Rising tensions between Russia and Ukraine carry critical implications for the global gas market, a Center for Strategic and International Studies expert told reporters Feb. 1.

Russia assembled as many as 100,000 troops on its border with Ukraine, beginning in late 2021. Russia supplies more than 40% of Europe's gas, according to European Commission figures, and gas prices on the continent are already high; the White House and European leaders are working to secure additional supplies for the region in the event a military conflict creates supply shortfalls.

There are two primary scenarios to consider, according to Nikos Tsafos, a senior fellow with the energy security and climate change program at the Center for Strategic and International Studies. One is the wholesale interruption of gas exports to Europe from Russia, a possibility that Tsafos described as "catastrophic and impossible to fathom, but also unlikely." A broader cutoff would mark a major escalation by Russia that would likely result in rationing of gas to industrial customers, prices so high they become "essentially meaningless" and the switching from gas to dirtier fuels such as oil, coal and wood, Tsafos said.

"If you have a wholesale cutoff, that will basically destroy whatever remains of Russia's reputation as a reliable supplier," Tsafos said. The oil and gas industry is a major driver of Russia's economy.

The more likely scenario is the disruption of gas flows to Ukraine, Tsafos said, noting that could even happen inadvertently if infrastructure were damaged.

Disruptions of deliveries to Ukraine would be "painful but manageable," Tsafos said. This is largely the result of changes to Europe's gas supply mix in recent decades with the construction of new pipeline infrastructure and the expansion of the LNG trade. The transit of gas through Ukraine dropped by 70% from 1998 to 2021, to about 42 billion cubic meters, making it less important to Europe's energy security than in past instances when Russia cut off gas to Ukraine, according to the center, citing data from Ukraine's Naftogaz.

Italy, Austria and Slovakia would likely be the most affected by the interruption of Ukrainian flows, but each country has alternatives, according to the center. Italy has the most, given its access to imports of LNG.

Potential price shock

An interruption would nonetheless send a shock through global gas markets and encourage shipments of LNG to Europe. Tsafos considered that sort of price-driven market response the most likely instrument for rebalancing the global gas system to make up a shortage in Russian supplies.

European prices at sustained highs have already encouraged flows of LNG to Europe. The European benchmark Dutch Title Transfer Facility price was $25/MMBtu on Feb. 1 — roughly 320% higher than the price of $5.97/MMBtu on the same day of 2020, according to S&P Global Market Intelligence data. European gas storage levels also remain low at about 40% full, compared to about 53% full at the same time a year ago, according to S&P Global Platts.

It is against this backdrop that a number of government officials are searching for alternatives to Russian supplies. White House Press Secretary Jen Psaki said on Jan. 25 that the administration is "engaging with major buyers and suppliers of LNG to ensure flexibility in existing contracts and storage is managed and enables diversion to Europe."

There is limited slack in the global gas market, and the highly contracted LNG trade constrains the ability of exporters to voluntarily redirect the destinations of their cargoes. Between 60% and 70% of global LNG supplies are traded under long-term contracts, meaning five years or longer. In 2020, spot LNG cargoes represented 35% of the global LNG imports, according to Paris-based International Group of LNG Importers.

US LNG flows to Europe

Cheniere Energy Inc., the largest LNG exporter in the U.S., reported during its most recent earnings call in November 2021 that contracts cover 90% of the LNG supplies from its export terminals in Louisiana and Texas. For months, high global gas prices have incentivized U.S. LNG exporters to run their facilities at full capacity, meaning they cannot simply produce extra LNG to relieve Europe.

In the U.S., total feedgas deliveries to the country's six major operating LNG export terminals were about 11.1 Bcf/d on Jan. 31, according to S&P Global Market Intelligence pipeline flow data. The leading U.S. LNG trade group touted the role of the country's exporters as "EU's largest supplier of LNG throughout their energy crisis" in a Jan. 28 statement.

"U.S. LNG is not the sole solution to the EU's energy supply crunch, but this situation would be far worse without U.S. LNG," Charlie Riedl, executive director of the Center for Liquefied Natural Gas, said in the statement.

About two-thirds of U.S. LNG went to Europe in January, but a price shock from a Russia-Ukraine conflict could draw more supplies from the U.S., along with other producers such as Qatar and exporters in Africa, Tsafos said. If prices are sufficiently high, buyers outside of Europe could seek other sources of fuel or electricity and send their cargoes to Europe instead, for a profit.

"Diplomacy helps, but on the margin, we have a pretty good system for responding to shocks," Tsafos said. "We have dealt with Fukushima [nuclear accident]. We have dealt with a lot of the things over the last 10-plus years. We know how to adjust."

S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.