Baltic Team
26 August 2021

Michał Paszkowski
Komentarze IEŚ 434 (131/2021)

Winter is coming. Central European countries and their preparations for the increased natural gas demand

Winter is coming. Central European countries and their preparations for the increased natural gas demand

ISSN: 2657-6996
Komentarze IEŚ 434
Publisher: Instytut Europy Środkowej

In Central European countries (as in other parts of the continent), the level of natural gas stored in underground gas storage (UGS) facilities before the coming autumn-winter period is low. This situation is a consequence of the limited availability of this commodity. Market conditions are not very favourable, and if such a situation continues in coming months, problems with the availability of natural gas in the Czechia, Slovakia, Bulgaria, Croatia, and Romania can be expected at the end of 2021. The next weeks will show whether there is a chance to rebuild inventories to a safe level, and in this regard, Russia’s role will be crucial.

Unfavourable market conditions. Since the beginning of March 2021, the price of natural gas in Europe has been steadily increasing due to several factors. The primary cause has been weather conditions. In January-June 2021, the temperature was 1.5°C lower than in the comparable time in 2020. In addition, an extended period of withdrawal of natural gas from USG has shortened the time for re-injection. While in 2020 this process began in April, in 2021 it was not until June. In addition to weather conditions, the economic recovery after the COVID-19 pandemic resulted in an increase in the demand for electricity in Europe, including that generated in combined cycle gas turbine (CCGT) plants. The same situation can be observed in the Asia-Pacific region, which means that large volumes of natural gas in liquefied form (LNG) is directed to this region, thus limiting the availability of the commodity in Europe (delivery of LNG to Europe was delayed when the container ship Ever Given blocked the Suez Canal for few weeks in March 2021). The price of natural gas was also influenced by maintenance works on oil and gas fields in Norway and UK (longer than in recent years), as well as high temperatures in summer, which increased the demand for natural gas due to the growing consumption of electricity for cooling in Europe, the US, and the Asia-Pacific region). Consequently, in July 2021, the average price of natural gas on a Dutch virtual trading point (TTF) was 12.5 (USD/MMBTu) compared to 7.3 (USD/MMBTu) in January 2021.

Insufficient inventory level. Under these conditions, it is extremely important that the gas system of Central European countries is well prepared for the seasonal increase in demand. However, stocks in these countries are currently extremely low. In July 2021, UGS in Central European countries were filled at an average of 54%, compared to 76% in July 2020 and 68% in July 2019 (in all EU countries it was 52%, 83%, and 78%, respectively). Additionally, while in the past there were comparable situations in which the level of inventories in this period was low, no comparable example of the slow process of rebuilding inventories has been recorded. As a result, it can be expected that in the autumn-winter period, not all countries will be adequately supplied, as some UGS may not be filled to a sufficient level. In the Baltic states, there is only one UGS facility, in Inčukalns, Latvia, with a capacity of 2.3 bcm. The lack of extensive infrastructure makes it difficult to balance the market during peak demand. In July 2021, the UGS was 55% full compared to 66% in July 2020 and 40% in July 2019, which means that the UGS is currently filled to a comparable level as in 2019. In addition, there is an LNG terminal in Klaipeda, Lithuania, and from there, the Baltic states can import natural gas from other places than just Russia.

In the case of the Visegrad Group countries, all of which have their own UGS facilities, in July 2021 their average filling level was 61% compared to 83% in July 2020 and 79% in July 2019. Of these, Poland is currently the best prepared (73%), and Hungary (68%) follows, and the worst are Czechia (51%) and Slovakia (53%). In Poland, the LNG terminal in Swinoujscie creates favourable conditions for stable supplies and rebuilding inventories for the autumn-winter period. The commissioning the Polish-Slovak interconnector (planned for Q1 2022) is expected to improve the transportation of natural gas in this region. The supplies to the Visegrad Group countries will also take place via the LNG terminal on the Krk island in Croatia, which should play an important role in balancing the market.

In the Balkan states belonging to the EU (Bulgaria, Croatia, Romania), the level of filling inventories in July 2021 was also extremely low. Bulgaria (37%) and Romania (41%) are in the worst shape. In their case, supplies from Russia will be the only option. The situation is slightly better in Croatia (57%), and they have an LNG terminal, so deliveries from destinations other than Russia will be ensured.

Russia’s strategy remains unchanged. Central European countries are in the process of rebuilding their inventories, but the availability of natural gas has been limited recently. On the one hand, availability of LNG was reduced, but on the other hand, maintenance work on gas pipelines from Russia, i.e. Yamal (5-10 July 2021) and Nord Stream (12-23 July 2021), also reduced supply. While most of the maintenance was planned well in advance, in July 31, 2021, delivery reduced through the Mallnow interconnection point (Polish-German border) by 40% compared to deliveries by day earlier due to a fire in a condensate plant in Novy Urengoy, Russia. OAO Gazprom is consistently striving to increase the availability of natural gas in Europe, but through the most convenient delivery channels for the company. In this regard, the company is continuing building the Nord Stream 2 gas pipeline (the second line of the pipeline is being laid in the Baltic Sea, with work to be completed by September 12, 2021). In addition to the construction of the offshore section of this pipeline, work is also underway to expand Russia’s internal gas pipeline system. The construction of infrastructure in Russia is necessary to supply natural gas to the Nord Stream 2 gas pipeline. In 2021, six out of the total of seven planned compressor stations are planned to be put into operation (though so far, only the compressor station in Novoyubileinaya has been put into operation) on the Ukhta-Torzhok 2 pipeline, which was already laid in 2018. The ongoing work related to the expansion of gas pipelines in Russia shows that OAO Gazprom plans to commission the Nord Stream 2 gas pipeline extremely quickly (the company has already announced that by the end of 2021 it will be able to deliver 5.6 bcm of natural gas to Europe). The testing process for the first line of the gas pipeline and the certification process are already underway. Additionally, taking into account a recent US and Germany deal, the certification process (the most controversial recently) should be quickly clarified.

Conclusions. The level of natural gas stocks in Central European countries is currently low. Market conditions mean that at the beginning of the heating season in 2021, when natural gas is no longer injected into the UGS, some countries of this region may not be fully prepared, most notably Czechia, Slovakia, Bulgaria, Croatia, and Romania. In the case of any possible interruptions in gas supplies (e.g. limiting transit of Russian natural gas through Ukraine), Europe may experience shortages in the availability of this commodity.

The recent restriction of gas supplies from Russia to Europe was of a technical and short-term nature. Nevertheless, it was another factor which, on the one hand, contributed to an increase in natural gas prices (and thus the revenues generated by OAO Gazprom), and, on the other hand, delayed the opportunity to accelerate the process of refilling UGS facilities in Europe. Importantly, the rebuilding of stocks is based on supplies from Russia. At the same time, under these conditions, there are currently no factors that would cause the price of natural gas in Europe to fall in the coming months.

The limited availability of natural gas in Europe will be another argument for Russia to continue the construction of the Nord Stream 2 gas pipeline and to put the pipeline into operation. Any potential supply interruptions in the near future will be used by OAO Gazprom to complete the construction and deliver the natural gas via this route to clients in Western Europe, possibly (taking into account the signals from Russia) already partially completed in 2021.