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No all-clear on the natural gas market
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No all-clear on the natural gas market

August 28, 2023
Last winter gas shortages and blackouts loomed as spectres. This year the situation is better. However, the European gas market has changed a great deal, with liquefied natural gas replacing fuel from Russia.

Original article: Neue Zürcher Zeitung

A year ago, all hell broke loose on the natural gas market. At the end of August 2022, the reference price for European gas, which is provided by the Dutch trading point TTF, shot up to over EUR 300 per megawatt hour, a value ten times higher than usual. Electricity prices followed this rapid increase. Discussions about gas shortages and blackouts in winter increased.

One year later, the situation on the natural gas market looks more relaxed. The TTF price has fallen by more than 85 percent since last year's record high. Currently the value is EUR 34. The fact that the price has fallen is also because European natural gas storage facilities are already well filled at more than 93 percent. This means that the EU reached its target fill level two months earlier than planned. In addition, demand for natural gas remains subdued.

Despite lower prices, natural gas consumption in the EU fell by 18 per cent in the first half of the current year compared to the average between 2019 and 2021, according to think tank Bruegel. A similar figure is arrived at for Switzerland if figures from the federal government's energy dashboard are used.

One reason for this could be the weak economy. However, it is also possible that some companies have already moved production out of Europe, which would be a longer-term problem for gas consumption. Moreover, the lower demand may already reflect an increased switch to heat pumps and district heating replacing gas heating.

Complete cessation from 2027

Although the TTF price has fallen, it is still high compared with historic levels. Behind this is also a far-reaching upheaval of the gas market in Europe. The former main supplier, Russia, was replaced by imports of liquefied natural gas (LNG) following the large-scale Russian invasion of Ukraine. Russia now supplies only a fraction of its former quantities by pipeline via Ukraine and Turkey. The EU even wants to forego Russian gas and oil completely from 2027.

Europe's greater dependence on LNG supplies also means that European prices will be subject to greater fluctuations. While pipelines bind suppliers and buyers together, LNG deliveries open up the whole world to an importer. However, Europe is competing on the global natural gas market primarily with Asian countries such as Japan, South Korea and China.

Experts from the energy market service provider Icis write that the price fluctuations and also the relatively high prices are a "new normal" – at least until 2025. Until then, they say, no new LNG volumes will come onto the market and supply will be tight. We have seen in recent weeks what this means. Threats of strikes at three large LNG plants in Australia caused prices in Europe to shoot up by 40 percent – even though the volumes were not intended for Europe. With the strike averted, the price also dropped again.

The episode shows that even distant events can have a great impact. Russia supplied a large part of its natural gas under long-term contracts, which offer more price certainty. For this, a buyer has to commit for a long time. In the case of LNG, Europeans are currently buying mainly on a short-term basis, which makes them more vulnerable to price fluctuations.

A cold winter would be difficult

The coming winter will be the next test for the European gas market. "The situation is more relaxed than last year, but it is still too early to give the all-clear," says Thomas Hegglin of the Swiss Gas Industry Association. From the point of view of the Baar-based energy company MET Group, Europe should be able to cope well with an averagely cold winter. However, an extremely cold winter could lead to a nasty surprise.

Besides the temperature, there are other question marks: problems in Europe could be intensified if demand in Asia is also high at the same time. Much depends on whether China manages an economic comeback. At present, however, the situation is gloomy.

In addition, there is the question of how much natural gas is needed to produce electricity. Last year, a significant proportion of the French nuclear power plants were out of action due to maintenance work. These are currently producing significantly more than in the previous year. In addition, it is questionable how much pipeline gas and LNG will come from Russia, which is mainly a political issue.

Meanwhile, the federal government advises businesses and the population to use the time to prepare for next winter. Thus, dual-fuel systems that can be operated with gas and heating oil are to be ready for use for the heating season, and heating oil tanks are to be filled up.

Hegglin of the Gas Industry Association also points out that the industry still has to hold around 15 percent of annual gas consumption in storage facilities abroad. Switzerland itself has no gas reserves of its own. A solidarity agreement with Germany and Italy, which would guarantee the supply of gas in the event of a crisis, is still pending. However, Bern has already been able to conclude a bilateral agreement with Italy to help each other in the event of a gas shortage.