Rising gas prices drive Europe to tap US and Ukraine sources

On European markets, gas prices have reached levels unseen since October 2023. Although it seemed that the gas crisis was a thing of the past for the EU, the cost of gas is rising again, exceeding £44 per megawatt hour. This is still far from the worst moments of the energy crisis when 2022 prices approached £265, but it is already significantly higher than in March 2024, when gas was priced at £25.

Europe is thus using its reserves and delaying their replenishment. As a result, according to experts from Energy Aspects, storage levels might drop to 30-35% by the end of March. According to a report from Gas Infrastructure Europe, the gas storage level in Europe has fallen from 70% at the beginning of January to 56.1%. For comparison, a year earlier, at the beginning of January, the storage units were filled to 86%.

Weather factors also play a crucial role. Low temperatures in some areas of the USA and Europe, recorded around the turn of the year, have led to increased gas consumption for heating purposes. In the previous two years, this demand was much lower.

"Europe used large amounts of gas early in the winter and is likely looking to forgo Russian supplies," comments Michał Stajniak, the vice director of XTB's analysis department. Let's remember that the EU still purchases liquefied natural gas (LNG) from Russia. Still, since Putin invaded Ukraine, the transmission of Russian gas via pipelines has been gradually decreasing. "Gas will still be needed in Europe, given the emerging questions regarding the Green Deal and the recent drop in stock levels," he notes.

Additionally, with the expiration at the end of 2024 of the Russian-Ukrainian gas transit agreement (which mainly benefitted Slovakia and Hungary), a gap arises that needs to be filled with supplies from alternative sources.

Ukrainian President Volodymyr Zelensky declared that his country is ready to increase gas transit from Azerbaijan to Europe. Azerbaijan theoretically can export 25 billion cubic metres of gas, which is s a little over one-third of what Germany consumes (approximately 80 billion cubic metres).

However, Ukraine's offer does not solve Europe's gas issue. First, there are lingering doubts about whether this could become a loophole for Gazprom, as Azerbaijan's SOCAR has agreements with the Russian giant. Second, the volume that can be imported will not entirely cover the gap.

The increase in gas exports by EU countries from Azerbaijan through the pipeline system, including via Ukraine's territory, will not solve the full problem of limited gas availability. Currently, the amount of gas imported to Europe from Azerbaijan meets about 5-7% of the demand, calculates Michał Stajniak.

The XTB analyst reminds us that European Commission President Ursula von der Leyen signed an agreement with Azerbaijan in 2022 to double exports to Europe by 2028. So even if the current 5-7% import increases to 10-14%, it would only slightly offset the more expensive LNG, which today accounts for 40-50% of the entire import to EU countries.

"Nonetheless, it is important to remember that pipeline gas prices are significantly lower if solid transmission infrastructure exists." Building new pipelines and infrastructure is, of course, very costly. In the case of pipeline gas imports, sales occur through long-term contracts, while LNG can be purchased even in the short term, Stajniak emphasises.

The development of infrastructure for liquefied gas reception has opened up numerous import opportunities for Europe. Gas is imported to the EU from countries like Qatar and Algeria, as well as from the USA and Russia.

However, successive sanction packages limit Russian supplies, and in the long term, Brussels intends to completely replace Russian gas with resources from elsewhere. Donald Trump's return to the White House has prompted Europe to declare larger purchases from the USA to reduce the trade deficit and slightly appease Trump. Gas is expected to become a bargaining element for the EU and a safeguard against the 10-20% tariffs on European products promised by the US President.

The head of the European Commission has already spoken with Trump about replacing Russian liquefied gas with American gas. For similar reasons, interested buyers are already lining up at Trump's terminals. Both Europe and Asia have declared a willingness to increase purchases from the USA.

To satisfy the growing demand for American gas stimulated by Trump, the Republican president has announced the removal of barriers to greater extraction and production in his country. During his election campaign, he announced an increase in exports of American LNG that would be greater than the previously planned doubling by 2030.

The question remains whether the USA will be able to meet the growing demand for LNG. The current expansion programmes for LNG in the USA show that these capabilities will significantly increase. Even with the liberalisation of mining laws, building additional fields and terminals is not likely within a single-term perspective. However, the USA's share in gas production is steadily rising, assesses Szymon Pastucha, an analyst from the Polish Institute of International Affairs.

Following the shale revolution, the USA became a major player in the LNG market. In 2024, exports of this resource from the USA reached 90 million tonnes, compared to 87 million tonnes a year earlier.

However, as the XTB expert points out, the more significant export potential from the USA may restrict gas availability in the local market. And although the potential for production growth remains, domestic demand in the USA may also rise.

"This is linked to the development of infrastructure for artificial intelligence. Trump has stated that energy needs in the USA could double in the coming years, and it should be noted that over 40% of electricity in the USA comes from gas-fired power stations. Therefore, a potential reduction in available local supply in the USA can be observed alongside a probable increase in demand. This must mean rising prices," evaluates Stajniak.

Furthermore, this year's summer may be very hot, raising energy needs in the USA due to air conditioning use. This could result in a minor reserve increase before the next heating season. Therefore, the analyst wonders, "Is this the end of the era of cheap American gas?"

However, Szymon Pastucha notes that consumers from Europe or Asia are still willing to pay more for American LNG in exchange for other economic benefits. American gas is still relatively affordable, even considering all the costs of liquefaction and transport. "Europe's massive demand means American importers are very interested in our market," adds Michał Stajniak.