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The Stark Realities of Energy Supply

Europe is providing a stark look at the vagaries of geo- and energy politics and how quickly complacency can be shattered. Will its lessons learned be heeded by the rest of the world?

Natural gas is considered the transition fossil fuel to move the world toward a meaningful reduction in global greenhouse-gas emissions. But the clampdown of Russia’s natural gas supplies shifted the market’s dynamics, and the repercussions are being experienced around the world.

Europe is one of the hardest hit by this disruption in natural gas supplies. In a commentary posted on 18 July, Fatih Birol, executive director of the International Energy Agency, called for coordinated actions across Europe to prepare for the coming winter months and for worst-case scenarios of a complete shutoff of Russian gas and limited availability from other sources.

Although Russia resumed a reduced flow of gas to Germany via the Nord Stream pipeline on 21 July, there is no certainty about the fluctuations or duration of the flow. Birol wrote, “Europe is now forced to operate in a constant state of uncertainty over Russian gas supplies, and we can’t rule out a complete cutoff.”

The start of Europe’s winter heating season is 1 October. Birol called for action to fill European gas storage to adequate levels by reducing current gas consumption and to put that conserved gas into storage. High natural gas prices have led to gas conservation to some extent, but more efforts are required.

He wrote that the gas required to be saved over the next 3 months “is in the order of 12 billion cubic metres—enough to fill about 130 LNG tankers,” equivalent to 424 Bcf.

To lend some perspective to this, consider that US LNG exports averaged 10.1 Bcf/D in June. This reflects a 1.5 Bcf/D decrease from May because of a fire on 8 June that shut down Freeport LNG in Texas, according to the US Energy Information Administration (EIA). The agency expects US LNG exports to remain below average at 10.5 Bcf/D in the second half of this year.

The Freeport LNG shutdown, and the resulting lower demand for LNG export gas, decreased the US benchmark Henry Hub natural gas spot price. It fell by $1.27/MMBtu to$8.16/MMBtu on 9 June and averaged $7.70/MMBtu in June. EIA expects the spot price to continue to decline to an average of$5.97/MMBtu in the second half of this year.

European imports of LNG rose by more than 50% in the first 5 months of 2022 compared with the period a year earlier, according to Bernstein, a Wall Street research firm. Although a wide range of shippers have sent fuel to Europe, the major increases in its LNG imports have come from gas produced from US shale.

The increased European demand also increased the price of its imported LNG to nearly nine times what it was about 2 years ago, and those higher prices enticed LNG shippers away from Asia. European futures prices have been around $40/MMBtu. The Wall Street Journal compared that to more than$200/bbl for oil, about twice the price for Brent crude, the international benchmark, as of 22 July.

In most years, China, Japan, and South Korea have been the major markets for LNG. During the first 5 months of 2022, Asian imports fell by 8%—in part because of slowing demand from China caused by COVID-19 lockdowns.

Birol’s commentary began with this sentence: “The world is experiencing the first truly global energy crisis in history.” For Europe, the Russian invasion of Ukraine also sparked a cost-of-living crisis when oil and gas prices soared. Crises, by definition, require immediate and effective actions.

Germany, which has relied on Russia for about 50% of its gas supply for the heating of households, electricity, and industry, is implementing measures to conserve gas to fill its storage caverns. Besides urging citizens to take shorter showers, dial up refrigerator temperatures by 1°, and better insulate their homes, it is also considering rationing.

“It is categorically not enough to just rely on gas from non-Russian sources—these supplies are simply not available in the volumes required to substitute for missing deliveries from Russia,” Birol wrote.

He proposed five actions for an EU-wide approach to prepare for the coming winter.

• Introduce auction platforms to incentivize EU industrial gas users to reduce demand.
• Minimize gas use in the power sector by increasing coal- and oil-fired generation while speeding up deployment of low-carbon sources, including nuclear power.
• Increase coordination among gas and electricity operators across Europe, including demand-side peak-shaving measures.
• Decrease household electricity demand by setting cooling standards and controls, beginning with government and public buildings. Behavioral changes among consumers should be encouraged.
• Unify emergency planning, including measures for supply curtailments.

Russia invaded Ukraine on 24 February, about 6 months ago. Europe is providing a stark look at the vagaries of geo- and energy politics and how quickly complacency can be shattered. Will its lessons learned be heeded by the rest of the world?