From the Editor: European gas prices once more rising [Gas in Transition]
European natural gas prices rebounded in the first three weeks of June by around 50%, after six months of fairly steady decline, in a clear sign that the market remains highly volatile.
The front-month TTF price peaked at €41.15/MWh ($522/’000 m3) on June 15 – its highest point in nearly two months. This compares with a low of just above €23/MWh it reached at the start of June. As of June 19, the contract was trading at just under €35/MWh.
Prices are still much lower than the spike last summer, at the height of the energy stand-off between the EU and Russia, when months of dwindling Russian pipe gas flow culminating in the front-month price hit an all-time high of over €340/MWh in late August. And with high levels of gas in storage, with underground facilities filled to almost 74% of capacity as of June 18, the recent bullish trend does not pose a threat to energy security. But it highlights that the market’s stability remains very much at the mercy of shifts in demand and supply.
Furthermore, the rebound in prices means further pain to European industry, which has already seen significant closures as a result of soaring energy costs.
The recent trend is a culmination of a number of factors. First, maintenance impacting Norwegian pipeline gas flow to Europe that had been scheduled to wrap up on June 21 has been extended for longer. Work at the Nyhamna gas processing plants and the fields that feed it, namely Aasta Hansteen and Ormen Lange, will carry on for nearly a month longer than anticipated, until July 15.
Norway is now the top gas supplier to Europe, following drastic cuts to Russian pipe flow over the past year. The drop in Norwegian flow was partially compensated by increased Russian flow and LNG regasification send-out.
Europe is also enjoying a heat wave, with expectations of further hot weather to come, and this has driven up cooling demand, and in turn power consumption. Recent weeks have also seen a rise in Asian gas demand, driven by stronger economic growth. This means greater competition for LNG cargoes between Europe and Asia. The price of LNG in northeast Asia briefly regained a premium over European prices this month, after being lower for much of the last two years.
Groningen’s end in sight
The bullish sentiment among traders was also driven by media reports that the Dutch government is set to follow through on its pledge to close down Groningen, once Europe’s single-biggest source of gas supply, on October 1. The Dutch cabinet is yet to make a formal decision, however.
Groningen’s output peaked at 87.7bn m3 in 1976. But for decades, production activities had been causing earthquakes, and in 2014, the then-Dutch government vowed to shut down the field, initially planning to do so by 2030. The target was later brought forward to 2022, and then delayed by a year in light of the energy crisis.
For the year ending October 1, 2023, production at Groningen has been capped at 2.8bn m3, down from 7.6bn m3 in the previous 12 months. As such, it is nowadays a relatively minor source of gas supply, although reports about its intended closure within months still have an impact in such a tight market.
It is understood that some wells at the field could still be restored if considered necessary, for instance in the event of a very cold winter, and within mere weeks.
In September last year, NGW reported that Groningen represented Europe’s ace in the hole, helping to offset the loss of Russian gas supply if restored to full production capacity. The NAM consortium operating the field explained at the time that flow could be increased to 22-25bn m3/yr within a short period if permitted.
The risk to European energy security was far greater at that time, with winter looming and fears of a further cut in Russian gas supply. But there is still a rationale for at least keeping the field open for longer, if not raising its output, given that Europe faces several more testing winters before a new wave of global LNG supply is expected to loosen the market up.
However, as NGW reported, the decision on Groningen’s output lies with the government, which is reluctant to make a choice that would bring about negative consequences for citizens in Groningen at risk of quakes. This impasse likely could only be ended through a political initiative by the Groningen community, perhaps involving giving each household a cut of profits from the field. No such initiative has emerged, and it looks increasingly unlikely that one will.