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Tuesday, December 7, 2021

Gas prices. Europe increasingly dependent on gas from Russia – Bank Pekao report

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Russia is responsible for more than 40 percent of gas supplies to Europe. Bank Pekao economists have indicated that the dependence on gas imports from this direction has been growing in the Old Continent for several years. Meanwhile, Russian gas prices have risen significantly. “In May 2020, the prices of Russian gas in Europe were at the lowest level in 30 years, and then in just a dozen or so months they reached a level close to the record” – noted economists.

Bank Pekao economists assessed that “in recent years, gas price volatility in Europe has definitely increased, showing particularly strong amplitudes during the COVID-19 crisis (and during its recovery).” “In May 2020, the prices of Russian gas in Europe were at the lowest level in 30 years, and then in just a dozen or so months they reached a level close to the record” – they added.

Bank Pekao

As they noted, this situation has a significant impact on the gas market in Europe, which from year to year is becoming more and more dependent on gas imports, including – to a large extent – from Russia.

“In the past decade, the popularity of natural gas in EU countries has clearly decreased. Despite the renewed increase in consumption in recent years, its level in 2020 was over 10% lower than the peak in 2010. For several years, however, the dependence on imports has definitely increased , of which over 40 percent are supplies from Russia (the main trading partner in this area), Pekao economists reported.

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The price for Russian gas in August this year. compared to May 2020, it is 9.8 times higher, and the gas price on the Amsterdam exchange in September this year. compared to May 2020, it is 8.8 times higher.


Demand for gas

The report estimated that extreme weather events in the northern hemisphere in the first quarter of this year sharply increased the demand for gas, also stimulated by the economic recovery, and on the other hand, last and this year “were full of unplanned production stoppages limiting the supply”. It was recalled that in 2019 gas consumption in Europe was at the level of 537 billion m3, and in 2020 the consumption of blue fuel decreased by 3%. up to 522 bcm. Experts forecast that in 2021 gas consumption in Europe will increase to 545 billion m3.

“The dynamically growing demand for gas in Asia (especially in China) was satisfied primarily by increased LNG supplies. This year, however, was partially lacking for Europe – LNG imports to the Old Continent recorded significant drops,” the report reads. As economists have pointed out, Asian countries have a limited natural gas import infrastructure, compared to, for example, the European Union, and they use this raw material mainly from sea supplies of liquefied natural gas (LNG).

“The result of the strong increase in demand for natural gas this year is a significant increase in LNG supplies to the Asian continent – in China alone in the first 8 months of 2021 they were over 30% higher than in the corresponding period of 2019 (despite the simultaneous dynamic development pipeline imports from Russia), the bank said.

The bank’s economists noted that the lower gas supplies to Europe were accompanied by a decline in production (the effect of shrinking resources), and the decline in imports from Russia was not compensated by increased supplies from other directions. “The situation was mainly saved by gas from European storage facilities, which, however, resulted in a partial drainage of strategic reserves of this raw material, which in October 2021 were still more than 20% lower than 2 years ago. “- they added.

They emphasized that Russia has limited gas supplies to Europe almost exclusively via the Ukrainian gas pipeline, which – apart from the pressure on Ukraine – which has lost revenues from gas transit, but also on the EU, has been the main factor behind price increases in recent months and an element of pressure aimed at faster finalization the Nord Stream 2 gas pipeline.

Economists recalled that the reaction to the sharp increase in European gas prices was already in the third quarter of this year. quite a significant reduction in its consumption – mainly in the energy sector, where there has been a shift in production from gas-fired power plants towards coal and nuclear units. “A decline in demand is also expected throughout 2022” – forecasts Bank Pekao.

Gas prices in 2022

According to Pekao economists, the most important factors that may affect the gas price in 2022 are: weather conditions in the winter season 2021-2022; unblocking some imports from Russia – dependent on the finalization of Nord Stream 2 and Gazprom’s decision, as well as the pace of growth in demand from China, which is a competition for supplies to Europe.

PAP / Adam Ziemienowicz

As they assessed, the demand and supply crisis in Europe “could not remain without impact on the domestic market”, and the scale of price increases on the Polish Power Exchange is comparable to other exchanges on the Old Continent.

They also emphasized that Polish companies are also feeling more and more strongly about the rapidly growing gas prices in Europe. “The increase in gas spot prices on the Polish exchange market in recent months has reached a similar scale as in Western Europe. It also forced three increases in gas tariffs for households approved this year by the Energy Regulatory Office – successively in April (growth by 5.6%), July (increase by 12.4%) and in September (increase by 7.4%), in total by more than 27%. At the same time, the statements of PGNiG authorities show that in the following year applications for further increases are inevitable “- they added.

Gas supplies from Russia to Poland

Economists pointed out that rising gas prices are another cost problem for the industry, which is by far its most important recipient. This applies especially to certain industries – fuel, chemical, mineral, metal, energy and mining.

“Some industries will be acutely affected by the high costs of gas and will try to pass them on to their customers (an additional inflationary factor). In the West, some industrial plants (e.g. fertilizer plants) have temporarily suspended production for this reason” – indicated.

The representatives of Bank Pekao pointed out that Poland “is constantly reducing its dependence on supplies from Russia, although it is still high”. “From 2023, the possibilities of their diversification will increase significantly with the completion of the Baltic Pipe. However, it would not protect against the effects of the current price crisis” – emphasized the economists.

PAP / Maciej Zieliński

Main photo source: Gazprom

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