On Monday 16th June 2014, Russia cut off gas to Ukraine, in a long running dispute over unpaid bills. Over the last few months Wood Mackenzie has assessed the impact of the potential disruption of Russian gas supplies to Europe via Ukraine – a key transit route.
Key considerations about the disruption of Russian gas transit to Europe:
Wood Mackenzie estimates that Europe imported 155 billion cubic metres (bcm) of gas from Russia in 2013, some 30% of its overall gas demand. Ukraine is the key transit route for Russian gas to Europe, with 50% (82 bcm) transited through Ukraine in 2013.
In March 2014 Wood Mackenzie used its global gas model to assess a six-month disruption to the Ukrainian transit route over winter 2014/15 and concluded that high storage inventories and spare capacity in alternative Russian routes, including the Yamal pipeline (via Belarus) and Nord Stream pipelines (via the Baltic Sea), would compensate for the loss of supply in North West Europe. Wood Mackenzie estimated that the Southern European countries of Turkey, Greece and Spain would require additional LNG, equating to less than five million tonnes. Wood Mackenzie also noted that alternative, eastward-flowing pipeline capacity would not be sufficient to meet gas demand in Eastern Europe throughout a six-month disruption despite drawing upon all available storage volumes.
However, due to a mild winter European gas demand has been substantially lower than 2013 levels in the first four months of 2014, resulting in storage inventories reaching record levels, supported by spot prices dropping to levels below US$7/million British thermal unit (mmbtu). These robust storage levels should further limit the risk of unmet gas demand in Europe in the event of a prolonged disruption. In addition, increased availability of global LNG supply through the summer, a consequence of unseasonably low Asian LNG demand following a mild winter, will also limit the price pressure for additional LNG requirements.
In addition, in April 2014 Wood Mackenzie used its global gas model to assess the implications of a four-month disruption on Ukraine and concluded that summer demand could be met by indigenous sources of gas. Nevertheless, available storage and proposed reverse flow capacity would not be sufficient to avoid unmet demand during winter 2014/2015. However, Ukraine itself has increased its gas storage inventory to 13 bcm over the last couple of months to try and alleviate the impact of a disruption of Russian gas flows and progress has been made to increase reverse flow capacity. Up to 17 bcm per annum of reverse flow capacity could be available – from Slovakia, Poland and Hungary- by the start of 2015, reducing the risk of unmet demand.
Fundamentally, the 2014 dispute is different to the 2006 and 2009 disputes which both resulted in a gas supply short-fall in Europe. This time gas demand is at its lower summer levels, Europe has built up substantial gas volumes in storage and the European Commission has been a central part of the negotiations. In contrast to previous disputes – where an agreement was reached quickly to re-start gas flows to Europe – this time Gazprom and Naftogaz can afford to take longer to reach a settlement as the dispute moves into arbitration.
Press Release, June 20, 2014