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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Europe’s Race To Ensure Gas Supply Comes At A Cost 

  • Europe has managed to fill its gas storage sites to nearly 90%.
  • Europe is paying high prices for LNG, and these prices are determined by traders in a tight market.
  • For the first time ever, the European Union imported in June more LNG from the United States than gas via pipeline from Russia.
LNG terminal

Europe has managed to fill its gas storage sites to nearly 90% as winter approaches, but stocking up on gas has come at a price. Gas and energy prices are now so high that energy-intensive industries are shutting down production lines or whole factories, while households are constantly being asked to conserve gas and electricity to avoid rationing and/or blackouts this winter.    The EU, most of which is now deprived of any gas supply from Russia, is doing relatively well with stocking up on alternative supply. The prices, however, are high, and so is the price that industries, residential consumers, and governments must pay. 

As of October 9, gas storage sites in the EU were 88.58% full, according to data from Gas Infrastructure Europe. Storage in Germany, the biggest economy, was 94% full, and the one in Italy—at 92.7%. 

“Europe really wanted this time around to have their storage full. They kind of learned a lesson last winter that it’s not a good thing [to not have enough gas in storage], especially if the supply is not given or is uncertain,” Anna Mikulska, Nonresident Fellow at the Center for Energy Studies, Baker Institute, said last week. 

“Currently the storage is at a very high level, sometimes 100 percent, most of the time beyond 80 percent,” Mikulska said at the panel ‘Energy Market Update: Winter Is Coming’ last week.

Yet, “This did not come at zero cost,” the industry expert said. 

Europe is paying high prices for LNG, and these prices are determined by traders in a tight market, not by the U.S. LNG producers and exporters, Mikulska said during the panel. 

Related: U.S. Households See Electricity Bills Soar As Energy Crisis Comes To America

“It’s the companies that buy the gas from U.S. producers, and it usually goes where the price is highest,” she said.

American LNG has been crucial in meeting European demand, which is scrambling for gas supply and willing to pay up for spot deliveries, outbidding most of Asia.

High demand in Europe, high natural gas prices, and increased export capacity made the United States the world’s largest LNG exporter in the first half of 2022, the U.S. Energy Information Administration said in July. 

For the first time ever, the European Union imported in June more LNG from the United States than gas via pipeline from Russia, as Moscow slashed its supply to Europe. 

In September, as much as 70% of all U.S. LNG exports in September were headed to Europe, up from 63% in August, per Refinitiv Eikon data cited by Reuters earlier this month.   

But this influx of LNG supply to secure Europe’s winter comes at a cost. 

“It came at a cost of cutting down demand in industry. And that’s the big story of this winter and the year coming forward. It’s not only about the inability to heat houses, which obviously is something that you are going to prevent, but it’s about the ability of Europe to recover going forward from the industrial downturn that cutting supply of gas to industry has caused,” Mikulska said.  

Due to sky-high prices and a very tight gas market, natural gas usage in the power-generating sector in Europe is forecast to drop by nearly 3% this year. Industrial gas demand is expected to plunge by as much as 20%, the International Energy Agency (IEA) said in its quarterly Gas Market Report early this month. 

Energy-intensive industries in Europe, including aluminum, copper, and zinc smelters and steel makers, have already warned EU officials that they face an existential threat from surging power and gas prices. 

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“All the signs point to markets remaining very tight well into 2023,” Keisuke Sadamori, the IEA’s Director of Energy Markets and Security, said

Despite the high LNG imports and the rush to build LNG import terminals, Europe could still face rationing or power outages this winter, and a longer-term deindustrialization as energy-intensive industries relocate some production out of the continent.  

The EU has admitted that the increased supply of non-Russian gas needs to be coupled with reductions in demand if the gas market is to balance any time soon. Germany’s regulator has been calling for months for “significant” cuts in gas consumption to avoid a gas emergency and subsequent rationing of gas use.

By Tsvetana Paraskova For Oilprice.com

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