European Gas Market Challenges:
the 2022-23 winter and beyond
Professor Jonathan Stern
Distinguished Research Fellow

AGENDA
European gas supply, demand and pricing and the2022/23 WinterNational and EU Policy Responses to the Crisis
The Outlook to 2030
Summary and Conclusions

European Gas Supply,
Demand and Pricing and the2022-23 WinterHow much Russian pipeline gas will Europe
continue to receive?

Sources: ENTSOG Transparency Platform; Eurostat;Gas Infrastructure Europe (AGSI); Kpler LNG Platform

Daily Russian Gas Flows to Europe by Route (million cubic metres per day)
420400380360340320300280260
240
220
200
180160
140
120
10080
60
40
2001/09/2021

01/10/2021

01/11/2021

01/12/2021

01/01/2022
Belarus

01/02/2022

01/03/2022

Baltics & Finland

01/04/2022
Nord Stream

01/05/2022
Ukraine01/06/2022

01/07/2022

01/08/2022

01/09/2022

01/10/2022

Turkish Stream

In October 2022 Europe received 65-75mmcm/day compared with 350400 mcm/d one year previously; Russian LNG supplies continue
Source: Sharples, OIES

4

Russian Gas Supply Routes to Europe: Ukraine and Belarus

Source: OIES

Yamal Europe pipeline not operating, Ukraine system flowing at around 10% capacity

Nord Stream 1 ceased flowing in July 2022, Germany
severely affected

Source: S&P Global Commodity Insights

Major sabotage damage to both lines in September 2022
(one string of NS2 still available to flow gas)

The Blue Stream and Turk Stream Pipelines

Blue Stream and Turk Stream operating normally flowing gas toTurkey, Balkan countries, Greece and HungaryWith Nord Stream already interrupted what happens if Ukrainian Flows
Stop?
Net Imports of Russian Gas Delivered via Slovakia (mmcm/day)120

Net imports calculated from imports/exports.
Excludes Russian gas into Hungary via Serbia &gas trade on the Austria-Germany border.
Italy imports from Austria & exports to Slovenia.

100806040

20-Sep-2021

Oct-2021

Nov-2021

Dec-2021

Jan-2022

Feb-2022
Net to IT

Mar-2022
Net to AT

Net to SK

Apr-2022
Net to HU

May-2022

Jun-2022

Jul-2022

Aug-2022

Sep-2022

Oct-2022

Net to SI

Czech Republic, Slovakia, Austria, and Italy are most seriously impacted
SOURCE: SHARPLES, OIES

8What Happens if Flows Via TurkStream Stop?

Sources: ENTSOG Transparency Platform; Eurostat;Gas Infrastructure Europe (AGSI); Kpler LNG Platform

5045403530252015105-

Sep-2021

Oct-2021

Nov-2021

Dec-2021

Jan-2022
Net to GR

Feb-2022
Net to BG

Mar-2022
Net to MK

Apr-2022
Net to RS

May-2022
Net to HU

Jun-2022

Jul-2022

Aug-2022

Sep-2022

Oct-2022

Net to RO

Serbia and Hungary would be most seriously impacted
SOURCE: SHARPLES, OIES

9Pipeline supplies to Europe in 2021/22 (mmcm/d)
Total Daily European Pipeline Imports (mmcm/d)
450400350
300
250200150

RussiaNorwayN.Africa

Azerbaijan

100500

Data from ENTSOG

There is very little additional short term supply available
from non-Russian pipeline suppliers to Europe. Europe will
become much more dependent on LNG
SOURCE: SHARPLES, OIES10Major increase in LNG new import capacity in NW Europe
European Floating Storage and Regasification Units:• Germany – six FSRU, three operational by early 2023,
others by end 2023; three land-based terminals by2026• Netherlands – two FSRUs started operations in 2022
• Poland – one FSRU 2025
• Greece – two FSRUs 2023
• Finland/Estonia – one FSRU – Q4 2022
• Italy – two FSRUs: Q2-2023 and Q3 2024
• Albania – one FSRUESTIMATED ADDITIONAL EUROPEAN REGASIFICATIONCAPACITY:• By end-2023 ~ 50 bcm• By late 2020s an additional ~50 bcm

European Gas Storage: this winter and 2023/24
European Daily Gas Storage Stocks (bcm)

Sources: ENTSOG Transparency Platform; Eurostat;Gas Infrastructure Europe (AGSI); Kpler LNG Platform

European Storage Injections 1 April to 1 October (bcm)

11080

100

7090
80

6759605854704950606065

4342504040

46363230

302020100102017/18

2018/192019/20

2020/212021/222022/23

-2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Storage levels in early November were 95% full. If levels are below 40% at the end of thewinter, it will be difficult to refill for winter 2023/24 without Russian gas. Europe needs`normal temperatures’, demand reduction, and no additional supply problems 12
Source: Sharples, OIES

