Europe will struggle to reduce its dependence on Russian natural gas after prices fell to the lowest in more than three years, making the continent an unattractive destination for supplies from new projects.
U.K. gas, a European benchmark, fell to the lowest since 2010 yesterday on the ICE Futures Europe exchange in London as the region’s mildest winter in seven years and rising Russian flows left European storage more than half full. Current prices make it unlikely that projects including U.S. liquefied natural gas shipments will make it to the continent, potentially increasing reliance on Russia, according to Societe Generale SA.
Russia supplies about 30 percent of Europe’s gas needs, with half of that transported through pipelines crossing Ukraine. Tensions between the two nations, which disrupted flows in 2006 and 2009, are raising concerns about Europe’s energy security. The European Union will by June prepare a road map on how to cut reliance on Russia and boost supply security.
“My personal expectation is that we will not see those kind of disruptions,” Stefan Judisch, chief executive officer of RWE Supply & Trading said yesterday at the Flame conference in Amsterdam. “Everybody would have too much to lose.”
Front-month U.K. gas fell 35 percent this year and touched 43.6 pence a therm ($7.37 a million British thermal units) yesterday on ICE, the lowest since September 2010. The contract rose 0.7 percent to settle at 44.6 pence a therm.
Northwest European prices will be below year-earlier levels in the second half of 2014, 60 percent of respondents in a panel attended by about 170 people said at Flame yesterday. Thirty percent said they would be at least 10 percent below the 25 to 28 euros a megawatt-hour in the second half of 2013.
“I’m on the bearish side,” Thierry Bros, an analyst at Societe Generale, said yesterday at Flame. “It seems to me that there’s quite a pessimistic view. The elephant in the room is Ukraine and political interference could have an impact.”
The European Union has limited options to overcome a cutoff of Russian gas in the coming winter and might have to add more storage or form a common reserve, according to a draft document from the European Commission, the bloc’s executive arm.
Stockpiles in the 28-member states of the EU were 57 percent full as of May 19, the highest level for this time of the year since at least 2007, data from Gas Infrastructure Europe, a lobby group in Brussels showed.
Russia’s pipeline-gas export monopoly OAO Gazprom exported 42.7 billion cubic meters to Europe in the first quarter, up from 41.7 billion a year earlier, Sergei Komlev, the company’s head of contract structuring and price formation, said today in Amsterdam.
Russia’s deal to supply 38 billion cubic meters of gas to China signed today will have a limited impact on Europe in the medium term, Vadim Khramov, an economist at Bank of America Corp.’s Merrill Lynch unit, said by e-mail. Europe consumes about 500 billion cubic meters, more than 170 billion of which is imported from Russia, he said.
“The Russians aren’t looking at demand in Europe, they are looking at their exports to Europe and their exports into Europe are growing,” Bros said. “Not only are they growing but they will be growing even faster.”
That will “kill competition” from potential new projects before they even start, Bros said. Russia also wants to have European storage filled in case of a supply disruption to Ukraine, he added.
U.S. LNG exports, expected to start in the first quarter of 2016, cannot replace Russian supplies, Jean Abiteboul, president of Cheniere Supply & Marketing Inc., said in a May 19 interview in Amsterdam.
“Whether it’s done to kill the U.S. projects, I’m not sure,” he said. “They probably also have an issue of reliability of supply with the Ukrainian crisis so they have to appear as a good supplier for Europe, which by the way they have been so far. It’s true that at a certain level, the long-term price export from U.S. could become less attractive.”