2023-09-10 12:39:24
Russia’s invasion of Ukraine 18 months ago shook Europe in every way. The war completely overturned the continent’s economy, and one of the biggest challenges was the solution to the sudden energy crisis, which the EU eventually got through without major shock. Let’s see what can be expected in this year’s heating season. Faced with the prospect of Russian gas drying up, there were fears that Europe’s energy infrastructure would not be able to cope with the winter of 2022-23, which threatened to collapse economies. However, a mild winter, efforts to reduce energy consumption and purchasing from alternative suppliers helped avoid an energy disaster. Last heating season, Germany, Italy and other gas-dependent nations weaned themselves off Russian dependence without significant energy shortages, and there has been more good news since then. Energy prices continued to fall in 2023, while Europe’s gas storage level reached 90% capacity three months ahead of the November target and might reach 100% in September. Some politicians, such as German Energy Minister Robert Habeck, say the worst part of the energy crisis is over. But as we will soon see, this joy may be a little premature. European gas prices 2020-23 (US$/MMBtu) Concerns regarding liquefied natural gas (LNG) stocks have seen the share of EU gas imports from Russia fall from 39% to 17% between 2022 and early 2023. To cope with this shift, the EU is much more dependent on LNG shipments than before. The total share of LNG in EU gas imports increased from 19% in 2021 to approximately 39% in 2022. This is largely due to rapid infrastructure upgrades, which aim to increase LNG capacity by a third between 2021 and 2024. (In fact, 13% of EU LNG imports still come from Russia, and Russian shipments have increased significantly since the invasion). This increased LNG use makes European countries vulnerable to market volatility. For example, we have seen Europe’s benchmark gas price rise in recent weeks due to concerns regarding strikes at Australian LNG plants. This shows that stocks remain tight and potential disruptions in the world market will have a major impact on price developments. In order to coordinate the demand for LNG, the European Commission introduced the EU Energy Platform. It is an IT platform that facilitates the joint purchase of the energy carrier for the suppliers of the member states. However, it is questionable how functional the device is as it has yet to be tested. Moreover, this type of state intervention can backfire and potentially undermine the functioning of the market. Potential difficulties in obtaining pipeline gas As for gas coming through the pipeline system, in this category Norway has overtaken Russia to become Europe’s leading supplier, supplying 46% of needs in early 2023 (compared to 38% a year earlier). However, this extra load has put a heavy strain on Norway’s gas infrastructure. In May and June, due to prolonged maintenance work, the flow slowed down, pushing up prices. And this once once more highlighted how limited the possibilities of the European market are at the moment. If Norway has to carry out further extensive maintenance work in the future, this might once more lead to obstacles. Meanwhile, the EU still needs to buy regarding 22 billion cubic meters of pipeline gas from Russia this year. This corresponds to approximately 11% of all pipeline gas used by the region in 2022. Most of the resources come through Ukraine, and with the current Russian-Ukrainian transit agreement unlikely to be renewed following 2024, the current supply route is at risk. As part of its shift away from Russia, the EU managed to reduce its gas consumption by 13% in 2022 ( once morest the 15% target), according to the International Energy Agency. However, war-weary EU member states may not fare so well on this front in the coming months. Some states did not even take part in the implementation of the strategy aimed at avoiding Russian gas last winter. Only 14 of the 27 EU member states have introduced a mandatory energy policy, while eastern states such as Poland, Romania, Bulgaria and Hungary have done little to reduce consumption. A potential shortage of physical gas on the continent might undermine solidarity efforts. What can be expected for the future? The harsh reality is that Europe will have to hope for at least two to three more winters of mild weather and global LNG supplies without significant interruption to avoid a significant rise in gas prices and a potential energy crisis. As things currently stand, European gas prices are around 50% above their pre-invasion average, hitting households and businesses alike. There is growing concern that continued high energy prices might facilitate a reversal of industrialization, as large companies in energy-intensive industries have begun to move production outside the EU. The good news is that pressure is likely to ease from the mid-2020s. At that time, a significant amount of LNG will arrive from the United States and Qatar, and the market will rebalance. According to the EU’s energy saving plan, the continent’s gas demand must decrease by 40% by 2030, which also enhances stability. Overall, Europe appears to have succeeded in turning away from Russian gas pipelines, but remains exposed to volatility in global gas markets unless it significantly reduces its gas demand in the coming years.
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