Francesco Mazzagatti, Group CEO of Viaro Investment Ltd., recently shared his thoughts and insights about Europe’s skyrocketing gas prices. The rising cost of energy is one of the top items on political agendas for the European Union. Because of the influence of the unprecedented increases in natural gas prices, electricity costs have also been rising. The EU’s supply of natural gas comes from pipelines that connect to several countries. Natural gas trading occurs in the spot market or the futures market, which involves gas being purchased a month prior to its delivery. Mr. Mazzagatti noted that at the end of 2021, more than 65% of the EU’s member states utilized support initiatives for vulnerable customers. He pointed out several key considerations in relation to the European gas price increases and ensuing worry among EU citizens.
Recent Spot Market Trends
There was a drop in natural gas demand after the restrictions started that related to the pandemic in 2020. Because of that, TTF natural gas prices hit record lows by May of 2020. By the third and fourth quarters of 2020, demand had increased again, and prices returned to the levels they were before pandemic-related restrictions. Those upward trends continued throughout 2021, with all-time high prices arriving in October of 2021. After a brief decrease at that point, prices reached another all-time high in the middle of December 2021. Between 2019 and 2021, there was a 429% increase in EU wholesale natural gas prices. That increase also affected electricity prices, which rose during the same period by 230%.
Natural Gas Storage
The subject of gas storage has been a popular topic recently. Traditionally, gas storage in the EU has been sufficient enough to supply ample gas to meet demand if there were extreme weather events or other disruptions that affected gas supply. For the winter season that spanned late 2020 and early 2021, 720 TWh of gas was used from storage locations throughout Europe. Current storage levels are a little less than two-thirds of capacity. However, that is a significant decrease from 95% during the same period a year prior. Although specific storage rates vary between EU member states, overall gas storage is at a 10-year low point.
Less Pipeline Supply From Russia
Russia is one of the major suppliers of natural gas for the EU. Two key pipelines that connect Russia go through Ukraine and Poland. Currently, there are some pipeline approval delays with the Nord Stream 2 pipeline that may be reducing some of the transported supply. Additionally, tensions at the Ukraine border with Russia may affect gas that is piped in from Russia. However, the decrease has spotlighted some deficits in energy and storage policies of the EU. Since renewable energy power is not at a level that can compensate for the deficits, it highlights how dependent the EU is on imported gas.
The outlook for the future of Russian-imported gas may also shift. It is possible that Russia may be more interested in selling more of its natural gas to Asian countries for higher costs. To add to the issue, there may be increased domestic use of natural gas in Russia, which could be a possible reason for a lower export rate. Russia could also decide to increase its own supply and storage of natural gas, leading to less being sent to Europe.
Decreased EU Gas Production
At a time when demand is increasing, the production of natural gas in the EU is decreasing. In the second quarter of 2021, it was 8% lower than it was in the second quarter of 2020. Norway is a major supplier of natural gas for the EU. Because of maintenance, its gas production was down by about 9% between the second quarter of 2020 and the second quarter of 2021. Due to the Groningen field output drop in the Netherlands, its production was down 10%. The Groningen field output is supposed to close by the middle of 2022 as a result of seismic activity.
What Happens Next for Europe?
Mr. Mazzagatti pointed out that Europeans are worried, and many people are losing hope as they watch the Dutch TTF hub front-month gas prices rise and the day-ahead prices at the National Balancing Point rise. Business owners in every industry are worried about how they will be able to continue operations. From bakers who rely on gas for ovens, to retail shops that need to heat their stores for the sake of customers and workers, businesses everywhere are suffering and worried. Of course, renters and homeowners are also worried about how they will be able to afford to stay warm. The supply issues also leave Europeans wondering if there will be bad enough shortages that there will be no available gas.
Mr. Mazzagatti said that the prices may remain the same or increase more during the rest of the winter. Unfortunately, a simple solution to the multi-faceted problem does not exist. However, the European Commission has several additional measures that it is saving for any extreme situations, and those would help support businesses and households if prices increase more. For now, Mr. Mazzagatti recommends that the EU focus on supporting vulnerable businesses and households with direct support and that citizens try to avoid panicking while the natural gas situation remains volatile for now.
