Page 4 - FSUOGM Week 07 2022

FSUOGM COMMENTARY FSUOGM

Analysts weigh up Europe’s

vulnerability to a Russian supply

disruption

The consensus is that if only Ukrainian transit was disrupted, Europe would not
suffer physical shortages, but prices would remain bullish for some time

EUROPE VARIOUS oil and gas analysts have offered their physical supply crisis,” IHS’ vice president for
takes in recent weeks on how Europe might han- global gas, Shankari Srinivasan, explains. “While
WHAT: dle a potential disruption of Russian gas transit gas supply is sufficient to meet most market
Analysts have offered in the event of military conflict in Ukraine, and needs through the end of the winter heating sea-
their takes on the impact what the implications might be for the global son, high prices are already leading to closures
of a potential disruption market. The consensus is that such a disruption, of some industry and furloughing of workers in
in Russian gas flow to if confined only to Russian gas flow, would be Europe.”
Europe. manageable, as Europe would be able to resort However, IHS warns that a complete cut in
to LNG imports. In the very unlikely event of a Russian gas deliveries to Europe would have far
WHY: full stoppage in Russian pipeline exports though, more reaching consequences. Europe could not
The odds of a significant Europe would have to take very drastic steps to rely on LNG alone to make the short full.
disruption are very low. avoid its energy system failing. And a disruption “Under an extreme, if highly unlikely, sce-
of any kind would drive up already record gas nario, where all Russian pipe flows were cut off,
WHAT NEXT: prices, both in Europe and across the world, the tightness of global LNG supply and limited
If Ukrainian transit only severely weakening the post-coronavirus global spare European LNG regasification capacity
was severed, prices could economic recovery. means that other supply levers would be needed
remain high for some Europe relies on Russia for around a third to close the gap,” Stoppard says. “Extra coal and
time. of its gas supply, and its market share has not nuclear power generation capacity - either in the
changed significantly over the past decade, form of mothballed capacity being brought back
despite a concerted EU effort to diversify its online, resorting to strategic reserves or delayed
imports. In a new report, IHS Markit argues that plant closures - along with additional draw-
a shutdown in Russian gas transit via Ukraine downs of gas from storage would all be required.”
would have relatively limited impact on Euro- This said, even in this extreme scenario,
pean supply, given that flow already fell to an European gas storage would be able to accom-
historic low of 50mn cubic metres per day in modate additional drawdowns needed to get the
January. continent through the rest of the winter season.
“Europe is already experiencing a ‘quasi-cur- This is despite the fact that European storage is
tailment of Russia gas flow,” IHS’ chief strategist currently at a historically low level for the time
for global gas, Michael Stoppard, says. “The of year - just 35%.
result is a European gas import picture that is “Low storage inventories have been a key
starkly different from a year ago. One where element in keeping gas prices at elevated levels,”
LNG imports have ramped up to fill the gap.” Stoppard says. “Running down storage further
LNG imports to Europe soared in January to this winter would leave a huge mountain to cli-
account for 34% of total supply, whereas Russian mate to restock before the start of next winter.”
deliveries slumped to 17%. US LNG supplies
in particular soared, accounting for the largest Wood Mackenzie agrees that the risk of Rus-
share of LNG by far. Average LNG imports last sia intentionally cutting off supply is remote, but
month came to 490 mcm per day, and that trend notes that such an event could lead to “energy
has continued into February. chaos in Europe and ripple out into global gas
Yet, while a disruption in Ukrainian transit and power markets.
would not pose a threat to physical supply, IHS “It would prove impossible to find alterna-
argues that it will place further price pressure on tive volumes to meet 28% of annual demand,”
global markets, as shipments would have to be WoodMac says. “Were all gas flows to stop today,
diverted from Asia. existing gas storage would run out in six weeks.
“So far, this is more of a price criss than a Demand destruction would be massive and if

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