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You Don't Own Me - What Will It Take for Europe to Give Up Russian Gas RBN Energy

You Don't Own Me - What Will It Take for Europe to Give Up
Russian Gas?
Wednesday, 03/09/2022
Published by: Sheetal Nasta
The fallout from Putin’s full-scale invasion of Ukraine has been multifold, with the human
tragedy front and center. But it’s also reverberated across world economies as governments
move to sanction Russia and corporations cut their ties with it. In a bid to minimize the
impact on energy supplies and prices, the U.S. and its European allies have been grappling
with how best to wean themselves from Russian crude oil and natural gas. That was relatively
easy for the U.S. — the Russian import ban announced earlier this week by President Biden is
likely to have only minor side effects. But the challenges for Europe are far greater due to its
significant dependence on Russian supplies. If you’re stateside and trying to make sense of
the market implications of all that — and trying to wrap your head around Europe’s energy
infrastructure (and its approach to discussing energy volumes) — you’re not alone. In today’s
RBN blog, we begin a look at what the European response could mean for the global LNG
Let’s start with the flurry of recent announcements, with the U.S., UK and European Union all
moving to cut or curtail Russian oil and gas imports. The Biden administration on March 8
announced an immediate ban on Russian energy supplies into U.S. ports, including crude oil,
LNG and coal. In concert with the U.S., the UK followed with its own plan — to ban all
imports of oil and refined products from Russia but take a more phased approach, with the
goal to end them by the end of 2022, given its heavier dependence on Russian oil. The UK’s
plan does not include natural gas or LNG. On the natural gas side, however, the European
Commission (EC), which represents the 27 countries in the European Union (EU), on March 8
announced plans to reduce imports from Russia — which make up 40% of Europe’s gas
supply — by two-thirds by the end of this year. The plan echoed and built on elements of a
plan outlined by the International Energy Agency (IEA) last week for the EU to reduce
Russian gas imports by more than one-third within a year.
We recently dissected the impacts of a potential (now real) ban on Russian oil to the U.S. —
in particular, the implications for U.S. refineries — in We’re Not Gonna Take It
(https://rbnenergy.com/were-not-gonna-take-it-what-do-us-refineries-import-from-russia-andwhat-if-they-stop) . Banning Russian supplies is a much bigger deal for Europe, however,
especially when it comes to its natural gas requirements. So, we now turn our attention to
the European gas situation, putting the EC/EU’s plan in the context of the continent’s gas
market landscape, what the curtailments could look like and implications for the global LNG
market, including exports from the U.S., given its increasing role as marginal LNG supplier
(https://rbnenergy.com/sultans-of-swing-the-economics-of-us-lng-in-a-competitive-global-gasmarket) in global LNG trade.
The Lay of the Land
First, let’s get a quick lay of the land across the pond to understand just how big a deal —
and ambitious — it is for Europe to cut Russia out of the picture. We first provided an
overview of the European gas market in The Space Between (https://rbnenergy.com/thespace-between-european-and-us-gas-markets-look-to-each-other-for-price-direction) in June
2020, when European demand was slashed by pandemic lockdowns, storage was full there,
and U.S. LNG cargoes to Europe were being canceled in droves. Now, the pendulum has
swung the other way on Europe — declining production, low on gas inventories and needing
all the help it can get from the U.S. to offset the prospective loss of Russian gas supplies.
