rule”: in an emergency, when countries can’t supply gas to households and social services, neighboring countries are required to redirect their gas supplies from non-essential services to help them.

To better monitor European gas reserves, the European Commission introduced target indicators for gas storage levels throughout the year, which countries are advised not to fall below. Targets are set for the beginning of February, May, July, September, and November. The E.U. plans to have 33 percent of its gas remaining in storage by May 1, the end of the winter season.

A lack of stability

Gas prices in Europe have significantly decreased over the past year — from peak values in August 2022 of 292 euros ($308) per megawatt-hour to 29-32 euros ($30-34) in the summer of 2023. With the onset of the winter season, the price of commodities has begun to rise again. As the temperature falls and the demand goes up, prices will continue to rise — but they’re unlikely to reach the 2022 highs again, believes Sharples.

Even if winter across the entire Northern Hemisphere is cold, and LNG shipments go to Asia, forcing Europe to rely more on withdrawing gas from its storage facilities, it is unlikely to cause a price spike like we saw in 2022. However, market conditions continue to be tight, volatility remains, and we see strong price reactions to news about LNG production or [sabotage] affecting European [gas] infrastructure.

Analysis from Timera Energy shows a high risk of asymmetric price growth both this winter and next summer. This means that even small changes in the market can cause disproportionately sharp price spikes. This situation will likely persist until new LNG plant capacities in the USA and Qatar come online in 2025–2026, experts predict. For Europe, this can’t come soon enough.

Translation by Emily ShawRuss