European gas storage on track to meet target but at a cost

By Bozorgmehr Sharafedin

LONDON (Reuters) – European countries are on track to reach a gas storage filling target by the start of this winter, but the cost of replenishing stocks will be over 50 billion euros ($51 billion), 10 times more than the historical average of filling up tanks for winter.

European governments had been concerned that Russia’s cut in supplies through its main gas pipeline to Germany would leave countries unable to meet goals to refill storage for winter.

They have managed to build up gas storage steadily by curbing demand, switching from gas to coal for some power plants and increasing imports of liquefied natural gas (LNG).

European gas storage levels were 70.54% full on Tuesday, surpassing the 5-year average of 70.32%, according to data from Gas Infrastructure Europe (GIE) released on Thursday. The levels were also not far from a 10-year average of around 71.40%.

The European Union aims to refill storage to 80% of capacity by Nov. 1 to provide a buffer for peak demand winter months. The EU has also set interim targets for each country for each month.

Gas storage levels Europe: https://graphics.reuters.com/UKRAINE-CRISIS/egvbkdkgrpq/chart.png

Germany, hardest-hit by Russia’s reduced gas flows, has set a higher goal for itself and aims to be 95% full by November.

“The EU already surpassed its September 1 interim filling target in early July and is still on pace to reach the November 1 target,” said Jacob Mandel, senior associate for commodities at Aurora Energy Research.

Ramped-up LNG imports have helped. The EU imported 21.36 million tonnes of LNG in the first half of 2022, up from 8.21 million tonnes in the same period a year ago, according to ICIS.

In June, for the first time in history, U.S. LNG contributed more gas supply to Europe than pipeline gas from Russia.

However, despite being on track to meet the target, analysts cautioned against complacency and warned that Europe’s dependence on Russian gas is far from over.

“Europe remains dependent on two things: how cold the winter will be and how Russian flows will evolve into spring. Uncertainty on both will likely keep prices supported even if inventories keep rising over the coming months,” UBS oil analyst Giovanni Staunovo said.

Analysts and industrial experts have warned filling up gas storage to target levels would be impossible if Russia totally cuts supplies through the Nord Stream 1 pipeline to Germany.

HIGH PRICES

Private firms are primarily responsible for storage injections. European governments have offered incentives such as credit lines, loans and subsidies to help them buy gas as prices hit record highs.

The price of the front-month Dutch TTF gas contract, the benchmark for Europe, has almost tripled since the start of the year due to the slowdown of Russian gas deliveries through Nord Stream 1 and a tight global market.

Gas prices have soared: https://graphics.reuters.com/GAS-PRICES/xmpjomgjyvr/chart.png

This makes buying wholesale gas a costly enterprise.

“Hypothetically, replacing the North Stream 1 flow over this winter based on the TTF future price for the winter season, would cost Europe over 50 billion euros, about 10 times higher than it would have been historically,” said Callum Macpherson, head of commodities at Investec.

Simone Tagliapietra, senior fellow at think-tank Bruegel estimates that Europe would have to spend 26 billion euros to fill up gas storage to 80% from current levels.

Europe’s natural gas imports from Russia: https://fingfx.thomsonreuters.com/gfx/mkt/zdvxogjmepx/Pasted%20image%201651650909918.png

Aurora’s Mandel estimated the total cost of gas injected into EU storage since the introduction of the targets in June is about 19.8 billion euros, assuming that all gas injected into storage has been and will be purchased at spot prices at the Dutch TTF hub.

He expected an extra 35.5 billion euros is now needed to fill EU storage to the targets, bringing the total to over 55 billion euros.

“I would also estimate an additional 300 million to 600 million euros for the cost of using the storage,” he said.

The cost of filling up the storage could be passed to consumers by ever higher energy bills or through taxation, analysts said.

The European Commission, the EU executive, proposed last month a target for all member states to cut gas use by 15% from Aug. 1 to allow storage to fill more quickly.

EU gas inventories were around 78.81 billion cubic metres (bcm), UBS said, still 25 bcm below the level the bank estimates would allow the EU to ride out a complete cut-off of Russian supplies without significant demand-rationing.

($1 = 0.9817 euros)

Main routes for Russian gas into Europe: https://graphics.reuters.com/UKRAINE-CRISIS/GAS/dwvkrnyoepm/graphic.jpg

(Reporting by Bozorgmehr Sharafedin in London, additional reporting by Marwa Rashad and Susanna Twidale, Edited by Nina Chestney and Emelia Sithole-Matarise)