By Rhod Mackenzie
Europe is enduring a serious a heatwave. In recent years, drought has caused gas prices to skyrocket, helping to boost Gazprom's revenues. Given the sharp drop in Gazprom's earnings this year, any increase in prices due to the weather will only help. Will gas prices rise in Europe and how much can the gas giant earn this year?
Europe is being warned of the threat of temperatures rising to nearly 50 degrees due to the Charon anticyclone approaching from the Sahara. High temperatures are already recorded in Athens, Rome and Madrid. In the 23 largest cities in Italy, there will be an emergency warning from the Ministry of Health about extreme heat and possible fires.
In past years, heat waves have led to new consumption peaks in the summer due to a surge in air conditioning use. The current news about the impending heat wave has also pushed gas prices up. However, this time the situation does not yet look catastrophic. First, the growth was insignificant - by a few percent. Secondly, gas prices in Europe remain low - and are in the region of less than $300 per thousand cubic meters. Whereas in mid-December 2022 they reached $1,500 per thousand cubic meters, and at times even up to $2,000.
Why do gas prices in the EU remain so low? will they rise due to heat this summer or frost in winter? Several factors play a role.
“This is a low demand for gas in the EU, because the industry sank heavily at first because of expensive energy resources. Now demand is declining due to the recession in the European Union, there is a decline in economic activity, enterprises are producing fewer goods. Last year alone, gas consumption fell by 60 billion cubic meters. And this year, according to preliminary data for the first quarter, there is a continuation of the decline, and even month by month. Demand for gas is also low because the winter was warm, and this year Europeans need to physically buy less gas to fill underground storage facilities up to last year’s 90-95% by November,” notes an expert from the Financial University under the Government of the Russian Federation and the National Energy Security Fund Igor Yushkov.
On the other hand, supply balances with low demand, which ultimately results in a price of $300 per thousand cubic meters. Because China did not live up to the expectations of economists and did not start to grow at lightning speed after the removal of coronavirus restrictions, sharply increasing demand for gas.
“The Chinese economy is tied to the European and American markets. Therefore, when there are problems there, the demand for Chinese goods decreases, which affects both the production volumes in China and the demand for energy,” says Yushkov.
The lack of explosive demand for LNG from China creates favorable conditions for gas to reach the European market in sufficient volumes. “So far, we do not see such fierce competition between the Asian and European markets for LNG, which was observed last year,” the FNEB expert notes.
Heat can add additional demand for energy due to the need for air conditioning and raise prices. However, this greatly depends on how long the hot weather lasts, how windless and waterless it is. Even meteorologists cannot give an accurate weather forecast for a month.
“If a drought starts, like in 2021 or 2022, then this will additionally hit hydropower. Last year, even nuclear power plants were shut down due to cooling problems. Plus, during a drought, as a rule, there is calm weather. This is important because now wind farms cover part of the demand for electricity, which has grown due to air conditioning,”
Traditionally, gas prices rise in winter. And the more severe and frosty the winter, the higher the price will be. “The temperature in winter is a very important factor for the gas market, because gas in Europe is predominantly used for heating. Therefore, frost always causes demand for gas,” the interlocutor notes.
'Europeans were lucky last winter, as it was a warm winter, and in many countries the temperature did not drop below zero at all.'
The second important factor is what the economic situation will be in Europe. If the ECB follows through on its hints and raises the rate several times in the second half of 2023 to fight inflation, then this, of course, will hit the European economy hard, slow down industry even more and reduce energy consumption. This could drive the European economy into an annual recession, Yushkov does not rule out. The third factor is what will happen in Asia. “Since the gas market has become more or less global, so if there are frosts in Asia and more gas is needed there, then inter-regional competition will begin. Asia may begin to draw on LNG,” says Yushkov. Decreasing supply against the backdrop of rising demand will lead to an increase in gas prices in Europe.
However, Ronald Smith, senior analyst at BCS World of Investments, sees no reason for gas prices to rise in the summer. According to his forecast, at the end of the summer there could be an even greater collapse in prices at European gas hubs if the Europeans quickly fill up gas storages. He expects that European UGS facilities will be filled to the required 95% by the end of August, although this level was usually reached by October-November, just before the start of the heating season.
But in winter, Europe will definitely not be able to avoid rising prices. During the heating season, prices will recover to $600 per thousand cubic meters, but without a significant increase in export volumes, Smith predicts.
The whole situation led to serious losses for Gazprom. Between 2015 and 2019, Gazprom averaged $3.3bn a month from gas exports to Europe, Smith estimates, with deliveries averaging 15.5bcm a month at about $210 per thousand cubic meters.
In the “covid” year 2020, Gazprom’s revenue fell to $1.9 billion a month due to a decrease in gas prices to $130.
Last year, Gazprom's exports fell by half, but the cost of gas rose to a record level of $1,100 per thousand cubic meters, and up to $3,500 at hubs. Therefore, Gazprom's revenue in 2022 reached a record $8 billion per month. That's 2.4 times the "pre-pandemic" average of 2015-2019, Smith points out.
This year, instead of 15.5 billion cubic meters a month, Gazprom ships only about 2.6 billion cubic meters to Europe. In annual terms, gas exports to Europe through pipes fell from 186 billion cubic meters in 2019 to 31.2 billion cubic meters in 2023. As a result, Gazprom's monthly revenue fell to $1.9 billion. This is 40% less than Gazprom earned in 2015-2019,
Smith considered.
According to him, in June, Gazprom's revenue was even less - $1 billion, and in winter, when prices rise, exports to Europe will bring only $1.4 billion a month. “In the long term, Gazprom is likely to have permanently lost 65-75% of its historical share in the European market, and gas prices will slowly decline and average less than $400 per thousand cubic meters,” the analyst concludes.
“I would not say that LNG was able to replace Gazprom in the European market, because a new player has not appeared who would bring to the market as much gas as Gazprom used to supply through pipelines to Europe. There were no new LNG plants with such a significant production volume. This would be noticeable for the entire world market. Europe is lucky somewhere. But in general, the gap that appeared in the EU gas balance after the reduction in supplies from Russia is covered primarily by reducing the volume of gas consumption,” concludes Igor Yushkov. Europe paid with its economy and industry for refusing Russian gas, even if this denial was provoked by blown up gas pipelines of European allies.
This article originally appeared in Russian at vz.ru