Gas shortages: what is driving Europe’s energy crisis?

For those who reside in continental Europe or the UK the pure gasoline that heats your own home this October is costing no less than 5 instances greater than it did a yr in the past. The explanations are diversified: amongst them are earthquakes within the Netherlands, China’s try to wash up its air and Russian president Vladimir Putin’s energy politics.

However the influence is obvious. The document costs being paid by suppliers in Europe and shortfalls in gasoline provide throughout the continent have stoked fears of an power disaster ought to the climate be even marginally colder than regular. Households are already going through steeper payments whereas some power intensive industries have began to sluggish manufacturing, denting the optimism across the post-pandemic financial restoration.

And whereas some within the gasoline trade consider the value surge is a short lived phenomenon, attributable to financial dislocations owing to coronavirus, many others say it highlights a structural weak point in a continent that has change into too reliant on imported gasoline.

“Europe principally has two choices for extra gasoline provides as it’s so closely reliant on imports: Russia or cargoes of liquefied pure gasoline,” says Tom Marzec-Manser at ICIS, a consultancy. “Neither of these sources have labored as Europe would possibly hope throughout this disaster.”

The transition to cleaner power resembling wind and photo voltaic has had the impact of pushing up demand for gasoline — typically seen by the trade as a medium-term “bridging gas” between the eras of hydrocarbons and renewables. However the long-term goal of making web zero economies within the UK and Europe has additionally sapped traders’ willingness to place cash into growing provides of a fossil gas they consider could possibly be largely out of date in 30 years. In the meantime, Europe’s home gasoline provides, run low by a long time of fast growth, have declined by 30 per cent up to now decade.

Europe’s makes an attempt to be a worldwide chief on local weather change have arguably fed into the broader modifications available in the market. They’ve pushed the fast-growing economies of Asia to maneuver away from coal, solely to search out that international locations resembling China and India at the moment are rivals for a similar provides of LNG that Europe has come to depend on from international locations such because the US and Qatar.

The gasoline trade used to function nearly fully on point-to-point pipelines that saved regional competitors to a minimal. The fast progress of the LNG trade means seaborne cargoes have now created one thing extra akin to a worldwide market just like oil.

“Yearly China connects as much as 15m houses in its coastal cities to the gasoline grid — that’s like including a Netherlands and a Belgium value of demand yearly,” says Henning Gloystein at Eurasia Group, a consultancy. “So when it will get chilly in China the gasoline value goes up within the UK and Germany.”

European governments argue that “risky” gasoline costs reinforce the necessity to speed up in the direction of renewable power. However there are issues that the issues might set off a backlash in opposition to renewables if shoppers begin to consider the value of the power transition is just too excessive.

“Some individuals try to painting this as the primary disaster of the power transition,” says Fatih Birol, head of the Worldwide Vitality Company, which advises governments and is basically funded by OECD nations. “They might be incorrect, but when that is the dominant voice coming from this example it might change into a barrier to the insurance policies we have to enact to make the power transition work.”

‘Swing provides’ begin to dry up

The world’s oil consumption stays comparatively steady all year long with solely small fluctuations between the seasons. Gasoline demand, nonetheless, is way stronger every winter owing to its position in home heating.

Whereas there’s a baseload of gasoline demand all yr from electrical energy era and trade, resembling fertiliser and metal producers, the winter peaks might be far larger throughout the northern hemisphere. About 40 per cent of whole gasoline consumption within the UK goes on to heating houses, largely condensed right into a 5-6 month interval.

The trade manages these cycles in varied methods. The chief one is storage — pumping gasoline underground through the low-demand summer time months that may then be known as on when the climate turns chilly. The opposite is entry to swing provides that may rise or scale back as wanted. One of many massive issues the UK and Europe faces, nonetheless, is that the principle sources of those provides aren’t working as they as soon as did, creating the circumstances for extra risky gasoline costs.

Groningen, in the Netherlands, is Europe’s largest gasfield, but it has seen its huge supplies slowly depleted
Groningen, within the Netherlands, is Europe’s largest gasfield, however it has seen its large provides slowly depleted © Jasper Juinen/Bloomberg

Europe’s largest gasfield, Groningen, within the Netherlands, was designed to be a major swing provider, with manufacturing boosted or suppressed to assist steadiness provide with demand, permitting different gasfields to supply freely all yr spherical. However Groningen has change into a legal responsibility for the Dutch authorities. As its large provides slowly depleted, small earthquakes had been triggered within the surrounding space, inflicting harm to houses and companies.

