Wood Mackenzie outlines scenarios for Europe as stability of Russian gas flows ‘remains uncertain’

The stability of Russian gas flows to Europe remains uncertain, despite the reopening of the Nord Stream 1 pipeline, as further disruptions are expected as winter approaches, Wood Mackenzie stated, outlining two potential scenarios.

Nord Stream restarted gas transmission yesterday, 21 July, after a ten-day shut down due to annual maintenance at 63 million cubic meters per day (mcm/d), which is 40% of the pipeline’s overall capacity.

According to analysis by Wood Mackenzie, although the European gas market has reacted with prices down by 5%, the stability of Russian gas flows is by no means a given.

“Further disruptions are expected as Russia seeks to increase political and economic pressure on Europe as winter approaches,” said Penny Leake, research analyst for Europe Gas and LNG at Wood Mackenzie.

“It remains unclear what Russia will do. There is a risk that Nord Stream flows will reduce below the 40% capacity seen before the maintenance.”

This way, Russia will continue receiving revenues from gas exports, disincentivizing the much-needed early gas rationing recommended across Europe, thus exposing European countries to more pressure this winter, the analysis said.

Potential scenarios

Wood Mackenzie has defined two scenarios for what may come for Russian gas flows and their impact on Europe in the coming months.

The first scenario claims that if Nord Stream flows remain at 40% of capacity and imports through other routes remain at the levels seen before Nord Stream maintenance, Europe will be able to refill storage to more than 80% by 1 November.

“Gas demand is expected to be 12% lower than previous winters, due to high prices and demand mitigation measures, including the re-introduction of old coal plants, and Wood Mackenzie anticipates Europe will be able to get through the heating season with a comfortable level of storage under normal weather conditions,” Leake stated.

However, cold winter in Europe and Asia could result in up to 20 billion cubic meters (bcm) of additional demand (7% of total) and reduce availability of LNG for Europe.

This could bring storage levels down to approximately 10 bcm by the end of March 2023, which is the minimum level Wood Mackenzie analysis indicates is required to ensure the appropriate functioning of storage facilities.

As a result, some limited demand curtailment may be required to manage peak demand episodes, unless additional supply is secured, Leake added.

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Scenario 2 says that if Nord Stream flows reduce to zero by August this year, Europe will only be able to refill its storage to 70-75% by winter, and could finish the heating season with only approximately 10 bcm of gas in storage, risking some demand curtailments.

But if winter is unusually cold, there is a risk gas in storage could run out by the end of February 2023, with Europe risking as much as 20 bcm of demand curtailments – the equivalent of 7% of total gas demand or 30-35% of all industrial demand in winter.

In all scenarios, the impact will differ by countries, Wood Mackenzie stated, emphasizing that the ones most dependent on Russian gas, such as Germany, Austria, and Central and Eastern Europe, will be most exposed.

“Under these conditions, the only material upside that could limit demand curtailments would be bringing back production at Groningen – which brings with it political challenges,” Leake concluded.

“One thing is clear – volatility and uncertainty will persist, meaning that demand and solidarity measures across Europe are required now so we can avoid leaving European gas balance to chance.”

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