Aura Sabadus, senior analyst at market intelligence firm ICIS, predicts that Austria, Hungary and Slovakia are likely to be the countries most affected by gas import cuts
Natural gas markets started the week on a bullish note, with Henry Hub prices up 26.4% to $2.03/MMBtu, while futures as of 1:30 pm yesterday were up 5.5 %. The rally appears to have been triggered by concerns over the end of Russian gas flows.
THE 2019 GAS AGREEMENT BETWEEN RUSSIA AND UKRAINE
In 2019, Russia and Ukraine signed a five-year transit agreement to supply natural gas to Europe. Both countries have continued to honor the contract, despite Russia having been at war with Ukraine for two years now. That agreement – writes Alex Kimani on Oilprice – is now on the verge of coming to an end, after Kiev has signaled that it has no intention of renewing it when it expires, scheduled for December 31st. Furthermore, the European Energy Commissioner, Kadri Simson, declared that the EU executive has “no interest” in pushing to revive the agreement.
THE SHARE OF UKRAINIAN GAS IN EUROPEAN UNION IMPORTS
Ukrainian gas amounts to 5% of total EU gas imports. Aura Sabadus, senior analyst at market intelligence firm ICIS, says Austria, Hungary and Slovakia are likely to be the countries most affected by the import cuts. Fortunately, gas producers could benefit if Europe freed itself from more Russian energy raw materials. TotalEnergies CEO Patrick Pouyanne predicted that natural gas and LNG prices will rise after the EU sanctions Russian gas from the Yamal LNG project. “If the EU sanctioned Yamal LNG, the price of LNG would rise rapidly and our portfolio globally would benefit. If sanctions arrive it would be positive, not negative, because the liquidity coming from Yamal is rather limited. European leaders understand that security of supply today relies on LNG and do not want to see prices rise again. They might have some ideas, but from 2027 onwards, not before,” Pouyanne added.
TotalEnergies owns a 19.4% stake in private Russian LNG producer Novatek, which owns the Yamal LNG project in eastern Russia. The company will not receive dividends from Yamal LNG from 2023 due to US and EU sanctions. However, it received around $450 million from Novatek in semi-annual dividends at the end of 2022.
THE POSSIBILITY OF A DIFFICULT WINTER
The European Union has warned member countries to prepare for the worst-case scenario, in case the leak of Russian gas is accompanied by a harsh winter. The situation is further exacerbated by Berlin’s recent decision to unilaterally tax gas exports, making it more difficult for these countries to swap Russian imports for supplies coming through Germany, Italy or Turkey. “We should avoid measures that harm the work done and strengthen the Russian aggressor,” Czech Industry Minister Jozef Sikela said last week about the sanctions.
So far the EU has managed to eliminate around two-thirds of Russian gas imports and increase imports from the United States and Norway. However, Russia supplied 14.8% of EU gas in 2023. It remains to be seen whether or not Brussels will proceed with sanctions, considering that European politicians are under pressure to keep energy prices under control and guarantee supplies, with the memory, still fresh, of gas prices at record levels after the 2022 invasion of Ukraine.
GAS STORAGES IN THE EUROPEAN UNION
Overall market fundamentals, however, remain weak, with global markets currently flush with gas amidst tepid demand. Last week, European Union storage stood at just over 72 billion cubic meters (at 62% full), a record for this time of year.
On the demand side, Europe is about to face a hot weather front, which will dramatically reduce gas demand on the continent, while more supply is likely to arrive in the coming weeks as the US Freeport LNG plant outgrows some of its technical problems. For months the plant – the second largest LNG export terminal in the United States – operated below 80% of its capacity due to technical problems.
