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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Europe Is Buying Natural Gas At A Premium To Fill Up Its Storage

  • Lower natural gas consumption has helped Europe stock up the commodity.
  • Europe is paying a premium for natural gas as importers refuse to pay for Russian gas in rubles.
  • American LNG has been a lifeline for European importers, but some worry that the region could trade its dependency for Russian gas for a dependency on U.S. LNG.

Prohibitively high natural gas prices in Europe have helped the continent stock up on the commodity amid lower consumption, simultaneously motivating more imports, Reuters’ John Kemp reported, meaning Europe might get its storage caverns full before the next heating season begins. That inventories are filling up faster than previously expected is a rare instance of good news for the European Union, which has been struggling with high energy prices for more than six months now. The more important question, however, is precisely the one about prices. Storage may be full, but would the gas it holds be more affordable for European consumers?

The answer is unlikely to be positive. The EU is buying natural gas at a premium because of its urgent need to fill those caverns before either winter comes or Russia turns the gas taps off because importers are refusing to pay in rubles.

The suspension of deliveries to Bulgaria and Poland appears to have spurred European importers into action: Earlier this month, requests for Russian gas deliveries to Europe hit a five-month high. LNG imports are also going strong even though total U.S. shipments abroad are on the decline due to regular maintenance at liquefaction facilities on the Gulf Coast.

According to Reuters’ Kemp, at the start of May, natural gas inventory levels in Europe were 18% below the five-year average from before the pandemic. This translated into 81 TWh. As of the start of this month, the amount of gas in storage in the EU and the UK has grown to 380 TWh. At this rate, Kemp said, gas in storage could reach 904 TWh by October 1 when heating season begins.

There is an “if” here, however. This rate can be maintained if there is sufficient gas supply from different sources and if, of course, Russia continues to supply gas to its European buyers. This, in turn, will happen if they agree to pay for Russian gas in rubles. In other words, it might look like the EU is holding the reins, but it’s not doing it alone.

Then there is the question of prices. Businesses and consumers across the EU are already struggling with their electricity bills. Businesses in some parts of the union, such as Bulgaria, are warning about imminent bankruptcies because of excessive energy costs. 

Now, if the EU is buying up natural gas at “exceptionally high prices”, as Kemp puts it, what prices would it be selling this to those that consume it? It would be quite bold to assume that governments will shoulder most of the exceptional price to make the gas affordable for everyone. 

Related: OPEC+ Agrees To Boost Production By 432,000 Bpd In June

The very fact that one big reason for the faster-than-usual filling up of inventories is because of subdued consumption due to elevated prices should be cause for concern already. It means that gas is simply too expensive to use. And this is not a good thing for the European economies.

Meanwhile, there are calls for further reduction in the consumption of gas, too. A German research institute this week called on Germans to curb their gas consumption in case Russia suspends deliveries to Europe’s largest consumer and importer.

According to the researchers from EWI, if Russia suspends gas flows now, the EU—excluding Spain and Portugal—and the UK, together, would need to cut gas consumption by 459 TWh during the summer. But if that region seeks to maintain a 33% level of gas inventories to total capacity, then it would have to cut consumption by as much as 790 TWh. 

In other words, even as it seeks to shake off its dependence on Russia, the EU remains very much dependent on it. At the same time, it is developing a new dependence on U.S. liquefied natural gas, as Europe has remained the top destination for U.S. LNG for five months in a row. But U.S. LNG capacity is not endless and that may become a problem down the road. 

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on May 06 2022 said:
    The EU is paying prohibitively high natural gas prices in order to fill its gas storage before either winter comes or Russia turns the gas taps off if importers refuse to pay in rubles. This means that customers will have to pay excessive gas and electricity bills or decline. Moreover, the added cost is causing a heavy financial burden for the EU budget and could eventually plunge the EU economy into a harsh recession.

    A level-headed decision maker will opt to cut his losses and accept to pay in rubles rather than paying through the nose for LNG whose exports to the EU are unsustainable.

    Unfortunately, the decision makers of the EU are letting their hatred for Russia cloud their sanity. They seem to be hell-bent on cutting their noses to spite their faces. They will still end up having to pay for their gas needs in rubles.

    The EU is clutching at straws. It will never be able to replace Russian gas supplies now or for the foreseeable future. It is now turning its gaze towards Africa.

    The two relatively significant African LNG exporters are Algeria currently exporting 29.3 million tonnes (my) which already go to the EU (Italy and Spain) and Nigeria with an export capacity of 22.2 mt. The rest of Africa’s producers have limited production and export capacities with neither LNG plants nor gas pipelines. The only gas pipeline planned is one connecting Nigeria with Algeria known as the trans-Sahara pipeline but it is still in the drawing board stage and I very much doubt it will see the light of day in even the next 10 years if ever.

    That is why the EU’s efforts to diversify its gas needs away from Russia is a painstaking job that will take years to accomplish if ever.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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