It sounds like a mistake. For a brief period last month, natural gas prices in Europe turned negative, meaning that financial traders were actually willing to pay buyers to pick up the prized resource — one that is central to the continent’s economy, used to heat homes and keep factories humming. And critically, one that Russia’s President Vladimir Putin has been squeezing in an effort to pressure Ukraine’s allies.
After months spent worrying about shrinking supplies and skyrocketing prices, now traders were — for that short window at least — basically giving the stuff away.
How could this be?
For months, European leaders have been panicking about the opposite scenario: that prices would spiral out of control as war rages and Russia cuts natural gas flows to the continent. It was a reasonable fear: Until the outbreak of war in Ukraine, Russian supplies accounted for more than 40 percent of Europe’s overall gas needs. Germany, far and away Europe’s biggest economy, received more than half of its natural gas from the Kremlin. And the risk extended beyond countries that were directly dependent on Russian supplies; gas, like oil and other major commodities, is traded on global markets, meaning that wholesale prices reflect what is happening with supply and demand overall, not just in one country.
The obvious implication of this wasn’t lost on Putin, who, after months of cutting deliveries to Europe, declared in October that “the ball is in the EU’s court. If they want to, then the taps can be turned on, and that’s that.”
Translation: Stop supporting Ukraine or face the economic pain that comes with losing a critical energy resource.
So why, for an hour at the end of October, were European financial traders offering up natural gas essentially for nothing? What, in other words, happened to those fears of a gas shortage and sky-high prices?
“What has actually happened is that we are much more confident that we can make it [through this winter] without any energy disruption,” Franziska Holz, an energy expert at the German Institute for Economic Research, told Grid.
Behind this confidence is a confluence of factors that have for now effectively blunted Putin’s energy weapon. They are not without their costs, or their risks, analysts told Grid, pointing out that average gas prices remain significantly higher than last year. And they also warned that the road ahead is littered with major hurdles.
But the news at the moment is unexpectedly good: The combination of record levels of gas storage, alternative energy supplies from Norway and beyond, and significant dips in consumption by ordinary households and industry alike have left Europe in a far stronger position this winter than many experts had anticipated. Certainly stronger than many European leaders had feared.
“Things have relaxed,” Tom Marzec-Manser, the head of gas analytics at ICIS, a London-based energy consultancy, told Grid. “That’s a fair, high-level description of what’s happened in terms of where we actually are now versus what we thought would be the case in mid-November, say, back in even August.”
A store of good news
This sense of things having “relaxed” has much to do with the opposite emotion — the panic that gripped the portals of power in Brussels, Berlin and beyond as Russia invaded Ukraine at the end of February. The anxiety only grew as the war dragged on and Putin brandished his energy weapon, and it was focused largely on one key area: the state of the continent’s gas storage facilities.
The gas in such facilities — also referred to as reserves — usually helps European countries cover around 25 to 30 percent of their gas needs each winter. But as Russia invaded Ukraine, the picture was troubling: Storage levels were running at their lowest since early 2013.
So Europe set itself a target to prepare for this winter, and a deadline to meet it: Countries across the bloc were told to do whatever they could to ensure that storage facilities were filled to at least 80 percent of capacity by the beginning of November.
Would Europe make it? At the time, it wasn’t entirely clear.
“In the first place, there was the question of quantity — would there be enough supplies [to make up for any reduction in Russian natural gas]?” Holz, from the German Institute for Economic Research, told Grid.
The answer, it turned out, was yes. A resounding yes, in fact.
Two things happened as Russian supplies began to fall at the end of summer.
First, Norway stepped in. The Scandinavian country has now replaced Russia as the European Union’s biggest natural gas supplier, increasing production in recent months to make the most of demand from its neighbors. In late September, European leaders inaugurated a new pipeline to bring in additional Norwegian gas supplies via the Baltic Sea to Poland. The result has been record profits for Norway — an unlikely beneficiary of the war, in pure economic terms — and a more reliable source of energy for the rest of the continent.
The second factor: Europe’s wealth, which it has used liberally to strike new deals with international suppliers of liquefied natural gas (LNG).
Until the war, LNG — or natural gas chilled into liquid form and transported via container ships — constituted a relatively small part of Europe’s energy mix. Gas delivered via pipelines from Russia was cheaper, and for a long time it was seen — mistakenly, as it turned out — as a more reliable source of energy. The cutoff of most Russian supplies has resulted in a surge in LNG imports across Europe.
