Europe's gas crisis: Looking west as reserves dwindle

On European markets, gas prices have reached levels not seen since October 2023. Although the gas crisis nightmare seemed to be behind the EU, the cost of blue energy is rising again, exceeding approximately 71 CAD per megawatt hour. This remains far from the worst moments of the energy crisis when 2022 prices approached 426 CAD, but it is already significantly higher than in March 2024, when blue fuel was priced at about 42 CAD.

Europe is thus using its reserves and delaying their replenishment. As a result, experts from Energy Aspects predict storage levels might drop to 30-35% by the end of March. According to a Gas Infrastructure Europe report, Europe's gas storage level decreased from 70% at the beginning of January to 56.1%. For comparison, a year earlier, at the beginning of January, the storage was filled to 86%.

Additionally, weather factors play a role. Low temperatures in some areas of the USA and Europe, recorded around the turn of the year, have led to increased gas consumption for heating purposes. In the previous two years, this demand had been much lower.

"Europe used large amounts of gas early in the winter and is likely to want to give up Russian supplies," comments Michał Stajniak, the vice-director of XTB's analysis department, in an interview. Remember that the EU still buys liquefied natural gas (LNG) from Russia. Still, since Putin invaded Ukraine, the transmission of Russian blue fuel via pipelines has been gradually phasing out. "Gas will still be needed in Europe, given emerging questions regarding the Green Deal and the recent situation related to a strong stock decrease," he notes.

Additionally, with the expiration of the Russian-Ukrainian gas transit agreement at the end of 2024 (which mainly reached Slovakia and Hungary), a gap arises that needs to be filled with supplies from other directions.

Ukrainian President Volodymyr Zelensky declared that his country is ready to increase the transit of gas from Azerbaijan to Europe. Azerbaijan theoretically has the ability to export 24.9 billion cubic metres of raw material. This is about one and a half times what Poland consumes in a year (approximately 16.9 billion cubic metres) and a little over one-third of what Germany consumes (approximately 80 billion cubic metres).

However, Ukraine's offer does not solve Europe's gas problem. First, there are still doubts about using this as a loophole for Gazprom, as Azerbaijan's SOCAR has agreements with the Russian giant. Second, the volume that can be imported will not fully cover the gap.

The increase in gas exports by EU countries from Azerbaijan through the pipeline system, including via Ukraine's territory, will not solve the full problem of limited gas availability. Currently, the amount of gas imported to Europe from Azerbaijan is about 5-7% of the needs," calculates Michał Stajniak in an interview.

As the XTB analyst reminds us, European Commission President Ursula von der Leyen already signed an agreement with Azerbaijan in 2022 to double exports to Europe by 2028. So even if the current import level of 5-7% increases to 10-14%, it could only slightly replace the more expensive LNG, which today accounts for 40-50% of the entire import to EU countries.

"Nonetheless, it is important to remember that pipeline gas prices are significantly lower if solid transmission infrastructure exists. Building new pipelines and infrastructure is, of course, very costly. In the case of pipeline gas imports, sales occur through long-term contracts, while LNG could be purchased even in the short term," Stajniak emphasizes.

The development of infrastructure for liquefied gas reception has opened up numerous import opportunities for Europe from various directions. Gas is imported to the EU from Qatar, Algeria, and also from the USA and Russia.

However, successive sanction packages limit Russian supplies, and in the long term, Brussels aims to replace Russian gas with resources from another direction. The return of Donald Trump to the White House prompted Europe to declare larger purchases from the USA to reduce the massive trade deficit and slightly appease Trump. Gas is expected to become a bargaining chip for the EU and a safeguard against the U.S. President's promised 10-20% tariffs on European products.

The head of the European Commission had already spoken with Trump about replacing Russian liquefied gas with American gas. For similar reasons, interested parties are already lining up at Trump's terminals.Both Europe and Asia have declared they are willing to increase purchases from the USA.

To satisfy the demand for American gas stimulated by Trump, the Republican president has announced the removal of barriers for greater extraction and production in his country. During his election campaign, he announced an increase in the exports of American LNG on a scale greater than the previously planned doubling by 2030.

The question remains whether the USA will be able to meet the growing demand for LNG. "The current expansion programs in the USA for LNG show that these capabilities will significantly increase. Even with the liberalization of mining laws, building additional fields and terminals is not within a single-term perspective. However, the USA's share in gas production is steadily rising," assesses Szymon Pastucha, an analyst from the Polish Institute of International Affairs, in an interview.

After the shale revolution, the USA became a major player in the LNG market, and in 2024 exports of this resource from the USA reached 88.3 million tonnes. For comparison, a year earlier it was 84.5 million tonnes.

However, as the XTB expert points out, the greater export potential from the USA may limit gas availability on the local market. And although potential for production growth remains, domestic demand in the USA may also rise.

"This is linked to the development of infrastructure for artificial intelligence. Trump has stated that energy needs in the USA could double in the coming years, and it should be noted that over 40% of electricity in the USA comes from gas-fired power plants. Therefore, a potential reduction in available local supply in the USA can be observed with a probable increase in demand. This must mean rising prices," evaluates Stajniak.

Additionally, this year's summer may be very hot, which will also raise energy needs in the USA due to air conditioning use. This could result in a smaller increase in reserves before the next heating season. "Therefore, we can ask ourselves: is this the end of the cheap American gas era?" the analyst wonders.

However, Szymon Pastucha notes that consumers from Europe or Asia are still willing to pay more for American LNG in exchange for other economic benefits. "It's worth noticing that American gas is still relatively cheap, even when considering all the costs associated with liquefaction and transport. Europe's massive demand means that American importers are very interested in our market," adds Michał Stajniak.