October 2, 2023

EU gas storage targets require net injections of 54-55 bcm between now and November, US-EU LNG deal achievable

Last week, the European Commission announced a plan to implement a minimum storage obligation for European Union member countries to ensure security of gas supplies ahead of next winter. This follows in the footsteps of a recent plan to reduce Europe’s dependency on Russian gas by two-thirds before the end of this year and to completely diversify away from Russian gas supplies before 2030.

Storage contributes to security of supply by providing an additional source of gas in case of strong demand or supply disruptions. According to the European Commission, inventories provide 25-30% of European gas consumption in a normal winter, thus alleviating pressure on imports via pipeline and LNG.

The European Commission’s final proposal set a target for underground gas storages in each EU-27 member state to reach 80% utilisation by 1 November, with unspecified intermediary targets being set for August, September and October. As of 2023, targets for February, May, July, September and November will be enforced, with the 1 November target increasing to 90% full. The proposal will soon be voted on by the European Parliament and Council and should come into effect in the second half of this year.

With Europe emerging from winter with gas storage levels running below the five-year average, the pressure is now on to restock. However, the current backwardation in the TTF forward curve does not incentivise storage capacity holders to inject. The European Commission will therefore implement various measures to entice capacity holders to rebuild stocks, including removing capacity-based transmission tariffs on storage entry and exits points to reduce costs. EU-27 members will also be able to design their own measures, which could include financial support for capacity holders.

Failure to comply with the filling obligations could see the capacity holder having their rights withdrawn and tendered to other market participants. Russia’s Gazprom controls storage capacity at seven separate sites in European Union territory, including Jemgum, Katharina, Rehden and Etzel in Germany, Haidach in Austria, Bergermeer in the Netherlands and Damborice in Czech Republic. Many of these facilities have been underutilised in the last year. Should Gazprom choose not to refill these sites for a second consecutive summer, the company will likely lose access to this capacity.

Injection demand highest in Germany, Italy, Netherlands, France and Austria

Using the latest AGSI+ storage data, inventories in EU-27 countries will need to rise by a total 54.5 bcm between now and the start of November to meet the 80% storage target.

The graph below shows that on an aggregated basis, Europe tends to reach 80% fill by 1 November, but this was just missed last summer when strong demand for LNG in northeast Asia and South America pulled cargoes away from Europe, Russian pipeline imports fell from September and fill rates at Gazprom-controlled storage sites in Europe lagged behind. Last summer, net injections stood at around 46 bcm over the 1 April – 1 November period. Storage utilisation rose from 31% on 1 April to 77% by 1 November. As of 26 March, European storage sites had a utilisation level around five percentage points lower than the start of April last year at 26%.

Historical net injections over 1 April-1 November (bcm, left) and fill rates by 1 November (%, right) at European storage sites - Source: AGSI+. 2022 injection requirement calculated from 26 March.

The chart below shows how much each EU-27 member state will be required to inject into storage between now and 1 November to meet the 80% fill rate. Unsurprisingly, countries with the largest storage capacity will be required to inject the most gas. Germany, Italy, Netherlands, France and Austria together hold 73.7 bcm of capacity, accounting for 73% of the region’s total storage capacity of 100.9 bcm.

Germany’s injection demand exceeds that of other member states. Germany has the largest gas storage capacity in Europe at just over 22 bcm and a number of its sites are controlled by Russia’s Gazprom. Rehden, Gazprom’s largest storage site in Germany, has a working capacity of 3.9 bcm and is just 0.56% full as of 26 March, according to AGSI+.

Injection demand by country to meet 1 November storage target (bcm, left) and current fill level (%, right) - Source: AGSI+. Injection requirement calculated from 26 March.

US will likely exceed 15 bcm of additional LNG supply to Europe this year

In order to reach the European Commission storage targets, Europe will need to curb consumption and raise gas imports, particularly so if Russian pipeline supply remains below typical levels. Norway’s Ministry of Petroleum and Energy recently approved plans by Equinor to maintain high production levels at the Oseburg, Heidrun and Troll gas fields. But due to limited scope to significantly increase domestic gas production and pipeline imports from other sources, most of the additional gas will need to come from the international LNG market.

On Friday, US President Joe Biden and European Commission President Ursula von der Leyen announced an agreement to increase US exports to EU-27 countries by 15 bcm of gas (11 Mt of LNG) this year. In 2021, the EU-27 imported 20.7 bcm of gas (15.2 Mt of LNG) from US liquefaction facilities. Friday’s deal to increase those volumes by 15 bcm would take total imports to a record high of 35.7 bcm (26.3 Mt of LNG) this year.

In the first three months of this year, EU-27 member states have already received an additional 9.2 bcm of gas over the same period in 2021 from the United States. This leaves a 5.8 bcm y/y increase over the remaining nine months of the year. Given that US liquefaction capacity is increasing, Asian and South American demand could slow this year and US netbacks continue to point towards Europe over Asia for the remainder of the year, this target is highly achievable and could well be exceeded.

However, the 15 bcm target from the US is a drop in the ocean when factoring in Russian gas imports (pipeline and LNG) of 155 bcm into the region last year. The European Commission is targeting a number of measures, including a 50 bcm increase in LNG imports this year to achieve a two-thirds reduction in Russian gas imports. The Commission also intends to increase non-Russian gas supplies (10 bcm), deploying more renewable power capacity in replacement of gas in the power sector (20 bcm) and implementing saving measures (14 bcm). As mentioned in a previous Kpler insights article, accomplishing a two-thirds reduction in Russian gas supplies this year will be challenging.

EU-27 monthly LNG imports from the United States (bcm) - Source: Kpler

With the focus now shifted to summer stock rebuilding, Europe will need to continue to attract as much gas supply as possible to achieve the European Commission's storage target of 80% refill by 1 November. This will keep European gas prices elevated in 2022. Amid limited scope to significantly raise domestic production or pipeline supplies, attention is being concentrated on the LNG market with countries across Europe now looking to fast-track LNG import terminal plans. However, Russia will still remain a dominant supplier to Europe this year and any reduction or cut off in supplies, as a result of sanctions or retaliation, would leave the region unable to accumulate sufficient stocks and put Europe in a very difficult situation next winter.

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