It is enough to freeze in one winter to be frozen.
In less than nine months, Europe will be heading for another cold winter, this time presumably without the gas supplies it previously relied on.
Russia’s invasion of Ukraine highlighted Western Europe’s dependence on Russian gas. It also highlighted the world’s reliance on unreliable and unaffordable fuel.
Around 44% of European gas comes from Russia. Germany is even more dependent with sometimes up to 75% of its gas coming from Russia.
In the months leading up to the conflict with Ukraine, Russia limited gas supplies by delivering only contractual minimums to Europe and no excess volumes beyond that. Europe had grown accustomed to the luxury of one-time summer purchases and when this gas failed to materialize there was no viable alternative available.
Europe entered winter with its gas storages unfilled.
The global LNG market is finely balanced. Shortages meant prices were rising to exorbitant levels. The Dutch TTF, the reference hub for gas prices in Europe, rose from less than €5/megawatt hour (MWh) in mid-2020 to nearly €20/MWh in early 2021. This week, March 7, 2022, prices closed at €227.20/MWh.
In less than two years, spot gas prices in Europe have increased by more than 4,500%. This is a boon for suppliers.
EU Dutch TFF Natural Gas Price (€/MWh) 2017-2022
Is are gas and LNG a suitable fuel in Europe?
To be a viable source of energy in an energy system, a fuel must be available for the intended consumption and at an affordable price.
For the past nine months, gas/LNG has not been affordable or available.
Its price volatility has been completely unsustainable and beyond the ability of rational buyers to handle. If purchased, the ripple effects, particularly in emerging economies such as Pakistan, have been severely detrimental. Gas, or any energy product with such volatility, is not a viable fuel.
In the interest of profitability, many oil and gas companies have seen Russia’s incursion into Ukraine as an opportunity to increase their sales of US and Qatari LNG.
The LNG process is inherently expensive and increases the cost of gas. Price aside, the announced solution of building more LNG import terminals ignores one major issue: timing.
Timing is key
Europe, like a drug addict, is addicted to Putin’s gas. This gas – any gas – is now too expensive to buy or burn and supplies are limited.
There is simply no LNG capacity available in the world to supply Europe with gas. Even LNG import terminals with excess import capacity have struggled to source supplies from other sources. Gas prices in Asia have increased several times from mid-2021 to date, with available LNG cargoes being redirected to Europe.
Any new import terminal in Europe will struggle to source supplies.
Can Qatar or US LNG fill the void?
Qatar, the world’s largest LNG exporter until last year, is massively increasing its capacity from 77 to 110 million tonnes per year by 2026. Therein lies the catch. There are at least four European winters before and if Qatari gas arrives.
Any American intention to fill Europe’s gas deficit fuels the short memory. Europe is indebted to a foreign power that has not treated it well. When President Trump was in power, relations between some of Europe’s biggest powers and the United States were decidedly frosty. Does Europe Really Want to Jump Putin’s Gas in Uncle Sam’s Lap?
Europe’s problem is energy for next winter, in just nine short months.
The fastest construction of any new LNG project ever is the Calcasieu Pass LNG project. The final investment decision for the first gas delivered was only two and a half years away due to the design of the plant. While other US LNG liquefaction developers have permits in hand, their designs and configurations indicate 3-4 years from construction to commissioning.
So how can Europe fill the energy gap?
The threat of Russian gas withdrawal is a concern for those dependent on fuel – it is also an opportunity.
Domestic household heaters and low heat applications in industry are likely to be replaced by more efficient electric heat pumps.
And the nation’s investment in energy independence will find local renewable energy faster to deploy than any fossil fuel project without the attendant national security risks.
As German Finance Minister Christian Lindner recently said, energy security is the new priority – renewable energy is energy for freedom.
Last week, the International Energy Agency (IEA) presented a 10-point plan to reduce dependence on Russian gas by a third in twelve months. The plan relies on more LNG imports, heat pumps, energy efficiency, temperature control and lower emissions production.
A more ambitious plan proposed this week by EU Green Deal chief Franz Timmermans suggests that the EU can cut its dependence on Russian gas by two-thirds by the end of this year and accelerate energy deployment. renewables, biofuels and green hydrogen – if governments implement a series of emergency measures to be proposed to the European Commission.
Europe’s choices will impact local populations and global gas markets.
Connecting Europe’s problems to the world
Europe’s gas supply crisis has sucked the world dry of LNG, forcing prices higher. Emerging Asian markets felt the brunt of this with no relief in sight.
Gas companies based in Europe have made super profits by not honoring long-term contracts to supply Asia. LNG cargoes are being diverted to the high priced European market. In the spot market, emerging Asian economies have been unable to obtain LNG as high prices have drained allocated subsidy money.
In Bangladesh and Pakistan, unaffordable and unavailable LNG has caused high electricity prices, blackouts and gas shortages.
High prices have killed gas demand in emerging Asia.
Gas/LNG an unreliable fuel
Globally, the position of gas and LNG as a fuel in the energy system is under extreme pressure from geopolitics, lack of competitive prices, extreme price volatility and inability to supply.
Mr. Putin’s misadventure in Ukraine forced Europe to abandon its dependence on gas.
Emerging Asia will follow quickly, as affordability and volatility will undermine their ability to purchase unaffordable fuel.
And a cold winter is fast approaching.
By Bruce Robertson, LNG/Gas Analyst, Institute for Energy Economics and Financial Analysis (IEEFA)