Before we get into the data, a note about units. Unlike in the U.S., where gas fundamentals
are quantified in millions or billions of cubic feet (MMcf or Bcf), European gas fundamentals
are typically in millions or billions of cubic meters (Mcm or Bcm). To put it in perspective,
however, we’ve included the Bcf/d equivalents in our discussion (to convert from cubic meters
to cubic feet, you multiply by 35.3, meaning that 1 Bcm per annum equates to about 100
The 27 EU countries together consume about 400 Bcm of gas annually (about 1.1 Bcm/d),
according to Eurostat data available through 2020. To put that in U.S. gas market terms,
that’s the equivalent of close to 40 Bcf/d of gas demand (1.1 Bcm/d * 35.3) — roughly half
of what the U.S. consumes domestically. Germany is by far the biggest EU consumer, with
about 260 Mcm/d (~9 Bcf/d), or 23% of gas demand. The UK, which left the EU on January
31, 2020, and is not included in the EU plan to curtail Russian gas, is the second-biggest gas
consumer on the continent as a whole, with about 217 Mcm/d (~8 Bcf/d) of demand. Among
the EU countries, Italy is the second-biggest consumer after Germany, with about 200 Mcm/d
(~7 Bcf/d), or 18% of EU demand, while Spain, France and the Netherlands combine to make
up another ~30% of EU demand (with about 3-4.5 Bcf/d of demand each).
With indigenous production in the EU in decline and amounting to much less than 10 Bcf/d in
recent years (about two-thirds the Permian’s current output), the region relies on imports —
in the form of piped gas and regasified LNG — to meet about 80% of its gas needs. Net
imports to the EU countries have totaled 30-35 Bcf/d in recent years, again according to the
latest Eurostat data, with Germany importing nearly a quarter of that. Here’s the kicker
though: Russia is Europe’s biggest gas provider, with a 45% share of EU gas imports in 2021,
according to the IEA, equivalent to about 155 Bcm for the year (~15 Bcf/d). And the biggest
importer of Russian gas is also the biggest gas consumer in the EU: Germany.
There are several major pipeline routes for gas from Russia, of which two deliver directly into
Germany (pink lines in Figure 1): Nord Stream 1, which extends across the Baltic Sea into
Germany, moved an average 151 Mcm/d (5.3 Bcf/d) in 2021; and the Yamal-Europe pipeline,
which moves gas west through Belarus and Poland to a termination point in eastern Germany.
Net westbound volumes at the Mallnow metering station on the German-Polish border had
been closer to 80 Mcm/d (almost 3 Bcf/d) during the winter months in recent years,
according to data from Bloomberg. But volumes in that direction began falling off last
September and have been minimal since November, averaging just 2.6 Mcm/d (just under
100 MMcf/d), with flows flipping eastbound (from Germany to Poland) at times. Some of
those volumes appeared to shift to flow via Ukraine following Russia’s invasion; we’ll get to
that route shortly.
Figure 1. Major European Gas Import Pipeline Routes and LNG Terminals. Source: RBN
A third pipeline — the recently completed Nord Stream 2 (dashed pink-and-white line) —
would have doubled Russia’s deliveries to Germany along that path, but it was not yet
operational when Russia invaded Ukraine and has since been more or less nixed. (Germany
suspended certification of the pipeline in response to Russia’s actions in recent weeks; all the
pipeline operators’ employees have reportedly been laid off; and German utility Uniper, as
well as project co-funders Wintershall Dea, Shell, and OMV, have all written off their financial
exposure to the pipeline.)
Russia also exports gas volumes to southeastern Europe via the Blue Stream and TurkStream
pipelines, both of which cross the Black Sea and terminate in Turkey. Nord Stream 1, Yamal,
Blue Stream and TurkStream are all relatively newer systems, built by Gazprom in the past
two decades, and ones that bypass Ukraine, which stopped buying gas directly from Gazprom
back in 2015, after Russia invaded and occupied Ukraine’s Crimea. But there are still gas
volumes that flow to Central-Eastern Europe via Ukraine (outlined in yellow on the map)
using legacy pipelines that run through Ukraine — part of the Soviet-era Brotherhood
Network. This system now primarily delivers into Slovakia for further transport to Austria and
Italy. Based on data from Bloomberg, gas flows on this route, which are reported in yet
another commonly used unit in Europe — gigawatt hours per day (GWh/d) — were primarily
ranging from 1,000-2,200 GWh/d (~3.5-7.5 Bcf/d; multiply by 0.003412 to convert) in 201819, but they dropped off in 2020 to an average of little more than 1,000 GWh/d (~3.5 Bcf/d)
and to just 800 GWh/d (barely 2.8 Bcf/d) in 2021. In the days leading up to Russia’s
February 20 invasion of Ukraine, flows were averaging just 400 GWh/d (1.4 Bcf/d), but they
jumped just after the invasion and have climbed to as much as 3 Bcf/d in recent days. This
apparently has to do more with favorable economics due to the pricing structure between
Gazprom and its customers than the timing of the invasion.
