February 23, 2022

Cancellation of Nord Stream 2 will keep European gas prices elevated for longer

German Chancellor Olaf Scholz has put on ice the certification of the new Nord Stream 2 pipeline following President Putin’s decision to order troops into the Donbas region of Ukraine on “peacekeeping duties”. In this piece, we take a look at what implications this decision could have on the European natural gas market.

Cancellation of Nord Stream 2 will keep European gas prices elevated for longer

On Tuesday morning, German Chancellor Olaf Scholz announced that the country has halted certification of the new 55 bcm/year Nord Stream 2 pipeline. The move came in response to President Putin’s decision on Monday to send “peacekeeping troops” into eastern Ukraine after officially recognising the breakaway regions of Donetsk and Luhansk as independent.

The European gas market is now on tenterhooks as the news is digested. Unsurprisingly, the uncertainty surrounding European gas supplies rallied the Dutch TTF benchmark front-month contract, which reached an intraday high of €81.36/MWh ($26.90/MMBtu) at 11.54 am GMT and closed at €79.79/MWh ($26.40/MMBtu) on Tuesday. Calendar 2023-25 contracts also rose in response to the news. At time of publication on Tuesday, prices have further rallied.

In the short-term, the market is nervous of further action from President Putin, who could order state-controlled Gazprom to further curtail or halt gas supplies to Europe. Ex-Russian President Medvedev tweeted on Tuesday that Europeans should expect sizeable increases in the cost of gas following the move. While the status of NS2 as an operational pipeline is a longer-term concern for European balances, the statement was clearly meant as a short-term threat at a time when Europe is still in the midst of winter and domestic gas inventories are running low.

Medvedev’s comments follow on from expectations that Russia will limit natural gas exports towards Europe in a continuation of a policy that started last summer, thus keeping gas balances tight. If this policy persists into the spring and summer, restocking underground storage sites would certainly become more difficult with shortages exacerbated if deeper cuts are undertaken by the Kremlin. As a result, European gas prices are expected to stay high, and potentially over the €70/MWh mark, as Europe competes with Asia to attract LNG supplies to the continent.


Russia is the largest supplier of pipeline gas to Europe, but state-controlled Gazprom has capped flows into central Europe since September in a likely politically motivated move to put pressure on the west to approve the new €10bn (£8.4bn) Nord Stream 2 pipeline which would ship Russian gas via the Baltic Sea directly into Germany. Construction of the pipeline was completed on 10 September, but the pipeline requires regulatory approval from Germany before operations can begin.

Russian pipeline gas travels into central Europe through three key routes – the Ukrainian transit system where gas arrives into Slovakia at Velke Kapusany, the Nord Stream 1 pipeline which passes through the Baltic Sea into Lubmin in Germany and the Yamal pipeline which passes through Belarus and Poland into Mallnow in Germany. Flows through Ukraine and the Yamal pipeline have been hit hardest as Gazprom has sought to avoid costly capacity bookings. The Yamal pipeline has witnessed no westbound flows since 21 December.

Russian gas pipeline flows through the three main routes into central Europe (mcm/d) - Source: ENTSOG

European gas storage sites started this winter at lower levels than normal due to reduced gas supplies from Russia and competition with Asia and South America for LNG cargoes last summer. Based on current storage levels and the five-year average withdrawal rate, European gas inventories are set to end this winter at around 22% full, assuming no further disruptions to Russian pipeline supplies. Whilst not at critical levels as had been predicted earlier in the winter, this would still be the lowest end of winter storage level since winter 2017-18 when the Beast from the East storm pushed storage utilization levels to levels as low as 17%.

Disruption to Russian supplies would put pressure on storage withdrawals, LNG send-out

At time of publication, Russian gas flows through Ukraine and Nord Stream 1 had not been impacted. However, a retaliation from Russia following the news on Nord Stream 2 and the imposition of sanctions from the west cannot be ruled out. Medvedev’s comments are a clear indication of Russian frustrations towards German Chancellor Scholz who went on the record ordering a halt to NS2 certification. The move by Scholz, who is part of the SDP (Social Democratic Party), was significant given a longstanding desire among many in his party to pursue closer economic ties with Russia.  

Given that Europe is emerging from winter with a storage buffer (albeit a low one) in place, there is some room for manoeuvre if pipeline flows are curtailed from current levels or halted altogether. Certainly, a curtailment, as opposed to a complete halt, would put less pressure on the system. Based on Tuesday's nominations, if Russia turned off supplies through Ukraine, central Europe would lose around 35 mcm/d of gas supplies, equivalent to around one-third of a standard-sized LNG cargo each day. However, should flows through Nord Stream 1 also be affected, a further 166 mcm/d of supplies would be at risk, with Germany hit hardest.

Any disruption would likely see European gas storage sites increase withdrawals, putting fullness rates at risk of ending winter at critically low levels. The Dutch TTF price would rise in a bid to continue incentivising LNG cargoes to flow to Europe rather than Asia. However, Asia could put up a fight given recent cold weather has drawn down inventories there too. LNG stocks held by power utilities in Japan, for example, are currently below the four-year and 2021 February average. A number of utilities have been in the spot market seeking additional supply in recent weeks.

However, even if Europe could attract further supplies, the region could not substantially increase LNG imports above levels seen in January as regasification capacity is being tested. Based on January’s import levels, Spain is the only country in Europe that could drastically increase LNG imports (2 Mt/month), but that gas would likely remain trapped in Iberia as the region is not well integrated with the rest of Europe.

We believe a halt in supplies via Ukraine could be managed through a combination of storage withdrawals and an uptick in LNG import volumes, but a cut in supply through Nord Stream 1 would certainly wreak havoc on the market, given Europe's LNG regasification constraints.

Summer restocking just got more difficult

Should the cancellation of Nord Stream 2 be a permanent decision, this would have implications for next winter, and beyond. The anticipated approval of Nord Stream 2 in the second half of this year was expected to at least return Russian gas flows to Europe to seasonal normal levels, aiding the summer restocking process. Cancellation of the pipeline is bad news when considering global gas markets are materially undersupplied. By losing access to incremental Russian gas, Europe is forced to seek tonnage from alternative producers, all of which are supply constrained.

Assuming Russia continues to ship less gas to Europe than normal, filling storage sites to an adequate level ahead of next winter will become far more difficult and is expected to put significant upside pressure on winter 2022-23 TTF contracts. Assuming 22% utilization of underground storage sites by the end of the 2021-22 winter, inventories would need to inject around 70 bcm of gas this summer in order to return fullness levels back to the 2016-2020 pre-winter average of 92%. To put this into context, Europe injected only 49 bcm of gas last summer to take storages to 77-78% full, and that was with Russian supplies flowing at seasonal norms until August.

Given declining European gas production, limited options to increase pipeline gas supplies from other sources and competition for LNG supplies with Asia, 70 bcm of gas would be hard to come by, even more so if Russia continues to undersupply. This would likely leave Europe in a similar position to last year, with inventories starting winter below typical levels. As a result, we’d expect to see the TTF trade higher, for longer.

The European gas market will no doubt be keeping a close eye on geopolitical developments and Russian pipeline gas flow movements over the coming days and weeks. In the short-term, a cut in supplies through Ukraine could be managed through a combination of storage withdrawals and additional LNG, but a halt in supplies through Nord Stream 1 could have devastating consequences, particularly for Germany. If Scholtz’s decision is a permanent one, the market will be evaluating Europe’s ability to restock gas storages this summer and what that could mean for next winter, and beyond.

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