Here, the biggest beneficiary has been the U.S.: American LNG supplies to Europe have more than doubled this year, as European orders multiplied. Shipments from Qatar and other international suppliers have also increased.
All told, Europe’s LNG imports were up some 65 percent in the first nine months of this year. And it has helped that Asian demand for LNG has fallen, in part because of lower demand from China amid protracted covid-19 curbs on the economy.
“The availability of LNG in Europe has been better than many people had anticipated,” Marzec-Manser, from ICIS, explained.
The upshot of all this: The continent has smashed through its gas storage targets.
As of mid-November, storage facilities across the European Union were more than 95 percent full — well past the 80 percent goal. Germany’s storage facilities are filled to capacity, as are Belgium’s. France and Poland? Each are at 99 percent full.
Some help from Mother Nature
The doomsaying of summer had another source — an obvious but important reason to worry: A cold winter would drive additional demand for heating and make it that much harder for Europeans to conserve their precious energy.
As one analyst told Grid over the summer, while there were always “a lot of moving parts” to the European energy story, much depended on the weather.
A cold winter would punish the continent — particularly those heavily gas-dependent economies such as Germany.
It’s only the third week of November, but for now, Mother Nature has helped. Temperatures in much of the continent have been unusually mild — ”incredibly mild,” as Marzec-Manser put it to Grid.
And that in turn means less need — so far at least — to turn up the heat.
In this respect, Europe got lucky.
Ordinary Europeans are also playing a role in this good news story.
Apocalyptic media reports raising the prospect of gas shortages and freezing homes, nervous statements by top leaders, steps by local governments to cut energy use, as well as historically high gas prices — these have had the cumulative effect of changing people’s behavior. Across much of Europe, citizens have heeded the calls, leading to steep drop-offs in household gas usage. Industry has done its part as well, analysts told Grid.
“There has been a government advertising campaign [encouraging reduced usage] and media coverage of the issue,” Holz said, referring to the situation in heavily gas-dependent Germany — and people appear to have responded.
It’s one more example of good news and good timing: As supplies have ticked up from Norway and other international LNG producers, demand has eased.
Holz said that beyond the doomsaying, consumers large and small were probably also curbing usage because of historically high gas prices. “Large industrial consumers are relatively price-responsive, it turns out,” Holz said. “They were seeing higher prices in their bills, so they have been reducing their bills, essentially.”
Added Marzec-Manser: “We’ve seen industrial gas consumption really, really tank.”
One recent study in Germany showed that by September, gas usage by German companies was already down an estimated 19 percent. The numbers have likely dropped further in the two months since.
The next chill
That’s the good news — and there’s a lot of it.
But even as European leaders breathe a collective sigh of relief, attention is already turning to how the continent will get through the next few months — and the entirety of 2023.
“The loss of Russian pipeline supply means, ultimately, a loss of a lot of volume,” Marzec-Manser told Grid. “So cold snaps in the coming months could still have a significant impact on the market.”
But what’s really worrying experts is what happens later, when winter is over.
“A lot of concerns and a lot of focus is already starting to move to thinking about next winter,” said Marzec-Manser.
The current high levels of gas storage were helped by the fact that Russian supplies were fairly steady until the summer. Next year promises to be very different; no one expects Russian supplies to tick back up. In fact, they could drop to zero.
But then couldn’t Europe simply purchase more LNG? Not necessarily, analysts told Grid. Here, there is another potential risk for Europe, from the other side of the world: the reawakening of the Chinese economy and what that might do to LNG demand. As Beijing eases its covid-19 curbs, analysts are watching for a rebound in economic conditions there — a rebound that would almost certainly drive up Asian demand for LNG. That would mean less to go around internationally — and therefore less for Europe to service its needs.
As European Commission President Ursula von der Leyen put it earlier this month, summing up the risks: “Russia may decide to disrupt completely its gas supply to Europe. Secondly, the global LNG capacity will not grow fast enough to fill this gap. And thirdly, growth in Asia may absorb most of this additional LNG.”
Europe, in other words, is doing better than many had expected. And this may well be a better winter than anyone had imagined. But among policymakers and energy experts, no one is celebrating just yet.
Thanks to Lillian Barkley for copy editing this article.