Geopolitical tensions are rising and the world is now focusing even more attention on the war between Russia and Ukraine. Last week, Ukrainian forces launched a surprise offensive and entered the Russian region of Kursk. This The invasion included the fighting in and around Sudzhaa key gas transit point, raising the risk of increased battles over critical pipeline infrastructure. As a result, TTF gas prices have risen to their highest levels this year, exceeding EUR 40/MWh, highlighting supply fears in Europe.

TTF prices began the year quietly, supported by record-high inventories. There was little disruption until May, when Israel launched its offensive in Rafah. Prices initially fell as the situation stabilized. However, since the start of the Ukrainian offensive on August 6, TTF prices have risen by over 15%.

Before the start of hostilities, Russian gas was moving to Ukraine through several transmission points. However, with the launch of Turkstream in January 2020, Russian flows were largely redirected and Ukrainian imports consolidated in Sokhranovka and Sudzha. After 2022, flows shifted again, with step on the gas now to travel through Sudzha alone. This makes Sudzha an important checkpoint for European supply, such as Almost 40 million cubic metres of natural gas are transported there every day.

Although gas flows through Sudzha have fallen dramatically, it remains a key supply point for Europe. Before disruptions to historic trade flows, gas from Sudzha met almost 10% of European demand. Although the continent has diversified its sources through increased LNG imports, this figure has now fallen to 3–5%, which is still a significant share of supply. LNG supplies many parts of Europe, but the predominantly Western European LNG regasification terminals make it difficult to transport supply to Central and Eastern Europe. Therefore, disruptions to gas flows through Sudzha disproportionately affect countries further east. The graph below shows European consumption by country on the left axis and supply from Sudzha as a percentage of total European supply on the right axis.

With Gazprom’s transit contract for Ukraine expiring at the end of the year and both sides apparently unwilling to renegotiate, the loss of gas supplies in Sudzha seems inevitable. In response, Europe will likely turn to global LNG markets to fill any shortages.

Since 2022, Europe has been working to expand its LNG regasification capacity. More than 12 terminals are planned and several new terminals and floating storage and regasification units (FSRUs) have already been built. Germany inaugurated its first FSRU in 2022 and further expanded its capacity with another terminal in Brunsbüttel. Poland, Greece and Ireland are aiming for similar expansions. The graph below illustrates the increase in LNG imports to Europe and highlights the rise of the United States as a major trading partner.

European energy markets have had a relatively quiet year, but that could change as geopolitical tensions escalate. While Sudzha is currently in focus, it underscores the broader issue of supply insecurity across the continent. Even non-military events such as the proliferation of data centers in the United States could drive up European prices. While high storage levels could mitigate short-term shocks, the approaching winter presents uncertainties. Check back for more insights as we continue to monitor these events.

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