Ivan Geliukh, Chairman of the Management Board at D.Trading

 

The war in Ukraine and sanctions against Russia compelled European countries to reconsider their gas supplies.

Europe is now focusing on diversifying supply sources and reducing consumption. Efforts to decrease reliance on Russian gas while ensuring energy security remain the primary challenge.

How gas supply sources changed since the full-scale invasion

Prior to 2022, Europe relied heavily on Russian gas, which accounted for approximately 35-45% of the EU's natural gas supply, delivered via pipelines like Nord Stream and the Ukrainian transit route.

In addition to Russia, major suppliers included Norway (approximately 25% of European imports), Algeria, and Qatar, which provided gas both via pipelines and in the form of liquefied natural gas (LNG).

Following Russian aggression and corresponding sanctions, Russia’s share of European gas imports dropped significantly, to 15% in 2023. European countries have shifted to LNG, notably from the United States and other nations, which now makes up about 43% of the EU's total gas imports. Norway and Qatar remain key suppliers, and Europe is investing in LNG infrastructure by building terminals for storage and processing.

These changes enabled EU countries to maintain stable gas reserves, even during the winter season. In 2023, Europe exited winter with reserves at 45-50%, significantly above the five-year average.

Ukraine’s role in stabilizing the European market

Ukraine plays a crucial role in stabilizing the European natural gas market, especially through its underground storage facilities. In the first quarter of 2024, more than 160 international energy companies from 32 countries stored gas in Ukraine’s facilities, which helped maintain high storage levels across Europe, reduced price volatility, and minimized the risk of sharp price spikes.

Despite challenges due to infrastructure damage from Russian attacks, Ukraine’s storage facilities continue to be used by international companies, reducing natural gas price volatility in Europe and decreasing dependency on traditional suppliers.

Future supply sources

Europe is intensifying efforts to diversify energy sources to further reduce dependence on Russian gas. The main strategy is to increase LNG imports from the United States, with the share of LNG in Europe’s supply expected to rise as new U.S. export terminals come into use in late 2024. More than half of new LNG export capacity in 2024 will come from the U.S.

Additionally, Europe is securing new long-term contracts with Qatar and Norway to ensure stable future energy supplies. Agreements with countries in the Eastern Mediterranean, such as Israel and Egypt, are also significant, as these countries continue to develop their gas fields.

EU countries are also investing in renewable energy and enhancing energy efficiency to reduce overall natural gas demand. This includes investments in solar and wind power and developing new energy storage technologies.

The EU is actively pursuing energy-saving policies, especially under the REPowerEU plan, which sets ambitious targets to reduce gas consumption by 2030. European countries are heavily investing in modernization and energy efficiency measures to decrease reliance on fossil fuels and support the long-term stability of the energy system.

Market outlook

With gas storage levels high and market stability improving, Europe’s outlook for the second half of 2024 is optimistic. Analysts anticipate lower demand for LNG compared to the previous year.

A key factor in this stability is the resumption of operations at the Balticconnector pipeline between Finland and the Baltic countries. After a service interruption in October 2023, the pipeline’s reopening is expected to normalize gas flows, enhance supply balance in the region, and bring added stability to the European gas market. Going forward, European countries aim to maximize gas storage levels to prepare for potential challenges in the upcoming heating season.

This also includes the continued use of Ukrainian storage facilities, which will help stabilize the European market and reduce the risk of abrupt price hikes. These measures, along with lower gas demand, should ensure market stability in the coming months and readiness for winter challenges.