EU gas demand was down by 11% in 2014, to a large extent caused by the exceptionally warm year with record high temperatures. 2014 was the warmest year on record in several countries, significantly reducing the need for heating. The effect was accentuated by the colder-than-average winter in 2013. The six largest gas consumers, accounting for ¾ of total EU demand, reduced their gas demand by 42 bcm.
By this, the downward trend in European gas demand continued last year. Since 2008, European gas demand has dropped by 100 bcm to 440 bcm (-18%), mainly due to losses in the power generation sector which continues to be squeezed by low coal and CO2 prices, and increased generation from renewable energy sources. Also, the sluggish economic situation has kept overall electricity demand and industrial activity low, putting additional pressure on gas demand.
Russia cut 2014 gas exports to the lowest in a decade as exports to Europe declined by 9% to 147 bcm. In comparison, gas exports from Norway were only marginally lower than in 2013. This could be seen as a sign that gas consumers are seeking to divert away from Russian gas due to the ongoing political situation. However, there could also be other explanations.
Most of Russian gas is still indexed to oil prices, with a lag of six to nine months. The impact of Brent falling to $46/bbl in January will hence show up in gas contract prices later this year. Gas buyers may have used their contract flexibility to optimise offtake within the gas year (from Oct 1st), waiting for prices to drop.
Also, Gazprom wants to protect its oil-linked contracts and as a result will not push additional volumes onto the spot market when demand is weak, which would lower prices. Norwegian gas producers have a much lower share of oil-indexed contracts, and few fields with the flexibility to adjust production.
(Data: Eurogas, Gazprom, Gassco, IEA)