According to Fitch Ratings, Ukraine’s intrusion into the Russian Kursk region, where the Sudzha gas transit station is located, has no significant impact on European gas supplies. Even a complete halt to supplies would have only a limited impact on European consumers. In 2023, 14.6 billion cubic meters of gas would be transported through the station, which corresponds to only 5% of EU demand.
Despite the military activities, gas supplies will continue, but if they are suspended, European buyers should be able to fill the gap with LNG supplies. High gas stocks should also help offset an immediate loss of supply, and demand for natural gas remains well below pre-2022 levels. Transit of natural gas to Europe via Ukraine is scheduled to cease at the end of 2024 as the transit contract expires and is not expected to be renewed.
The EU imported 133 billion cubic metres of liquefied natural gas (LNG) in 2023, corresponding to a capacity utilization of 62 percent of the regasification infrastructure. The LNG regasification infrastructure should already be comfortably sufficient to cover the additional demand and compensate for a supply halt from Russia.
EU gas storage facilities remain well filled at 86%, compared to 87% in the same period last year. We expect levels to reach almost 100% before the winter months, and storage facilities should cover almost half of consumption from October to March, assuming demand is similar to last winter.
EU natural gas demand fell 3% year-on-year in the first five months of 2024 and was 24% below the first five months of 2021 (pre-crisis). We expect demand in 2024 to be similar to 2023, depending on weather conditions. European chemical companies reported increasing sales volumes in the second quarter of 2024 after weak sales in 2023 and early 2024, but demand remains sluggish. If the trend continues, natural gas demand, which has been declining since the start of the Russia-Ukraine war, could at best stabilize at 2023 levels.
European natural gas prices are around $12.3 per thousand cubic feet (mcf), about 20% higher than at the end of July. However, the year-to-date average price is $9.7/mcf, in line with Fitch’s current full-year price scale of $10/mcf. We expect the price impact of Ukraine’s invasion of the Kursk region to be short-lived. European natural gas prices remain volatile and subject to geopolitical developments and supply disruptions, including those that do not directly affect European supply routes. Given the region’s large natural gas production, rising tensions in the Middle East may also have a greater impact on European gas prices in the coming weeks.
Landlocked countries such as Austria, Slovakia and Hungary would be most affected by a halt in Russian gas supplies via Ukraine. However, the Austrian oil and gas group OMV recently received additional rights for European natural gas transport capacity, and Austria has sufficient gas storage capacity for almost the entire annual demand.
Hungary has access to Russian gas through the TurkStream pipeline and several gas interconnectors with neighboring countries. In Slovakia, disruptions to Russian gas supplies could be offset by increased gas supplies through transit routes that receive gas from Polish and Croatian LNG terminals, as well as a possible reversal of gas supplies through a pipeline that currently transports Russian gas further west.
Russia’s invasion of Ukraine led to an unprecedented energy crisis in 2022. Russian producer Gazprom cut its natural gas exports to Europe by 90%, hoping to divert Western military and political support for Ukraine.
The war led to record prices for natural gas around the world, while Europe struggled to secure alternative supplies. These higher costs also had a significant impact on other important sectors such as fertilizers and petrochemicals.
Although prices have since fallen, the damage remains, as shown by weak demand. The outlook is also bleak – and not just in Europe. The World Bank has again revised its forecast for global GDP downwards, to 2.4 percent. It warns that the last five years will have seen the lowest growth in 30 years.
How vulnerable are Russian energy and energy-related supplies to disruptions?
In the past, Europe was dependent on Russian supplies for almost 40 percent of its annual gas consumption. Gas was delivered via four routes – from Ukraine, from Belarus to Poland, and via the Nord Stream 1 and TurkStream corridors, which connect Russia to Germany and Turkey via the Baltic and Black Seas respectively.
Overall, Russian pipeline supplies were limited throughout 2021 and were further reduced in 2022. By the end of last year, Russian pipeline supplies fell to less than 10% of Europe’s total gas imports, compared to 40% the previous year.
Russian transport volumes via Ukraine to Europe are currently one third of what was supposed to be under a five-year transit agreement
Russia has banned gas exports to several EU countries, and the Nord Stream I and II pipelines have been damaged. In 2022, supplies via Yamal and Nord Stream 1 will stop completely.
As a result, European petrochemical companies were faced with even higher gas prices, which have now fallen back to pre-war levels but are still above the long-term average. Fertilizer producers – for whom gas can account for up to 80 percent of costs – were forced to reduce production. Chemical companies were also affected, especially those that are heavily dependent on gas prices through their utilities or raw materials.