2022

04/01/22
14/01/22
24/01/22
03/02/22
13/02/22
23/02/22
05/03/22
15/03/22
25/03/22
04/04/22
14/04/22
24/04/22
04/05/22
14/05/22
24/05/22
03/06/22
13/06/22
23/06/22
03/07/22
13/07/22
23/07/22
02/08/22
12/08/22
22/08/22
01/09/22
11/09/22
21/09/22
01/10/22
11/10/22$/MMBTU

The impact of the crisis on European gas prices
Month Ahead Prices - 2022

100

Source: Argus Media

9080
TTF

70

60

50
NBP

40

30

2010
LNG
NWE

0

NBP – UK, TTF – Netherlands (Continental Europe), LNG NWE – LNG
delivered to North West Europe

TTF Prices August-October 2022 – month ahead and day-ahead:significant increase in volatility

Day-Ahead prices collapse due to full storage, low demand and limited LNG
import capacity, but prices strongly influenced by short term weather

European Day-Ahead Prices at Market Hubs, November 4, 2022 (€/MWh)
Source: S&P Global
Commodity Insights

Note Regional Price Differences: UK, Belgium, France more correlated withUK NBP; central/eastern Europe and Italy with Dutch TTF

European Gas DemandMonthly gas demand in EU27 + UK, 2019-2022 (bcm)

Sources: Data from IEA, Eurostat, Entsog, GRTgaz,Terega, NCG, Gaspool, SNAM, Enagas, NationalGrid,
A. Honoré’s assumptions and calculations

Change in gas demand in key markets, Jan-Sept 2022 vs 2021 (%)• Gas demand in 2021 was relatively resilient, even when gas prices rose to high levels• Gas demand collapsed in 2022 (almost -10% in Jan-Sept) – but with variations between countries - as a resultof warm weather and continued high gas prices
Source Honoré, OIES37

European Gas (and Power) Demand Outlook• Overall Gas Demand in Europe (EU27 + UK) declined by about 10% (40-50 bcm) in the first 9
months of 2022
• Power Sector• usually the first (and main) source of flexibility for short-term gas demand responsebut this has not been happening in 2021 nor in 2022
• strong demand for electricity coupled with low availability of French nuclear and hydro• high levels of gas (and coal) have been needed to generate electricity, despite record
high gas and EU ETS prices• Industrial Sector: Many sectors - chemicals, fertiliser, ceramics, paper, automotive, arecontracting due to high gas prices; some re-locating to the Middle East and the US• Residential Sector: countries with the biggest residential heating sector are most vulnerable
to low winter temperatures: UK, Netherlands, Hungary, Slovakia, Italy, Belgium, Germany
Outlook is short term recession and de-industrialisation
followed by slow recovery

Source: HONORÉ/OIES17

Additional cost of living increase in 2022 for households from higher
energy prices (%)• Many households are seeing a cost ofliving increase greater than 10% due toenergy bills• Measures to contain high prices have beendifferent across Europe: retail price caps
and direct payments (especiallyhouseholds); priority for vulnerable
groups; support for businesses• Measures cost billions of Euros ingovernment subsidies: Germany 200bn,Italy 50bn, Netherlands 16bn, France 70bn,
Spain 27bn, Greece 13.5bn, UK >100bn• To raise extra money `windfall profits’taxes on oil and gas producers andrenewable/nuclear generators

National and EU Policy Responses
to the Crisis

European Union Energy/Climate Law and Regulation
Pre-Crisis: “Fit for 55”: EU Climate law agreed to reducing emissions by 55% compared
to 1990 by 2030 and net zero by 2050 including:

Revision of the EU Emissions Trading System (EU ETS); non ETS Effort Sharing Regulation
Introduction of Carbon Border Adjustment Mechanism (CBAM)
Revision of the Energy Taxation Directive
Higher renewable energy targets under the EU Renewable Energy Directive (RED II)
Stricter targets for heating, vehicles, efficiency, carbon removals, infrastructure, and fuels foraviation and shipping, rules on land use, forestry and agriculture

Post-Crisis:• May 2022 - “REPower EU”: reduce dependence on Russian gas; increase LNG
imports; switch from gas to other fuels• July 2022 - “Save gas for a safe winter”: 15% voluntary demand reduction from1/08/2022 to 31/03/2023; mandatory in a supply emergency (‘Union Alert’)
But the gas (and electricity) crisis has required more detailed policy responses

