EU Gas Markets Risk Economic Fragmentation as Pipeline Transport Costs Split a Physically Connected Grid

EU Gas Markets Risk Economic Fragmentation as Pipeline Transport Costs Split a Physically Connected Grid Kpler warns rising pipeline charges are creating price divergence across European gas markets, while demand is forecast to fall 2.5% to 314 bcm this year. Europe's gas markets risk becoming economically fragmented despite being physically interconnected, an analyst with trade intelligence firm Kpler told Montel. Rising pipeline transportation costs following the energy crisis are creating price differentials across regions that were previously well-arbitraged. The same molecule of gas now costs meaningfully different amounts depending on where in Europe it is consumed.⁸ Kpler forecasts EU gas demand will decline 8 bcm, or 2.5%, this year to 314 bcm, driven by high prices, ongoing geopolitical risks, and increased renewable energy penetration. Northwest Europe is expected to see demand fall 4 bcm to 144 bcm. Southern Europe faces a steeper decline of 6 bcm to 86 bcm. The remaining EU-27 countries are projected to add 2 bcm, partially offsetting the declines elsewhere.² The fragmentation risk matters for gas traders because it undermines the assumption that ICE Endex TTF front-month is a reliable proxy for European gas prices as a whole. If transport costs drive permanent wedges between regional hubs, traders who hedge against TTF may find their positions do not reflect the price their physical counterparts actually pay.⁸ Europe's move away from Russian energy has reduced one vulnerability but created another. A Dutch think tank warned that growing reliance on US LNG exposes the continent to new economic shocks. Europe swapped dependence on Russian pipeline gas for dependence on seaborne LNG, and the Hormuz crisis has demonstrated exactly how fragile that supply chain is.⁷ Some industry experts told Montel that Europe will be forced to reconsider purchasing pipeline gas from Russia. Gas prices at current levels mean storage refill economics are marginal, and historically low storage levels heading into the Hormuz crisis left the continent exposed. The argument is not political preference. It is arithmetic.¹ Russia's gas pivot to Asia has not delivered the volumes Moscow expected. Russian natural gas production declined 3.2% year-on-year in the first half, to approximately 334.8 billion cubic metres. LNG production fell 5.1% to around 16.5 million tonnes. Power of Siberia pipeline exports to China are projected to increase more than 20% year-on-year, reaching its maximum capacity of 38 bcm annually. But Chinese demand has not replaced the European market Russia lost.³ Europe's Azerbaijan gas strategy carries its own irony. Western countries have struck a string of gas agreements with Baku, even during COP29 climate talks. But the deals could ultimately benefit Russia, since Azerbaijani gas infrastructure connects to Russian networks, and Moscow retains influence over Central Asian and Caspian gas flows.⁶ Global gas prices have soared on fears of lengthy Hormuz disruption, CNBC reported. Around 25% of Europe's total gas supply is LNG, according to Chris Wheaton at Stifel. With that quarter under threat and Russian pipeline gas politically off-limits, the remaining supply must flow through an increasingly expensive European pipeline network, widening the regional price gaps that Kpler identified.⁵ Russia is eager to expand its energy market in China, where demand is expected to grow as coal is phased down. But Power of Siberia is at capacity, Power of Siberia 2 is stalled, and Russian gas production is declining, not growing. Moscow cannot simultaneously supply Asia and maintain optionality for a European return.^4,3 The signal to watch is whether ICE Endex TTF front-month diverges further from southern European hub prices. If the spread widens through the summer injection season, it confirms that economic fragmentation is already priced into the physical market. Traders positioning on TTF as a pan-European benchmark may need to start hedging the basis risk that Kpler is warning about.^8,2