European gas: weathering the coming storm

Christmas presents can end up at the bottom of the closet. But this year, Europe got a gift that will really make a difference. The extraordinarily mild winter in most of the continent means it starts 2023 with falling gas prices and full storage. This was always meant to be the crunch year for supply. The extra cushion will help soften the blow.

Higher inventory reflects the benefits of nimble supply sources, thrift — and good luck. Europe responded to lower Russian gas imports of some 80bn cubic metres year on year by ferreting out 65 bcm of extra liquefied natural gas.

Meanwhile, European gas demand (including Turkey and the UK) dropped by a record 70 bcm to below 500 bcm, according to the IEA’s Gergely Molnar. That was due to more renewables, curtailments, fuel switching and the weather.

As a result storage is now 83.5 per cent full — meaning Europe has an extra 30 bcm in the tank compared to last year’s very depleted levels.

That surfeit should be welcome as the next 12 months will be tougher. Russian gas imports declined only gradually last year. Even at current flows, Europe ends up with 35 bcm less than last year. Should normal temperatures return, that would add 10 bcm to consumption. The installation of 20-25bcm of new LNG import capacity does help.

This extra storage buffer means the sums tally up in a base case. But that still puts Europe in a tight spot. A cold year without Russian gas would double the amount of gas required to cover any supply gap to over 80 bcm. And a China emerging from Covid might fight tooth and nail for LNG shipments.

That means Europe needs structural reforms. Plans to make buildings more efficient and ramp up solar and wind installations might shave 15 bcm off next year’s demand, according a recent report by the IEA — and that could be doubled with a hefty push.

Just when budgets are stretched that will be costly. But policymakers should be aware that the alternative is a return to soaring gas prices and forced demand destruction.