As political stress mounted, the choice was taken to start shutting it down, with the sector now pumping three quarters lower than in 2018. “It takes away one supply of flexibility,” says Laurent Ruseckas, Emea government director of gasoline and renewables at IHS Markit.

The UK faces related points. It has a lot decrease storage capability than most international locations in Europe — a legacy of being power impartial within the heyday of North Sea provides — a place that has been worsened by the shutdown of the Tough storage facility, off the east coast of England, three years in the past. That call minimize the UK’s storage capability from 15 days of winter demand to at most 5.

The excellent news for Europe is that it has extra LNG import capability than another area. The UK imported nearly 20 per cent of its gasoline in 2019 by means of LNG shipments, alongside pipeline flows from Norway and the EU to offset declines in home manufacturing. The unhealthy information, nonetheless, is that, Asian gasoline demand has grown so quickly — increasing by 50 per cent over the previous decade, led by a tripling in consumption in China — that LNG cargoes have change into a lot more durable to safe in 2021. What was presupposed to be a dependable supply of versatile provides instantly seems rather a lot much less so.

For example, the UK authorities not names Qatar, one of many two largest LNG exporters, as a important provider. The vast majority of Qatar’s cargoes sail east, the place patrons have been paying a premium to draw shipments.

“LNG will stay tight,” says James Huckstepp, Emea gasoline analyst at S&P International Platts. “So it should come right down to trade slicing demand to steadiness the market if it’s a chilly winter.”

Wind turbines and electricity pylons dominate the landscape at Ince Salt Marshes near to chemical and manufacturing plants on the River Mersey estuary in Runcorn
Whether or not renewable developments could have the identical capability to stabilise international power costs if gasoline provides stay tight stays untested © Christopher Furlong/Getty Photos

Business performs Russian roulette

Arguably an important consider all of that is Russia. Continental Europe will get greater than a 3rd of its whole gasoline provides from Gazprom, Russia’s state-backed monopoly pipeline provider. It’s a relationship that has developed over a long time, however has extra lately been poisoned by the fallout from Moscow’s 2014 annexation of Crimea from Ukraine.

The EU is usually characterised by critics as weak to its reliance on Russian gasoline provides. However the relationship is extra complicated. The EU initially pushed for a Russian shift away from long-term contracts linked to grease costs, a transfer that not directly created a pricing system extra reflective of gasoline market dynamics.

Nevertheless, Gazprom’s reliability has been known as into query this yr. A protracted 2020-21 winter meant storage services in each Russia and continental Europe have been drained to low ranges. And Gazprom has finished little to assist Europe refill, declining to ship extra provides through Ukraine past what had been secured beneath long-term contracts.

Ukraine and different international locations in jap Europe have accused Russia of attempting to “weaponise” gasoline provides, partly to stress Berlin to speed up the approval of the politically controversial Nord Stream 2 pipeline, which can bypass Ukraine to ship provides direct to Germany by means of the Baltic Sea.

In September, Putin derided “good Alecs” within the European Fee for pushing for market-based pricing, suggesting they had been at fault for the surge in costs now threatening European economies. “The Russian view is the EU requested for this world,” says one senior western buying and selling government. “Now they’re welcome to take pleasure in it.”

The gasoline trade is fiercely divided over whether or not Russia is enjoying video games with provides. In a single camp analysts argue that Moscow has needed to prioritise filling its personal storage services and that home consumption has risen lately, leaving it with much less gasoline to export.

The logo of the Nord Stream 2 gas pipeline project is seen on a pipe at the Chelyabinsk pipe rolling plant in Chelyabinsk, Russia
The brand of the Nord Stream 2 gasoline pipeline mission is seen on a pipe on the Chelyabinsk pipe rolling plant in Chelyabinsk, Russia © Maxim Shemetov/REUTERS

Others suspect that whereas there are components of fact in Russia going through challenges in boosting provides to Europe, there has additionally been a level of opportunism on Gazprom’s half — each to boost the gasoline value and to additional Moscow’s political ambitions. They consider these stretch from sealing approval for NS2 to reminding Europe to not neglect fossil gas producers in its rush to decarbonise. The IEA stated final week it believed Russia might ship roughly 15 per cent extra gasoline to Europe this yr.

