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Exports of Russian gas via pipelines running through Ukraine finally came to an end on New Year’s Day, marking the end of an era of Moscow’s dominance over Europe’s energy markets. Russia’s gas firm Gazprom said it had supplying gas at 0500 GMT on Wednesday after Ukraine refused to renew a transit agreement. Ukraine will lose up to $1 billion a year in transit fees from Russia– which it hopes to offset by quadrupling its domestic gas transmission tariffs for consumers–while Gazprom will lose close to $5 billion in gas sales. Ukraine gas amounted to 5% of total EU gas imports.
However, unlike the situation in 2022, natural gas prices have not been majorly impacted by the cut-off thanks to Europe’s success at finding alternative supplies. Energy experts had earlier warned that Austria, Hungary and Slovakia are likely to be the hardest hit when the imports are cut off. Thankfully, Slovakia has already secured alternative supplies: Azerbaijan’s state oil company, SOCAR, has started supplying natural gas to Slovakia’s Slovenský plynárenský priemysel (SPP), the country’s largest state-owned energy operator. This comes just a month after SPP signed a short-term pilot contract to buy natural gas from Azerbaijan as it prepared for a possible halt to Russian supplies via Ukraine. SPP has pledged to supply its customers mainly via pipelines from Germany and also Hungary, albeit at additional transit costs.
Related: 89% of New Cars Sold in Norway Last Year Were EVs
European natural gas futures climbed to €51 per megawatt-hour, the highest since October 2023, before easing to €50 as the Russia-Ukraine deal came to an end. However, the gas rally could gain momentum in the weeks to come: with inventories currently depleting at the fastest pace since 2021, sub-zero temperatures in parts of Europe could drive up heating demand. On the other hand, U.S. natural gas futures dropped 5.7% to $3.71/MMBtu following a surge to a two-year high as traders took profits. However, U.S. gas prices still booked their largest annual gain since 2016, driven by rising exports to meet overseas LNG demand and expectations of higher consumption during winter.
U.S. LNG Demand Could Surge
The United States is likely to emerge as the biggest winner of the unfolding situation in Europe–if recent developments are any indication. Norway and the U.S. have replaced Russia as Europe’s biggest gas supplier: last year, Norway supplied 87.8 bcm (billion cubic meters) of gas to Europe, good for 30.3% of total imports while the U.S. supplied 56.2 bcm, accounting for 19.4% of total. However, the U.S. is the biggest LNG supplier to Europe: last year, the U.S. accounted for nearly half of total LNG imports by the continent, marking the third consecutive year in which the United States supplied more LNG to Europe than any other country.
What’s interesting here is how fast this has happened: the U.S. supplied 27%, or 2.4 billion cubic feet per day (Bcf/d), of total European LNG imports in 2021; 44% (6.5 Bcf/d) in 2022; and 48% (7.1 Bcf/d) in 2023. Obviously, Russia’s war in Ukraine has played a big part in growing Europe’s appetite for U.S. gas. Meanwhile, Europe’s capacity to accept LNG is increasing. Europe’s LNG import, or regasification, capacity is on track to expand to 29.3 Bcf/d in 2024, a 33% increase compared with 2021. Currently, Germany is adding the most LNG regasification capacity in Europe, with developers in the country having added 1.8 Bcf/d in 2023 and on track to add another 1.6 Bcf/d in 2024.
On a global scale, the United States shipped a record 56.9 million metric tons of LNG during the first eight months of 2024, surpassing 54.3 million tons from Australia and 53.7 million tons from Qatar during that period. That marks the second straight year that U.S. exporters have topped global export rankings.
Interestingly, Europe has bought considerably less LNG from the U.S. in the current year, with shipments from January through August dropping by 22% Y/Y. The slowdown has largely been triggered by a sharp climb in European power generation from renewable energy sources, which remain a priority for Europe’s power utilities. Solar and wind power’s share of electricity generation in Europe jumped from around 16.4% in 2022 to 20.5% so far in 2024 while fossil fuel generation’s share dropped from around 44.6% in 2022 to 36.6% so far this year. As you might expect, coal-fired power has taken the biggest hit in Europe’s energy mix, although natural gas generation’s share has also declined, from around 26% in 2022 to 22% so far this year. But with Europe now receiving even less Russian gas, we expect U.S. LNG exports to the region to surge again.
The long-term U.S. natural gas outlook is equally bright. According to Morgan Stanley, the U.S. natural gas market is poised to enter a new cycle of demand growth thanks to surging LNG exports and rising electricity demand. Over the past few years, dozens of pundits and industry experts have predicted that the ongoing Fourth Industrial Revolution will drive unprecedented electricity demand growth in the United States and globally. Last year, the power sector consulting firm Grid Strategies published a report titled “The Era of Flat Power Demand is Over,” which pointed out that United States grid planners—utilities and regional transmission operators (RTOs)—had nearly doubled growth projections in their five-year demand forecasts. For the first time in decades, demand for electricity in the U.S. is projected to grow by as much as 15% over the next decade driven by the Artificial Intelligence (AI), clean energy manufacturing and cryptocurrency boom.
By Alex Kimani for Oilprice.com
