Reducing Gas Consumption Is Key for Upcoming Winter and Beyond
In our base case scenario, we estimate the European gas market faces a supply deficit of 35bcm and 41bcm in 4Q22E and 2023E, respectively. With EU gas storage levels now above 80%, draws from inventory should provide sufficient cover through the winter months. However, the situation is so tight that changes in the macro are likely to contribute to continued volatility in gas prices.
Permanently phasing out Russian gas demand involves replacing around 167bcm of gas imports to Europe (EU27: 155bcm). Domestic supply is currently running c.5% higher year over year. A theoretical source of additional supply is the Dutch gas field Groningen. Production was ~25bcm/year in 2015-17 before the government ordered the field closed on concerns that gas extraction triggered earthquakes. However, the Dutch government has said it would not increase production unless a supply emergency emerged.
To replace the reduction in Russian gas volumes, Europe increased its LNG imports YTD by >60% y/y, primarily from the US. This shift has driven up the global LNG benchmark Japan Korea Marker (JKM) by, on average, >200% y/y in 2022. From now until March 2023, we estimate 38bcm of new floating gasification capacity could be added in the EU. In the longer term, the EU has placed orders for ~70bcm of permanent regasification capacity, with start-up staggered throughout early 2023-2026.
We have already started to see demand destruction in the face of record-high gas prices, with 1H22 EU gas consumption -11% y/y (25bcm). Weather can also be another swing factor in gas demand. In power generation, we have seen some substitution effects with gas-to-oil switching and higher use of coal. Ongoing energy efficiency improvements and the acceleration of renewable projects could reduce reliance on natural gas beyond 2030.