European Shortages Show Gas Still Matters, But Crisis Could Speed Growth of Alternatives
The surge in oil and gas prices has reminded Europeans that they still need hydrocarbons and reminds them why they want to replace them.
The gas supply crisis in Europe has set off a surge in demand for natural gas from countries other than Russia, drowning out the talk about a rapid transition away from hydrocarbons.
But that transition is still in progress, and the surging prices are a mixed blessing for oil producers.
A report from Enverus said because of oil price spikes and a slowing global economy, demand growth for crude this year will be half of what had been expected.
And a report from DNV predicts that despite the current focus on natural gas supplies, by 2030 renewable energy’s share of the European market will be higher than was expected before Russia invaded Ukraine, triggering sanctions that are changing the energy markets.
The reports offer a reminder that while the horrors of war offer a short-term economic upside for oil, gas, and coal producers outside of Russia, those high prices are not killing long-term plans of those pushing for a transition.
Enverus said oil growth demand is expected to rise by 1.5 million B/D this year, which coincides with the volume of Russian oil cargos cancelled in early March by European buyers worried about the “reputational damage” associated with those deals.
While the mass disruption will create enormous opportunities for those with LNG to sell and result in some record profit reports, Enverus predicted that it will slow global economic growth and further erode oil demand ahead.
For US gas exporters, the demand that matters at the moment is filling the huge supply gap created by Europe’s sudden urge to rapidly phase out imports from Russia, which are equal to about one third of its gas demand, which exceeds the volumes of LNG available from suppliers on short notice.
Filling the Gap
DNV assumed a 40% drop in Russian gas imports this year, 80% less in 2023, and 90% less by 2024, with no imports after 2024.
By 2024, its modeling described a scenario where gas from other regions will fill nearly 66% of the demand, and increased production within Europe will equal 7% of the gas previously supplied by Russia.
Adding in other hydrocarbons (e.g., coal imports will rise as oil falls), about 70% of the Russia gas gap will be filled, with the rest of the energy coming from rising supplies from other sources and reduced demand due to greater energy efficiency.
The three biggest sources of energy filling the imported gas gap are added European gas production, electricity produced by nuclear plants that would have been shut down were it not for this crisis, and the energy saved by additional conservation measures.
The expected gains in bioenergy—power generated from sources such as methane produced from garbage—nearly exceed the rise in solar and wind, which are slowly growing.
The rush to meet current gas needs could alter the fuel’s future use as a feedstock to make blue hydrogen.
“Europe is in dire need of gas to replace the phaseout of Russian gas; it is unlikely that significant amounts of surplus natural gas will be available for producing blue hydrogen,” the DNV report said.
Higher-priced gas would also be a problem for blue hydrogen producers who must bear the cost of injecting the carbon dioxide produced by the process into underground storage to meet carbon emission limits in Europe.
Logically, green hydrogen should also suffer because the renewables-generated power needed to convert water into hydrogen is going to be needed by consumers, who are likely to be paying 12% more for electricity by 2025.
But DNV sees the opposite happening because increasing supplies of both renewable energy and green hydrogen remain a priority of European policy makers. As a result of the strong support for that emerging sector, the report predicts the growth of green hydrogen supplies will be faster than expected.
The Bigger Picture
If European gas producers follow through on their plans to phase out Russian gas, which the report admits is subject to huge uncertainties about how the war will play out, it is likely to be a significant problem for Russia as well.
While demand from China and other Asia nations is growing, there is no quick way to build the pipelines and LNG facilities needed to deliver gas to Asia from eastern areas of Russia now supplying Europe. DNV predicted that bottleneck would reduce demand in those areas 24%.
Elsewhere in the world, high prices should push up gas and oil production, but those same economic signals will be encouraging consumers to consider buying more fuel-efficient cars and make alternative energy sources more cost competitive.
But price booms never last forever. “Overinvestments will result in lower oil and gas prices in the second half of this decade,” according to the report. The forecast indicates a modest increase oil demand.
Demand for gas will be down in Europe, which is why DNV is expecting a 2.3% decrease in emissions by 2030.
Globally, the impact of rising prices has been less jarring than in Europe, and the report said any changes in predicted emissions later this year are likely to be “minor.”