In addition to supplies from Russia, southern Europe also receives imports from the Shah
Deniz gas field in Azerbaijan (purple line) via the Trans-Anatolian Natural Gas Pipeline
(TANAP) through Turkey and the connecting Trans-Adriatic Pipeline (TAP) to Italy. Additionally,
Northern Africa (orange lines) provides significant supply to Italy and Spain, and a separate
network of pipelines also connect Continental Europe with supplies from the UK, Norway, the
Netherlands and Denmark (light green lines). Keep in mind, there are also other routes and
entry points for pipeline gas across Western Europe, but these are the major supply corridors.
Finally, in addition to Western European supply and pipeline imports from neighboring
countries, numerous LNG import facilities dot the coastlines (green diamonds on the map)
and receive supply originating from various international ports, including an average 1.6 Bcf/d
originating from Russia in 2021, as well as an increasing amount from the U.S. (Deliveries
from the U.S. averaged 7.3 Bcf/d from December to February, according to our LNG Voyager
(https://rbnenergy.com/products/lng-voyager) report.)
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The European Commission’s Plan
It's become increasingly clear in recent weeks that Europe’s dependence on Russian gas
makes it vulnerable to a worst-case scenario — an abrupt loss of Russian supplies, whether
on Putin’s word or due to damage on the ground in the Ukraine. (Pipeline crews are
navigating life-threatening situations even now to keep pipelines flowing safely in the wartorn nation, according to a Wall Street Journal story.) Interior European countries in particular
would be most affected by curtailments, given their limited access to LNG imports and, thus,
increased reliance on piped gas imports.
As we mentioned above, the intense pressure to address these concerns and punish Russia
where it will hurt most led the IEA last week to recommend a 10-point plan for replacing
more than one-third of Europe’s Russian gas imports within a year. Echoing elements of the
IEA recommendations, the EC on Tuesday followed with a plan to reduce the EU’s Russian gas
imports by two-thirds, or about 100 Bcm (nearly 10 Bcf/d), by the end of 2022 (doubling the
IEA’s short-term target) and the remainder by 2030.
The measures to achieve that target run the gamut from diversifying and increasing LNG and
pipeline imports to increasing renewables, improving energy efficiencies, reducing usage, and
eliminating infrastructure bottlenecks, as well as providing relief to companies and farmers
affected by high energy prices. Some of these measures will clearly take longer to implement
than others, and some have more potential than others to have an impact sooner rather than
later. Nevertheless, the kitchen-sink approach taken in the IEA and EU plans underscores just
how dire the situation would get if the region stopped taking (or getting) even a third of
Russian gas imports. In short, it will take herculean efforts and cooperation on every front —
and even then, it likely will not prevent extremely tight balances and stratospheric prices,
and possibly supply disruptions, at least not this year and likely not next year either.
Specifically, the EU plan targets bringing in 50 Bcm (~4.8 Bcf/d) more non-Russian LNG
imports by the end of 2022, in addition to 10 Bcm (~1 Bcf/d) more in piped imports. It aims
to reduce demand by 20 Bcm (~2 Bcf/d) by adding 480 GW of wind power capacity and 420
GW of solar capacity, plus eliminating another 14 Bcm (1.4 Bcf/d) of gas demand with energy
efficiency measures, such as turning down thermostats for commercial heating by 1 degree
Celsius. Other measures such as rolling out heat pumps and pushing solar rooftops and
boosting production of renewable gas (biomethane) would replace or reduce another 7.5 Bcm
(0.7 Bcf/d) combined by the end of this year. (The plan also involves boosting hydrogen
production, but for the 2030 timeline.)
