FEATURE: Europe's 'ticking time bomb' of gas storage depletion

The European natural gas market has become increasingly reliant on storage reserves to meet winter demand, ever since the Continent's Energy Crisis between September 2021 and January 2023.

This reliance, however, could currently be considered a dependency in the short-to-medium term, with delays to global LNG liquefaction capacity coming online, and under-utilized LNG infrastructure in Europe itself.

Accordingly, a handful of major players in the European market have now begun to say publicly that a fresh bidding war could take place between Europe and Asia for marginal LNG cargoes, akin to what happened during the crisis, in the event of a deep drawdown in European storage inventory over the winter.

The crisis in the wholesale market for gas saw market prices for forward-curve products catapulted to more than twice their historic highs, and experience previously unknown intraday volatility, time and geographical arbitrage.

As such, a deep storage draw-down this winter could even go beyond a bidding war with Asia, and send the European market back into crisis territory once again, sources have told S&P Global Commodity Insights.

"Another crisis in Europe is a ticking-time bomb, when you consider next summer's storage injection requirements," a Geneva-based gas trader said. "The European Commission targets have not helped."

"Historically, and in the case of the crisis itself, authorities in Europe have always been reactive to such situations, rather than proactive in preventing them."

In June 2022, the European Union's Gas Storage Regulation came into force, mandating member states to ensure their gas storage facilities held a prescribed percentage of inventory relative to space on pre-determined dates.

While there are no shipper obligations written into these regulations, forward purchasing during previous summer injection seasons prior to the regulation, and the crisis, have nevertheless caused sustained rises in the wholesale market.

The Summer 2021 delivery period prior to the crisis itself was the most notable example of this, when even after the efforts of European shippers to inject, EU facilities were only around three-quarters full by the end of it, with little prospect of additional volumes being retained amid low LNG regasification levels.

Parallels to that situation could easily be drawn now, given that Europe will likely need to restock next year without Russian export via Ukraine, and with new LNG infrastructure noticeably being under-utilized at present.

German FSRUs

Since the crisis started, four floating storage and regasification units (FSRUs) have been fast-tracked and deployed in Germany at the ports of Lubmin (now Mukran), Wilhelmshaven and Brunsbuttel. Additional floating units are set to be introduced at Wilhelmshaven and Stade in Q1 2025.

However, there have been scant regasification capacity sales for these units in 2025 so far, with the currently active Wilhelmshaven terminal also likely to see activity drop-off in Q1 2025, according to operator DET.

"While the deployment of the FSRUs in Germany helped resolve the original crisis, they are currently more expensive to use than most other facilities in Europe, and are likely to remain largely idle this winter while storage is drawn down," a European gas analyst said.

"Germany will also have to play a part of supplying neighboring countries this winter, when Ukrainian transit comes to an end," she added.

"There are no active delivery contracts securing supplies to the new infrastructure, and those that could be agreed are not likely to have destination clauses written into them...meaning that another bidding war between Europe and Asia for LNG could happen."

Marginal supply

A fresh bout of competitive rivalry between Europe and Asia could indeed raise the marginal cost of supply. During Summer 2022 trade, the Platts DES Northwest Europe marker averaged $36.40/MMBtu, up from $13/MMBtu in Summer 2021. At these prices, there were reports of a reduced buying requirement in Asia due to the price level.

Commenting on the recent reports predicting a bidding war, a global gas trader said: "It seems a fairly obvious statement...If it's cold demand is high, and competition for limited supply is worse when demand is high."

"A JKM-TTF basis that remains positive at what could be perceived as a 'high' price level is an indication of higher global demand...If JKM-TTF goes negative, Asia gives up beyond that point, thus bringing [the global market] closer to balance."

As a result of this competition, Europe was able to restock in 2022, but at a high price. An analysis of Platts pricing data from Commodity Insights and storage information from Gas Infrastructure Europe indicated the average cost of prompt injection in Platts-assessed markets came to Eur154.38/MWh ($47.502/MMBtu in December 2024) during injections in 2022. Meanwhile, the Platts JKM benchmark price, reflecting LNG delivered to Northeast Asia, averaged $37.132/MMBtu in summer 2022.

In the current environment, storage could now be considered the source of marginal supply in Europe, meaning that some of the reserves, injected at high prices, may need to be called upon.

Furthermore, injections made during the crisis may not have been hedged against a winter premium. According to the analysis, the TTF day-and-month ahead contracts held a premium to the subsequent winter between April 2021 and September 2022, while the summer season held a premium to the following winter between October and December 2021, as well as February and December 2022.

"When summer holds a premium over the following winter, like there was for the majority of 2022, there is no incentive for shippers to hedge the winter withdrawal," the European gas analyst said. "The current premium of Summer 2025 over Winter 2025 contains an element of risk relating to further interventions by THE, which are still possible under the current regulations."

Indeed, German market operator THE's intervention in the wholesale market in March 2022 pushed summer-winter arbitrage to record proportions, as it was instructed by the German authorities to purchase gas ahead of winter to put into storage. This intervention remains the most famous purchase of unhedged storage inventory in the crisis.

"The crisis was exacerbated by THE being allowed to trade gas," the global gas trader said. "Trading storage as an outright product and not as a spread is [rather unwise]."

The exact quantity of unhedged injected gas in EU facilities is unknown, although it is possible the hedges were established later at a very high price. This would have been necessary to ensure a profit margin wide enough to enable a buy-back spot reversal if the reserves were no longer required.

The analysis showed that around 30% of current inventory in Platts-assessed markets was injected at a time when injection periods were at a premium to the front winter. Even if predominantly hedged, this stock may have accumulated value if the original hedge was reversed unprofitably for balancing purposes, and may condemn Europe to a structurally higher price of marginal supply.

Moreover, the latest storage targets from the European Commission have indicated a minimum fill level of 10% for Germany on May 1, 2025.

While it is not known why the level has been set so low, or if German inventory will fall to this critical threshold, Germany, and indeed Europe, could be relying on expensive storage reserves by this time, and find themselves in another tussle with Asia to restock.