The reduction in prices is expected to come thanks to the construction of European liquefied natural gas (LNG) terminals. Price relief could be realistic as early as 2024, according to a study by the University of Cologne's Energy Economics Institute (EWI) commissioned by the German gas association Zukunft Gas, with prices reaching levels comparable to 2018 by around 2026 if Russia is at least partially involved in the trade.
Reducing dependence on Russia
It is no secret that Europe wants to get rid of its current dependence on gas from Russia, including through the US. The study estimates that it could become the EU's largest supplier by 2030. According to EWI, last year European countries took as much as 147 billion of the 361 billion cubic metres of gas from Russia, 82 billion from Norway and 22 billion from the US. In the scenario that Russia is not eventually involved in EU off-take, the imported volume from the US could already amount to around 130 billion cubic meters in 2026. However, the importance of Qatar, with which European countries are currently negotiating, should be limited, according to the Institute's results.
Without Russia, prices will rise
EWI does not expect wholesale gas prices in Northern Europe to return to 2018 levels, when they averaged the lowest in 20 years at the Title Transfer Facility (TFF) trading hub in the Netherlands, if Russia is completely excluded from the trading. Should this scenario occur, EWI expects prices to return to 2021 levels by 2026 in the low demand case, and to 2030 in the high demand case. "But with globally falling demand, the 2018 price level can be reached by 2030 even without Russian gas," the association's head Timm Kehler said at a press conference.
Price unification
The rapid construction of LNG terminals in Europe should help to unify gas prices in Europe and Asia, Kehler further stated. According to TFF data, the price level for 2018 stood at €24 per megawatt-hour and €54 per megawatt-hour in 2021, when the full-year average was the highest in the last 2O years. The construction of LNG terminals has been initiated by European countries due to the uncertainty of supplies from Russia following the outbreak of war in Ukraine and the subsequent sanctions by Western states against the Russian superpower. While in 2021 gas supplies via pipelines to the EU accounted for 75 percent, in the future they could drop to 40 percent.
Current price movements
Currently, the price of the futures contract for delivery in October 2022 is around €185 per megawatt-hour, according to the TTF. For comparison, in August it was EUR 346 per megawatt hour.*
Futures contract value development over the past two years. (Source: Theice.com)
The reality may be different
It should be noted, however, that the Institute's study explored various possible scenarios with high and low gas demand and with Russia's full, partial or no participation in European trading. It is therefore important to bear in mind that these are only model situations, the real evolution of which will ultimately depend on the actual development of prices, demand, and import capacity.
Olivia Lacenova, analyst at Wonderinterest trading Ltd.
* Past performance is no guarantee of future results.
