Rystad: Russia-Ukraine tensions could jeopardize 30% of European gas demand

An escalation of military tensions between Russia and Ukraine could put up to 155 billion cu m/year (bcmy) of natural gas imports to Europe at risk if the conflict causes Russia to halt deliveries, according to Rystad Energy. The figure is equivalent to 30% of Europe’s annual gas demand.

While a total shutdown of Russian piped gas is unlikely, European gas markets are entering the final stretch of winter in a precarious position. Gas stocks are at 5-year lows, international LNG prices are volatile, and the Nord Stream 2 pipeline from Russia to Germany is not expected to be operational until this year’s second half.

If Russian exports were shut off entirely, Europe would struggle to meet its gas needs. Eastern Europe would be most severely impacted as the region is the most reliant on Russian imports, whereas Western Europe could, in theory, fill the void with increased LNG imports, primarily from the US, Rystad said. Western European countries have nearly enough LNG import capacity to replace all Russian gas but would need an additional 8 bcm of domestic production to make up the difference to 2021 levels.

Regasification could be a stumbling block for fresh imports, Rystad said. Western Europe’s regasification capacity was operating at 100% in January, and spare capacity to accommodate a future increase in import volumes is minimal. Poland and Lithuania have a limited amount of additional LNG import terminal capacity to be utilized. Southern Europe has significant spare import capacity but is less reliant on Russia as the region already sources the majority of its gas from the LNG market, as well as through pipelines from North Africa and Azerbaijan.

Of the 155 bcm of piped gas Europe imported from Russia in 2021, 40 bcm was piped through Ukraine, a supply that would likely be disrupted in the event of military escalation between the two countries. If only the 40 bcm were taken off the table, Europe could make up the difference with relative ease, Rystad said, but it would have to pay higher spot prices for the replacement volumes.

“Despite Europe’s implicit policy to reduce its dependence on Russian gas – as demonstrated by the significant build-up in LNG import facilities on Western Europe’s coast in recent years – Russia plays a pivotal role in helping meet the region’s gas needs. As a result, any military conflict could have serious ramifications for European gas supply,” said Sindre Knutsson, vice-president for gas and LNG market analysis, Rystad Energy.

European gas storage levels remain historically low at 45 bcm currently. This is 30% lower than the 5-year average and amounts to only 2 months of gas to meet average winter demand. The region is particularly vulnerable to short-term movements in supply and demand, as evidenced by record spikes in traded gas prices on the Dutch Title Transfer Facility (TTF) in recent months. Any disruption to Russian gas flows via Ukraine into Europe would immediately impact traded prices, LNG import demand, and gas-to-coal switching for power generation, among other factors.

Regionally, Western Europe (Northwest Europe, the UK, and Scandinavia) imported 75 bcm from Russia last year, accounting for 25% of its total demand. Eastern Europe (the Baltic States, Central and Eastern Europe) imported 55 bcm of Russian gas, equivalent to 57% of its total demand, while Southern Europe (Iberia and the Mediterranean countries) sourced 25 bcm from Russia, equal to 21% of its total demand.

Each region would be impacted by Russian flow disruptions to varying degrees, with Eastern Europe being the hardest hit. Poland, the Czech Republic, and Slovakia would be particularly impacted, with countries further south less vulnerable due to healthy supply through the Turk Stream pipeline.

Western Europe is already sourcing extra gas from the LNG market and maximizing import capacity after Russian supplies dropped significantly last month because of lower gas flows through Ukraine and the Yamal-Europe pipeline running in reverse. LNG imports into Western Europe reached an all-time high utilizing 100% of the region’s regasification capacity – with most additional volumes coming from the US. Of the total 8.6 bcm of LNG that Western Europe imported in January, 4.8 bcm (56%) came from the US, 1.7 bcm came from Russia, and 0.7 bcm from Qatar.

More LNG supply is available, but only if European countries are willing to pay elevated prices. The bulk of the extra LNG supply could come from the US, which has 102 bcm of free on board (FOB) volumes on the market. Australia and Asia have most of the market’s available spot volumes, but those cargoes are unlikely to arrive in Europe due to long voyage distances. Instead, the US, Africa, parts of Europe, and Russia’s Yamal LNG could offer additional spot LNG. Europe could also buy volumes from aggregators and traders looking to resell into the market.