Tectonic Shifts in Europe’s Natural Gas Trade and Prices

They were at their lowest in February, close to €22/MWh at the Dutch gas trading-hub TTF, but by the end of December they rose by over 200 per cent to €50/MWh, with warnings that these could reach €70/MWh in 2025, impacting European industry competitiveness even more. In contrast, US gas prices have remained steady at around €10/MWh, similar to pre-crisis levels, giving it a strong competitive advantage.

The consequences for Europe are far-reaching: higher energy prices, sky-rocketing electricity prices and further erosion of Europe’s industrial base.

The factors contributing to this are many and are deep-rooted: in addition to the ending of Russian gas supplies to Europe through Ukraine, a harsher winter, long periods of cloudy and calm weather, leading to low wind speeds and low sunshine forcing increased reliance on gas, US sanctions on Russian Gazprombank – through which payments are made for the purchase of Russian gas – and, of course, EU’s short-sighted gas policies that deter European utilities and companies from committing to long-term gas and LNG purchase contracts.

Europe is set for the coldest winter since Russia’s invasion of Ukraine, pushing up energy costs as the continent dips into its gas reserves at a faster-than-usual rate – the fastest since 2016. Gas storage levels are depleting at an alarming rate, now around 30 per cent lower than in 2023. As a result, gas for delivery in the summer is now being priced at a record premium, exacerbated by worries about how Europe will manage to re-fill storage in the summer.

With energy transition expected to be a long-drawn process, hydrocarbons are likely to carry-on being a major component of the European and global energy mix even by 2050.

Russian gas to Europe

In 2019 Russia provided 172bcm pipeline gas to the EU that supplied about 43 per cent of its gas demand. By the end of 2024, this dwindled to about 15bcm, or 5 per cent of EU gas demand. But over the same period, supplies of Russian LNG to Europe increased from about 13bcm/yr to about 24bcm/yr now. Despite European Commission’s (EC) commitment to phase this out, it is still being supplied.

Ending Russian gas flow through Ukraine will lead to an increase in European demand for costly LNG, with energy cost implications. It will result in a $6.5bn/yr loss for Russia, but it will also be a financial blow to Ukraine, which earned about $1bn/yr in gas transit fees.

This is happening at a time when demand for heating is high, with Slovakia and Moldova most affected. Other countries affected, but to a lesser extent, include Hungary and Austria. The Slovak prime minister went as far as to accuse Ukraine of damaging the economic national interests of an EU member state. Austria has already made arrangements to import LNG and Hungary has turned to TurkStream.

EC officials have been adamant that the EU can live without Russian pipeline supplies, even if it means accepting more expensive LNG from elsewhere. But the outcome of this is even higher prices, now over three-times higher than pre-crisis levels. Bloomberg went as far as to say that European politicians are in denial about the challenges this is posing.

Columbia University says “European policy leaders are well aware that Europe’s industrial base has been decimated, but the response always seems to be just more regulations!”

Not only this is leading to higher electricity prices, but it is making European industry even more uncompetitive. Europe’s industrial base is being decimated, with the European Central Bank warning that low growth and high debt risk another Eurozone crisis.

Eurozone manufacturers are reporting that business conditions are worsening as the EU struggles with high energy prices and poor business investment. German heavy industry output plunged 20 per cent over the last three years, losing more and more of its energy-intensive manufacturing and exports. These developments have prompted Poland to put energy security on top of its EU presidency agenda, sidelining climate.

The expected settlement of the Ukrainian problem, under pressure from President Trump, is now prompting more and more people to suggest that when the dust settles cheap Russian pipeline gas will return to Europe, with some suggesting that it is probably more of a question of “when and how much” than “if”. It should be remembered that one of the Nord Stream II pipelines is still operational. It is telling that despite Europe’s stated intent to completely phase-out Russian gas, Russian LNG continues to supply European markets.

But this may not save German industry that is reaching a point of no return. Europe’s largest economy is on a path of decline that threatens to become irreversible and could drag Europe with it. Especially at a time when Europe struggles to keep pace with China, deal with the Russia-Ukraine war and its aftermath and respond to an increasingly isolationist and aggressive US.

Global gas demand

Global gas supply is remaining tight, as a result of strong Asian gas demand growth that is expected to carry-on growing all the way to 2050. Asia’s LNG demand is forecast to almost double by then.

But LNG supplies are expected to experience an “unprecedented” boost that could lead to an LNG glut from 2026 onwards. It will also ease prices and gas supply concerns.

Massive amounts on new LNG are being released by Qatar and the US into the market from the end of 2025 onwards, leading to a rise of nearly 50 per cent in global export capacity by 2030.

But with the benefits of lower cost LNG not expected to materialise until 2026, 2025 will be a challenging year for Europe in terms of high energy prices.

Impact on Cyprus

With no gas utilisation, there is no immediate impact on Cyprus from gas developments in Europe. Quite the opposite. If Cyprus manages to complete the LNG import terminal at Vasiliko by the end of 2025, timing would be excellent to benefit from the lower LNG prices expected from 2026 onwards, as ample new LNG floods the markets.

The price of electricity in Cyprus remains at high levels -the second highest in Europe based on purchasing-power parity- due to burning diesel and the second highest tax rate in Europe, accounting for about 35 per cent of the entire price. Switching to gas could bring electricity prices down by as much as 35 per cent to 40 per cent and more if taxes are reduced down to the European average of 23 per cent . Completing the Vasiliko terminal must be our top priority in 2025.

Source: Reuters