The plan perhaps raises more questions than it answers. Take the biggest of the plan’s
pieces, the incremental 50 Bcm of LNG imports in an already tight global LNG market. That’s
equivalent to 1,765 Bcf, or 519 additional cargoes per year, assuming a standard cargo of 3.4
Bcf. (The IEA plan had proposed a 20 Bcm increase in LNG imports, which would equate to
200 additional cargoes per year.) The bulk of LNG deliveries happen on a long-term
contractual basis. So, whether that many cargoes can shift to Europe will come down to a
number of factors, including available global production and export capacity, how much
destination flexibility is built into contracts for major buyers to divert cargoes to Europe, and
how much regasification capacity Europe has sitting open, as well as the pipeline connectivity
to get the gas where it is needed most.
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If destination prices are high enough, it’s not unusual to see capacity holders redirect cargoes
to the higher-priced market or even produce “extra” spot cargoes, and price is not likely to
be a limiting factor. If it comes down to it, European buyers will pay what they need to
secure the supply. In fact, we already saw that happening this winter. As we mentioned at
the outset, the U.S. serves as a swing supplier in many respects, and many U.S. contracts
have destination flexibility (https://rbnenergy.com/upside-down-how-global-prices-steer-uslng-to-different-destinations) . So the European price premiums have been attracting record
volumes of U.S. LNG as well as some redirected cargoes from Asia. The U.S. exported 1,042
cargoes in 2021, and about a third of those went to Europe. That number is back-end
weighted because cargo destinations shifted dramatically toward Europe over the winter. So
far this year, Europe’s share of U.S. cargoes is closer to 70%, according to data from our
LNG Voyager (https://rbnenergy.com/products/lng-voyager) report.
U.S. LNG production capacity is also getting a boost this year (see Higher and Higher
(https://rbnenergy.com/higher-and-higher-us-lng-feedgas-demand-looks-primed-to-build-onrecord-highs) .) The sixth liquefaction train at Cheniere Energy’s Sabine Pass facility in
Louisiana began full service last month, and a new facility, Venture Global’s Calcasieu Pass,
also in Louisiana, has been ramping up and loaded its first commissioning cargo earlier this
month. So, there is some more flexibility there, especially from non-utility capacity holders
that don’t have specific destinations built into their contracts. The problem is, if all available
cargoes are siphoned off to Europe, what would happen to Asia — or Latin America, for that
matter — and what would that level of competition do to prices? At some point, soaring
natural gas prices will no doubt dictate that other energy sources ramp up. Asia or Europe, or
both, may have to burn more coal. (The European Green Deal commissioner was quoted
admitting as much.)
Even if Europe can attract all those incremental cargoes, does it have enough additional
import/regasification capacity to handle them? Terminals there have already been operating at
higher rates. And, while there may be some upside potential there as well, there’s still the
question of moving the gas from the import facility to the consuming markets, the biggest
one in Continental Europe being Germany. Germany can get piped gas from Norway, the
Netherlands, Britain and Denmark, as we noted earlier, but some of those routes are running
full, and Norway’s prime minister reportedly said it’s delivering at maximum capacity already
and won’t be able to replace any Russian gas supplies. Germany can also get LNG indirectly
via terminals in Belgium, France and the Netherlands, but those reportedly also have been
running near capacity.
