After record-high gas prices and extreme price volatility in Q4 2021, European policymakers are now warming to the idea of a procurement rethink.

Specifically, the European Commission (EC) is now considering the creation of European Union (EU) strategic gas reserves.

Similar to the US strategic petroleum reserve, the creation of EU strategic gas reserves would reduce volatility in wholesale energy markets, as it would reduce the EU’s reliance on imports. 

Extreme price volatility has been evident across European energy markets over the last few months. Contracts in the UK, for instance, have been losing over 100p/th on any given day.

The National Balancing Point (NBP) Jan-21 gas contract settled at c.432p/th on 22 December and lost over 100p/th in value on 23 December. 

Such price volatility has prompted policymakers to intervene, in an effort to protect residential customers, businesses, and suppliers.

The European Commission believes that building strategic gas reserves is a better solution for long-term price stability, rather than relying on solutions such as bailing out suppliers, providing state subsidies, or negotiating long-term contracts with Russia.

Government-controlled gas reserves

For much of Europe, low storage inventories in 2021 have led to an over-reliance on imports from Norway and Russia.

Statements made by Russian President Vladmir Putin, and auction activity by Gazprom, has led to extreme volatility in the European and UK market.

In order to avoid such volatility going forward, the establishment of government-controlled strategic reserves of gas held in storage beyond existing commercially-owned inventories could play a crucial role in protecting European gas prices from future price spikes. 

Several EU countries currently do have some regulation in the storage sector that requires minimum stocking levels, including France and Italy, but there is no centralised policy.

The European Commission for Energy has previously shown some support for the idea of European strategic gas reserves, as this would provide the bloc with stable and predictable supplies. 

Kadri Simson, the current commissioner for energy at the European Commission, has pondered the idea of EU strategic gas reserves since the beginning of 2021, and there is a strong possibility that a decision with regards to its approval could be made in the first half of 2022. 

The joint procurement organised by Brussels to purchase COVID-19 vaccines for all EU countries has reinforced the idea that joint procurement of EU strategic gas reserves is a viable solution, ensuring the European market remains well supplied. 

A long-term solution

The creation and procurement of gas and storage sites for government-controlled strategic gas reserves is a solution for the long term. 

The creation of storage sites, according to European members of parliament, could take up to three years. 

And with wholesale energy costs at record highs for 2022 and 2023, in the interim the European Commission has proposed introducing minimum gas stocking levels for Winter 2022. 

By legislation, the European gas market will be required to be a certain level ahead of the start of the winter contract. 

There are a number of points that need to be considered by policymakers before the EU strategic gas reserve is approved.

Firstly, when policymakers consider gas storage, would gas be stored in underground storage sites via injection, or in floating storage and regasification units? 

In terms of price economics, which would be the least inexpensive and with the net zero carbon targets in place, how much are European governments willing to invest in these infrastructures?

Secondly, the creation of strategic reserves will impact current hub markets. How current prices react to this news needs to be considered before any policy is approved.

Lastly, storage capacity in the EU is unevenly distributed with large facilities In Italy, France, Germany, and Netherlands.

However, geological restraints mean that only small gas capacities can be stored in east and southeast Europe to allow for continuous gas supplies. 

For EU gas strategic reserves to work efficiently, storage sites need to be spread across Europe and new interconnectors need to be built, with the purpose that all member states can benefit from stored gas.

What’s next?

Currently, there is no consensus amongst European policymakers on how a joint gas purchase system or how the European strategic gas reserve will work in principle. 

However, policymakers remain committed to ensuring a system is in place to strengthen the EU’s gas storage policies. 

There is a strong possibility that Kadri Simson will approve a joint procurement strategy for EU member states in the first half of 2022, and by means of legislation, there will also be a requirement of a minimum gas storage levels for member states heading into Winter 2022.