The report, entitled Putting Europe’s Security of Gas Supply to the Test by the IHS Markit Global Gas service highlights the reduced role of Ukrainian gas transit in Europe’s gas supply. The report says Russian gas flows through Ukraine fell to historical lows in January—50 million cubic meters per day (Mmcm/d), less than half of levels from a year ago. While flows through the Ukraine have swung back up with the beginning of February, they remain half the levels of the period 2015-2020.
“Europe is already experiencing a ‘quasi-curtailment’ of Russia gas flows,” says Michael Stoppard, chief strategist, global gas, IHS Markit. “The result is a European gas import picture that is starkly different from a year ago. One where LNG imports have ramped up to fill the gap.”
LNG imports to Europe increased considerably in January 2022 supplying higher volumes (34% of total supply) than Russian pipeline supply, which fell to 17% of supply, the report says. LNG imports from the United States rose to a new record of 245 Mmcm/d, accounting for the largest share of LNG by far. The average total LNG imports in January were 490 MMcm/d, with the upward trend in LNG imports continuing into February. LNG imports for the first three days of February have averaged 605 MMcm/d, with February 3rd reaching 710 MMcm/d.
The surge in LNG imports has reduced core Europe’s previously abundant spare regasification capacity, which has gone from 82% in January 2021 to 25% in late January 2022. Nevertheless, enough spare regasification capacity exists to cover the loss of remaining pipeline flows from Ukraine relatively comfortably, the report says. A modest acceleration in storage withdrawal could also feasibly compensate for any lost supply.
While the loss of remaining pipeline flows through Ukraine would not present a threat to physical supplies, it would likely put further pressure on prices as LNG volumes are pulled away from other destination markets in an already tight and rattled global market, the report says.
“So far, this is more of a price crisis than a physical supply crisis,” says Shankari Srinivasan, vice president, global gas, IHS Markit. “While gas supply is sufficient to meet most market needs through the end of the winter heating season, high prices are already leading to closures of some industry and furloughing of workers in Europe.”
While additional LNG supply would be enough to cover the shortfall of a cutoff of gas flows through Ukraine, if a more far-reaching reduction of Russian volumes were to take place—in the form of a complete stoppage of pipeline flows through all routes going into Europe—it would create an immediate supply deficit that LNG alone could not compensate for. In the event of such a scenario, which the report says is unlikely, additional supply levers would need to come into play.
“Under an extreme, if highly unlikely, scenario where all Russian pipe flows were cut off, the tightness of global LNG supply and limited spare European LNG regasification capacity means that other supply levers would be needed to close the gap,” says Stoppard. “Extra coal and nuclear power generation capacity—either in the form of mothballed capacity being brought back online, resorting to strategic reserves or delayed plant closures—along with additional drawdowns of gas from storage would all be required.”
Despite starting the winter well below average fill levels, European gas storage would be able to accommodate the additional drawdowns required under the more extreme shut off scenario for the remainder of the winter season, the report says. However, it would leave storage levels well below their normal averages.
“Low storage inventories have been a key element in keeping gas prices at elevated levels,” says Stoppard. “Running down storage further this winter would leave a huge mountain to climb to restock before the start of next winter.”