European Commission Proposed Regulation on: gas purchases,exchanges of gas across borders and reliable price benchmarks*
Specific Objectives:
1. To establish an energy platform [for] common purchase of natural gas and LNG
2. To establish a daily LNG price assessment/benchmark and an organised market forsecondary capacities (European Agency for the Cooperation of Energy Regulators (ACER)
3. To establish a maximum dynamic price for spot transactions at the TTF
4. To accelerate marketing of unused long-term capacities in the gas/LNG flows
5. To support in avoiding congestion (contractual and physical) of the existing pipelines andLNG terminals
6. To create a default solidarity mechanism..in an emergency leading to a very severe
shortage of gas; to define in this context specific provisions regarding gas-fired power
7. To allow..exceptional measures to reduce `non-essential consumption’ of protectedcustomers provided it does not reduce the production of vulnerable customers
8. To address the possibility of a regional emergency with major disruptions and supply
shortages, so that the Union is prepared to rapidly apply different solidarity
mechanisms..to mitigate the emergency situation*COM(2022) 549 final, Strasbourg 18.10.2022

European Commission Proposals – more details on the key objectives• Coordinated joint purchasing of gas – especially for refilling storages – via an Energy
Platform• A daily benchmark price for LNG: `which better reflects the price the EU pays for its
gas imports’; ACER will publish price assessments on all LNG transactions• A temporary intra-day volatility mechanism aimed at limiting large electricity andgas price movements within a trading day: `a time-limited measure to manage
excess volatility in gas and electricity derivatives markets’• A gas market correction mechanism to establish a maximum dynamic price for spottransactions at the TTF – other gas trading hubs may be linked to the corrected TTF
via a dynamic price corridor.* This should allow for over-the-counter gas trades, notaffect EU’s security of gas supply and intra-EU flows..not affect the stability andorderly functioning of energy derivative markets (futures)* 15 EU member states support this wholesale price cap

These are proposals. There is no clarity on whether they will beagreed and how they will operate in practiceWhat are the options for governments if the TTF price remains at levels
significantly above $25/mmbtu (current forward price for 2023?
OPTION 1. Governments continue to bear the cost of subisides:• protecting customers and utility suppliers from hardship and bankruptcy• focussing on those who genuinely cannot pay and hoping for a quick fall in
prices post-winterOption 2. Governments impose a cap based on a maximum price or a different
index (JCC/JKM/HH+) and run the risk of:• further reducing supply availability• limiting TTF’s liquidity and benchmark credibility• threatening viability of existing forward trades and contracts• `encouraging’ demand/disincentive to saving and efficiency• If the financial consequences of Option 1 become too great, then Option 2 may become
inevitable despite negative consequences• Option 2 measures suggest a new era of government control, threatening thecontinuation of the liberalised and competitive gas market
23JONATHAN STERNThe Outlook to 2030

Lower gas demand already expected due to Fit for 55 package
Gross inland consumption by fuel in the Fit-for-55 and REPowerEU scenarios (Mtoe)

EU gas demand will fall and not recover to pre-crisis levels
SOURCE: HONORÉ, OIES25

Long(er) term implications for the gas and power sectors in Europe• Accelerated energy transition implies declining demand for natural gas in Europe BUT..
• Short term security problems require signing long term gas contracts which conflict withgreenhouse gas reduction targets• Reliance on intermittent renewables means need for investment in flexibility, including
batteries and storage (e.g., hydrogen, CCS-gas)• Electricity market design is a major problem - competitive markets or government control?:• marginal electricity pricing• investment in storage• demand-side response• Important to reflect consumer preferences and ability to self-supply, limiting thepotential to recover excessive central system costs and raising risks of stranded
assets
Source: OIES:/Robinson26

Summary and ConclusionsSummary• Winter 2022/23 looks difficult but manageable unless we havevery cold temperatures, although there could still be problems incentral European countries• Winter 2023/24 looks more difficult, especially if Winter 2022/23
is very cold because of the problem of refilling storage without
substantial volumes of Russian gas• In both winters – but especially 2023/24 - gas rationing cannot be
ruled out
• By 2026-27 - and possibly earlier if Europe suffers severerecession – European gas supply and demand will come intobalance and prices will moderate28Conclusions• European gas prices are likely to remain above $15/mmbtu for atleast two years on average – but periods of much higher andlower prices are likely ie greater volatility• European gas demand will fall faster than previously anticipatedand will not recover• LNG will become a far more important source of gas supply for
Europe:• imports reach over 220 bcm by late 2020s compared to justover 100 bcm in 2020
• more than half the increase will be in north west Europe(Germany, Belgium, Netherlands)• this will create competition with Asian buyers until the market
rebalances and possibly even after rebalancing
29

THANK YOU
jonathan.stern@oxfordenergy.org