After a mild winter, the European Union is already starting to think about where its gas will come from later in the year. The bloc will be looking west, and the U.S. and Canada will be happy to gain some exposure to global LNG prices.
Demand restraint, a diversification of supply sources and exceptionally mild weather means that EU gas reserves are currently far higher than key member states anticipated would be the case at this point when they were looking to fill stocks last year.
As of this week gas storage still remains at over 66 per cent full according to data from the Aggregated Gas Storage Industry — and this is the lowest level it has reached since the start of the year.
The resilience of households and energy intensive industries has been impressive: EU gas consumption in November was 25 per cent below the five-year seasonal average for that month.
But will it be the same story next winter for the EU without Russian gas? EU member states adopted a regulation in June 2022 to ensure that storage capacities in the Union are regularly filled before winter and can be shared across the bloc. The regulation provided that underground gas storage on member states’ territory be 90 per cent full by this winter — 10 percentage points more than the 80 per cent required last winter.
Most member states have gas storage facilities on their territory but storage capacities in five countries — Germany, Italy, France, the Netherlands and Austria — make up two-thirds of the EU’s total capacity. These states are already thinking about how to source the gas to build their stocks, and how to do so without being faced with exorbitant costs.
According to the European Commission’s economic forecast released this week, EU economies are likely to be in slightly better shape next winter than looked to be the case last autumn, with the bloc now looking set to narrowly escape recession.
What does this mean for gas demand? It’s a complicated picture. Lower wholesale gas prices will benefit consumption as they pass through to consumer prices, and a stronger economy will lift demand.
But, although they are still more than three times higher than in 2019, EU natural gas prices have come off dramatically from their all-time highs in the middle of last year. According to futures contracts, TTF gas prices are set to remain within a narrow range of €55–€70/MWh next winter, some 57 per cent lower than the prices forecast last autumn.
A further factor is Europe’s new dependence on LNG, making it subject to volatility in that market. All eyes are on the speed with which China’s economic rebound happens, following its very low demand for LNG cargoes this past winter — many of which were re-exported to Europe. The overall supply picture is still tight, with both regions likely to need more gas than in 2022/2023.
“Risks of gas shortages in the winter of 2023-2024 cannot yet be dispelled,” says the Commission’s economic forecast.
Assuming that Chinese re-exports slow and that more Qatari LNG flows East rather than West, the EU will be looking back to the U.S. for its LNG. That trend is already well established: in the first half of 2022, 71 per cent of U.S. LNG exports went to the EU and the U.K.
Unlike each of the last seven years, the U.S. will not be adding LNG capacity in 2023. However the Freeport facility, which went offline in June due to a fire, is expected to come back online in the first quarter of this year and the Energy Information Administration’s forecasts show that U.S. LNG exports will rise by 11 per cent (1.2 bcf/d) on an annual basis in 2023 compared with 2022 if Freeport does come back online.
Temperatures across the U.S. in January were the mildest since 2006, reducing natural gas demand and significantly changing the EIA’s forecast for natural gas markets in the coming months — it now forecasts Henry Hub natural gas prices to average about US$3.40/mmBtu for 2023 and to stay below $4/mmBtu until December. Last year prices reached over $8/mmBtu during the summer months. That means exporters will be eyeing global markets with higher prices.
U.S. LNG exports are already starting to pull in gas from all over the North American upstream — including from Canada. The U.S.’s biggest LNG exporter, Cheniere Energy Inc., now has long-term supply deals with two Canadian natural gas companies — ARC Resources Ltd. and Tourmaline Oil Corp. The Tourmaline deal will see the Canadian producer supply 0.14 bcf/d to Cheniere for a term of 15 years beginning in early 2023.
U.S. LNG exports contributed to a wider demand pull last year which combined with record high Canadian production volumes to create Canadian pipeline exports to the U.S. of 7.4 bcf/d in the year to the end of November — the latest data that is available. This the highest level for that time period in 10 years.
Will there be a similar pull next winter? Indications are that high Canadian production will continue into 2023, with energy consultancy Rystad Energy saying the nation could produce 19 bcf/d in 2023 compared to 18 bcf/d in 2022. And Tourmaline said on a recent results call that it expected to send more gas to the U.S. than in 2022 — the Cheniere deal forms only a small part of its southbound exports.
Until LNG Canada is completed in 2025, it is likely that the U.S. will continue to serve as the link between the Canadian upstream and global gas markets.