“Both Russia is enjoying video games due to NS2 or they don’t have sufficient gasoline,” says Eurasia Group’s Gloystein. “[Either way] you may’t depend on them.”

It means Europe’s three important sources of swing provides have change into much more precarious all on the identical time.

Marzec-Manser at ICIS Vitality says that whereas LNG provides ought to enhance within the coming years as extra initiatives come on stream, shoppers have to brace for a interval of upper power prices. “No less than till the summer time of 2023 we must always assume wholesale costs aren’t going to fall again to the degrees of the pre-Covid years,” he provides.

Long run Europe might face much more competitors for gasoline provides. Russia began supplying China with gasoline by means of the Energy of Siberia pipeline two years in the past, however it’s fed by fields which have by no means been used to produce Europe. Gazprom is now finding out development of Energy of Siberia 2, a pipeline that will join the fields in western Siberia — which do provide Europe — to China by 2030.

Ruseckas at IHS Markit says that this might give Russia the choice of “the place to ship the gasoline on a month-to-month foundation”, probably creating extra uncertainty round provides to Europe.

“Put your self in Russia’s sneakers,” provides Ruseckas, “I feel they valued this position of being Europe’s important provider and thought they need to be revered. But when Europe is to decarbonise, ‘why ought to we maintain being Mr Good Man?’”

The Datai coal mine in Mentougou, west of Beijing
The Datai coal mine in Mentougou, west of Beijing. As China has moved away from coal, it has joined the competitors for a similar provides of LNG as Europe © Greg Baker/AFP through Getty Photos

Investor confidence

Regardless of the short-term enhance to money flows and share costs, the broader gasoline trade has not uniformly welcomed document costs. “This isn’t ‘good for gasoline’ that costs are so excessive,” says Paddy Blewer on the Worldwide Gasoline Union, an trade physique.

The trade concern is that though it nonetheless hopes to behave as a bridge gas through the power transition, current value rises have left it besieged on all sides. Gasoline executives level to the US, the place the shale trade has sharply lowered coal consumption, resulting in a steep drop in emissions, and document carbon costs within the UK and Europe, which have the potential to do the identical.

The gasoline trade has been criticised for being disingenuous. Whereas it produces about half the CO2 of coal when burnt, methane emissions — an much more potent greenhouse gasoline — are launched throughout extraction and transportation and have come beneath rising scrutiny. French energy firm Engie backed out of a US LNG deal this yr, reportedly beneath stress from the French authorities over methane issues.

“Vitality must be reasonably priced, dependable and clear and the gasoline trade is struggling on all three fronts proper now,” Gloystein says.

The hope is that if the trade tackles methane emissions, as many corporations have pledged to, it may well nonetheless play a task. However the Worldwide Gasoline Union desires governments to suppose more durable about insurance policies — from drilling restrictions within the US to licensing delays within the UK — they consider have broken the trade’s means to maintain the world properly provided.

“Governments have attacked the provision facet whereas executing insurance policies that really enhance demand for gasoline, like larger carbon costs,” Blewer says. “We wish to minimize emissions however electrification hasn’t moved quick sufficient to say we don’t want hydrocarbons any extra, so the position gasoline can play ought to be recognised.

“However gasoline developments take a few years and billions of {dollars} so require traders to really feel assured they’ll get repaid,” provides Blewer.

A liquefied natural gas tanker is tugged towards a thermal power station in Futtsu, east of Tokyo, Japan
A liquefied pure gasoline tanker is tugged in the direction of a thermal energy station in Futtsu, east of Tokyo, Japan © Issei Kato/Reuters

For now, policymakers are largely left hoping that Russia follows by means of on hints that it might enhance gasoline provides this winter, or that the climate might be gentle.

Within the longer-term, slicing demand and discovering options is crucial. Some analysts have drawn comparisons with the Seventies Arab oil embargoes. They spiked costs however triggered an power effectivity drive and the event of assets in areas just like the North Sea and Alaska, ushering in nearly twenty years of comparatively low-cost oil.

Whether or not renewable developments could have the identical capability to stabilise international power costs if gasoline provides keep tight stays untested.

Birol on the IEA has urged governments to remain the course and to make use of this second to solidify plans to decarbonise rapidly, even when they should discover methods to cushion voters from the total extent of the gasoline value rise this yr.

“I can’t predict how lengthy or how harsh this winter might be,” Birol says. “However I do know that after winter, spring will come and clear power transitions will proceed.”

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