Main logic:
0 Since mid-June, Europe's natural gas crisis has been ongoing. Now Gazprom said that due to "technical problems" in Nord Stream 1, the supply of natural gas shipped to Europe will be cut in half from July 27, down to 20% of the normal level. This caused European natural gas prices to rise sharply by 12% on July 25 and again by 14.75% on July 26. Will the natural gas crisis in Europe happen this winter? Through research, we have found several points:
First of all, Russia is no longer so important. Since 2021, Europe has been forced or consciously reducing its dependence on Russian gas supply. Russia's natural gas supply still accounts for 40% of European consumption throughout 2021, so by May-June 2022, this proportion has dropped to 13.40%. The corresponding increase is more about LNG import volume.
Secondly, natural gas demand has begun to decline in the power and industrial links. Higher natural gas prices have triggered the choice of raw materials in the power market. Coal has become the cheapest alternative.
Again, we see proposing that member states take voluntary measures in the next eight months to reduce gas usage by more than 15% compared to the average of the previous five years.
In summary, we believe that if European countries strive to reduce demand by 15%, even if Russia completely cuts off gas, it will not affect the demand for civilian and commercial gas. Europe accounts for as much as 83% of Russian pipeline gas exports. With limited LNG production capacity, there are not many places where Russia's pipeline gas can go. We don't think Russia will be likely to stop breathing against Europe for a long time. Therefore, we believe that the natural gas crisis in Europe this winter is not undecided, and it will be a key point for countries to actively reduce demand.
html Since mid-June, Europe's natural gas crisis has continued. First, the Freeport port, which accounts for 18% of the total LNG exports in the United States, caught fire and exploded. Another reason was the gas transmission of Nord Stream One fell to 40% of its production capacity, followed by the maintenance of Nord Stream One. On July 21, Nord Stream One was officially operated after ten days of maintenance, and the gas transmission was 40% of its production capacity. Now Gazprom says that due to "technical problems" in Nord Stream 1, natural gas supply to Europe will be cut in half from July 27, dropping to 20% of the normal level. This caused European natural gas prices to rise sharply by 12% on July 25 and again by 14.75% on July 26.
. What is the trend of natural gas prices in Europe?
European natural gas prices have seen three waves of rise in the past two years. The first wave is the natural gas crisis in winter 2021, and Russia hopes that Nord Stream 2 can be put into operation. The second wave is the supply crisis brought about by the Russian-Ukrainian conflict in March 2022. Europe sought more LNG from its US allies, and the gas price fell. The third wave is now, with the price soaring by the Freeport fire and the reduction in Nord Stream One gas transmission.
unit joules of power generation fuel price, and considering that the power generation efficiency of natural gas is 50%, and the efficiency of coal and oil is 33%, the generation cost of LNG is the highest in each crisis, followed by diesel, coal and fuel oil. Even considering the carbon price factor, taking Germany as an example, the ignition price difference of power plants is profitable for coal power generation and natural gas power generation loses.
. How important is Russia to the European natural gas market?
Russia's natural gas supply was once crucial to Europe. In 2021, the average annual import of more than 380 million cubic meters (mcm) of natural gas from Russia via pipelines, or about 140 billion cubic meters (bcm) throughout the year. In addition, approximately 15 bcm was delivered in the form of liquefied natural gas (LNG). The total 155bcm imported from Russia accounts for about 45% of the EU's natural gas imports in 2021, accounting for nearly 40% of its total natural gas consumption.
Since 2021, Europe has been forced or consciously reducing its dependence on Russian natural gas supply. Russia's natural gas supply still accounts for 40% of European consumption throughout 2021, so by May-June 2022, this proportion has dropped to 13.40%. The corresponding increase is more about LNG imports. The conflict between Russia and Ukraine has only accelerated LNG imports.
00 Since July, the gas supply of Nord River 1 has declined again. Even according to the proportion from May 1 to June 25, Russia's supply of natural gas to Europe is only 13.40%.
. What changes have occurred in Europe's natural gas demand?
There are three main natural gas demand in Europe, the largest proportion is LDZ, namely civil and commercial gas, the second is industrial gas, and the third is natural gas power generation.
LDZ gas is rigid, and industrial gas is also continuously declining due to high prices, and the most changing is electricity gas.
The higher natural gas price has triggered the choice of raw materials in the power market. Coal has become the cheapest alternative, wind energy in renewable energy remains stable overall in 2022, and solar power generation has set a historical record.
. Will the natural gas crisis in Europe continue into winter?
Natural gas is a typical seasonal variety, reserved in off-season and consumed in peak season. Currently, nearly 65% of the underground gas storage in Europe are filled with natural gas. The European Commission recommends that each member state increase its filling rate to 80% on November 1 this year. At the same time, Germany sets its goal to increase to 80% on October 1 and to 90% on November 1.
The European government has taken several measures to reduce its dependence on Russian natural gas. European governments and utilities purchase LNG from the United States by shipping; efforts to get more natural gas through the pipeline lines of Norwegian and Azerbaijan . Germany, which lacks liquefied natural gas receiving stations, plans to build four floating receiving stations, and two of them will be put into operation this year.
On July 20, the European Commission proposed that from August 1, 2022 to March 31, 2023, member states will take voluntary measures to reduce natural gas use by more than 15% compared with the average of the same period in the previous five years. If there is a shortage of natural gas supply by then, the EU will take compulsory measures to achieve this goal. The European Commission said that the plan to reduce the use of natural gas mainly focuses on industries and other fields. Homes, hospitals, schools, etc. are not affected by this measure, but unnecessary use should also be reduced to avoid energy waste.
We see that the reduction in demand advocated by the EU is equivalent to Russia's current supply ratio. If each country reduces demand by 15%, even if Russia completely cuts off gas, it will not affect the demand for civilian and commercial gas. From another perspective, Europe accounts for as much as 83% of Russia's pipeline gas exports. With limited LNG production capacity, there are not many places where Russia's pipeline gas can go. We don't think Russia will be likely to stop breathing against Europe for a long time. Therefore, we believe that the natural gas crisis in Europe this winter is not undecided, and it will be a key point for countries to actively reduce demand.
This article is derived from CFC Energy Chemicals Research
