17.05.23 Review

Russia’s Use of Gas as a Weapon Has Stalled: Europe is finding it easier than expected to turn away from Russian fuel

Even with the use of liquefied natural gas, Russia's share of European gas consumption is expected to be less than 10% this year, down from almost 40% in 2021. Experts have been surprised by just how quickly the reduction in the use of Russian fuel has taken place. In its latest review of the global energy market, the International Energy Agency forecasts that, in 2023, OECD countries will import 45% less Russian gas than they did in 2022. Thanks to the reduction in consumption and a relatively warm winter, they have accumulated record reserves. To prepare for the next winter, they only need to pump half as much gas into storage as they did last summer, when supplies were already down drastically. However, there remains a high level of uncertainty. The main risks are related to weather conditions, a shortage of liquefied natural gas, and an even further reduction in pipeline gas supplies from Russia.

Based on the results of the first quarter of 2023, the International Energy Agency (IEA) has adjusted its forecast for Russian pipeline gas exports to Europe. If deliveries continue at the same volume as the first three months of the year, the countries of the Organisation for Economic Cooperation and Development (OECD) will import 43 billion cubic meters, which is 45% lower than the level of imports in 2022, when the reduction was already around 80%, according tothe latest gas market review released by the IEA (in a February review, the IEA anticipated a 40% decrease in deliveries in 2023). LNG deliveries to Europe will remain at the same level as last year. As a result, even with LNG taken into account, the share of Russian gas consumed by Europe this year will be less than 10%, compared to almost 40% in 2021.

The unusually warm weather last winter and reduced consumption have made Europe's preparations for the autumn of 2023 easier. At the end of the 2022/23 heating season, European storage facilities were at 55% capacity. This is more than one and a half times higher than the average level over the past five years. Therefore, according to IEA experts, in order to reach 90% storage capacity by autumn, it will be enough to stockpile half as much gas  over the summer as in 2022.

According to the International Energy Agency (IEA), liquefied natural gas (LNG) has become Europe's ‘base fuel.’ Last season, LNG imports increased by a quarter year on year, with the United States increasing its exports to Europe by 30%, or 10 billion cubic meters, bringing its total sharel of LNG imports to 40%. Qatar increased its exports by 15%, or 1.5 billion cubic meters, while Russian LNG exports also increased but to a lesser extent, rising by 5% or 500 million cubic meters. This only accounted for a small share of overall growth. Prices have dropped to the levels seen in summer 2021, although they are still significantly higher than the multi-year average. In the first quarter of this year, spot prices at the Irish TTF hub were 48% lower than a year ago.

Generally speaking, the demand for gas is in the process of structural change. According to the IEA's forecast, demand will grow in Asia (by 3%) and increase slightly in the Middle East, but will continue to decline in Europe (-5%) and North America. China, which is returning to pre-pandemic levels of economic activity, will be the main driver of this increase in LNG demand. This could put pressure on prices, as Europe has been replacing Russian pipeline supplies with LNG imports. Meanwhile, the available Russian gas freed up by the sharp reduction in supplies to Europe will not reach the global market — the implementation of a new Russian export strategy, as Re: Russia has already reported, will take time and investment, and at the moment, this strategy has not been agreed with partners.

The IEA sees ‘reasons for cautious optimism’ in the results of the first quarter of 2023, but warns that there remains a high level of uncertainty. The main risks are related to weather conditions (summer may be too hot and the start of the heating season may be too cold), a shortage of LNG due to increased demand from China, and even greater reductions in Russian pipeline gas supplies. In this regard, as always, the IEA recommends that Europe improve its energy efficiency (including by reducing methane leaks and flaring associated gas, which can be achieved relatively quickly) and expand its use of alternative energy sources.