Figure 2. European Gas Storage. Source: LNG Voyager, Bloomberg
Of course, Priority #1 for the European gas market as it transitions from winter to spring and
summer will be replenishing low inventories before the next winter. The EC plan addresses
that too. It prescribes that storage fill should ramp up right away (earlier than usual — net
injections typically start sometime in April). It also proposes to require that storage facilities
fill up to at least 90% of capacity by October 1 (with some additional rebate incentives to
refill storage). That’s not a huge ask — European storage historically has gotten to 80%-95%
full by that time of year, and one bright spot, if you can call it that, is that because this is
occurring during the milder shoulder period, European demand will be somewhat lower.
The problem is that European storage is running lower than usual for this time of year (see
navy blue line in Figure 2), which means injections would have to be higher than normal to
get to that 90% level by October, which, in turn, would only add to European gas demand
this injection season. Which brings us back to LNG imports and the potential challenges of
sourcing and importing hundreds of additional cargoes. Ultimately, if Europe has to ramp
down Russian gas supplies by that much that quickly and still fill storage before next winter,
it may have to resort to more drastic measures to reduce demand, such as shutting off big
industry, including many major manufacturers (think companies like BMW, Bayer, VW and
Longer term, there are vastly more possibilities. Germany and Italy have both announced
LNG import projects in recent weeks, and inland pipeline projects that were previously
considered unnecessary are back on the table. The fundamentals also strongly support more
U.S. LNG export projects (https://rbnenergy.com/jump-in-the-line-part-2-how-close-ischeniere-to-another-lng-terminal-expansion) , especially along the Gulf Coast, and there is no
shortage of them vying for long-term contracts and financing to achieve final investment
decisions. But all of that will take years, and, in the interim, record prices and volatility are
virtually guaranteed.
“You Don't Own Me” was written by John Madara and David White. It appears as the first
song on side two of Lesley Gore’s second studio album, Lesley Gore Sings of Mixed-Up
Hearts. Released as a single in December 1963, it went to #2 on the Billboard Hot 100
Singles chart. It remained at #2 for three consecutive weeks, until The Beatles arrived with
“I Want to Hold Your Hand,” taking over the #2 spot. The song was recorded when Gore was
17 and is a pretty heady mix for a teenager to sing an anthem that celebrates defiance over
authority. It was inducted into the Grammy Hall of Fame in 2016. The song has been certified
Gold by the Recording Industry Association of America (RIAA). Recorded in September 1963,
the tune features Lesley Gore on vocals, accompanied by session musicians selected by
producer Quincy Jones. It would be Gore’s last Top 10 single.
Lesley Gore Sings of Mixed-Up Hearts was the follow-up to Gore's debut album, I'll Cry If I
Want To. The Quincy Jones-produced LP contained three charting hit singles: “She's a Fool,”
“You Don't Own Me,” and “Sunshine, Lollipops, and Rainbows.” It was released in November
1963 and went to #125 on the Billboard Top 200 Albums chart.
Lesley Gore (Lesley Sue Goldstein) was an American singer, songwriter and actress. Brooklynborn Gore recorded her first hit record, “It's My Party,” with producer Quincy Jones when she
was 16. It went to #1 on the Billboard Hot 100 Singles chart and has been certified Gold by
the RIAA. She released 13 studio albums, six compilation albums, and 37 singles. In the
sixties Gore acted on the television series, The Donna Reed Show, Batman, Malibu U, and
Dream Girl of ’67. In the eighties she appeared on All My Children, and in the nineties on
Murphy Brown. She composed songs with her brother Michael for the soundtrack album for
the film Fame and wrote music for the 1996 film Grace of My Heart. In 2003, she hosted
several episodes of the PBS series In the Life. Gore died in Manhattan in February 2015.
Europe Natural Gas (/comment/5881#comment-5881)
Submitted by LD on
Thu, 03/10/2022 - 17:09
What I have rarely seen mentioned is quickly ramping up Europe’s natural gas production.
Because of environmental pressures many older gas field were prematurely abandoned
(Groningen, etc.). Similarly, newer fields in the North Sea have been capped. Time to give
the petroleum industry some free rein to quickly jack up production. The economics are
certainly attractive!
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