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Self-inflicted energy crisis in Europe




Europe is in the throes of an unprecedented energy crisis. Some call it a seizure which, if left untreated, can be compared to Arab oil embargo 1970s with disastrous economic, social and political consequences. Brent crude is at a 5-year high of $ 84 per barrel as spot prices for natural gas are on the rise more than 500% year after year, forcing the switch from gas to highly polluting coal and putting the brakes on the EU’s green energy transition. Resurgence of post-Covid energy demand, extreme weather events (unprecedented heat waves and prolonged winters), supply chain disruptions and poor regional and global storage have all contributed to Europe’s current crisis. Russian supremo Vladimir Putin may have a reason to pop a bottle of champagne due to EU sanctions against the Kremlin. He says Europe has created a self-inflicted injury. He might be right.

By Samer Moses, Director of Global LNG Analytics at S&P Global Platts:

Europe is between a rock and a hard place. As global liquefied natural gas (LNG) markets have been strained for nearly a year, and Russia faces its own upstream and infrastructure challenges, the two main sources of flexible gas supply to the United States. Europe did not come forward. Given how depleted the region’s storage situation is, any tremor of bullish news, be it weather or supply outage, has the power to send markets looking for anchors. ever higher prices, with fundamentals dictating that the market will have to balance the destruction of demand, a dynamic already observed in industry in Asia and Europe.

This unfortunate confluence of factors, rare as it is, illustrates the concerns of many energy experts (including this author) about Europe’s hasty transition from traditional basic energy sources (gas, coal and nuclear) to intermittent renewable production. Europe’s blueprint for carbon neutrality has pushed member states to move away from long-term purchase agreements and adopt short-term prices, making the crisis even more costly for energy utilities and businesses. other consumers who are now looking for alternative fuel sources. Gas exporters like Russia and Qatar are ready to cash.

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The Qatari Minister of Energy, Saad Al-Kaabi said, we have a huge demand from all of our customers and unfortunately we cannot meet everyone. Qatar prefers East Asian customers who pay extra. The EU is no longer the primary market. This trend is consistent with exporters around the world. Coupled with a decline in domestic production, such as the exhaustion of the giant Groningen gas field in the Netherlands, the EU is forced to increasingly bid for imports. This coincides with an overall increase in demand for LNG across the world for use as a transitional fuel away from hydrocarbons.

At the same time, China is also in the throes of an energy crisis made worse by unprecedented flooding across the country, post-Covid supply chain disruptions and resurgent demand. To compensate for the lack of domestic coal production, China has double their LNG imports last year (another reason Europe ends up with less than normal supplies). More than 20 provinces have implemented rationing to cope with the worsening situation. Obtain energy supplies at all costs, the ruling Politburo has ordered, underscoring the giant economies’ dependence on imported coal and gas.

Russia, however, does not appear to be an outright market manipulator, is well placed to take advantage of unfolding market conditions as Europe seeks out all gas supplies at outrageous prices. Indeed, the gas shortage is used by the Kremlin to tout the need for Nord Stream 2, an ambitious (and highly controversial) geostrategic bet by the Kremlin to pump 55 billion m3 of gas directly into Germany via an undersea pipeline. The project may be presented by some German manufacturers and Russian policymakers as a boon to Europe’s energy security, but the reality is that the pipeline will only make the EU more dependent and vulnerable to the vagaries of the Russian state-owned enterprise. Gazprom.

Some time ago Gazprom CEO Alexei Miller told me that his company was half a business and half a political arm of the state. Since then, the shift is probably 40-60 in favor of the state.

European leaders were quick to assert that Russia is now arming the gas markets to obtain the approval of Nord Stream 2. Currently, Gazprom sends natural gas by pipeline through Ukraine. A new pipeline would bypass the besieged country. By law, Russian energy producers must satisfy domestic demand before exporting, which means that a shortage of exports could be attributed to domestic stock shortages.

IEA Executive Director Fatih Birol said Russia could do more to increase gas availability in Europe and ensure storage is filled to adequate levels for the upcoming winter heating season. Birol added that an additional 15% could be provided immediately by Russia.

Convinced pro-Russian actor, former German Chancellor Gerhard Schrder published a item claiming that the Russian government is incapable of manipulating the markets: “Anyone who conducts a serious study declares: the reasons for the rise in prices must be sought in the international market – increasing demand, global trends in the world market and weather.

As the EU sought to decarbonize its energy infrastructure, Brussels failed to establish a reliable benchmark capacity for electricity generation. Today, without the vast nuclear, coal and gas power plants, Europe would be a dark and cold place. In addition, they lack energy sources for low renewable periods like the windless summer from last year in the UK. Low wind speeds and cloud cover are becoming increasingly unpredictable as climate change progresses, and the lack of basic production has led to the current crisis.

Some of the reactions have been to buy alternative fuels such as coal, a fuel source that produces double carbon emissions from natural gas. It defeats the purpose of energy transformation.

The UK, France and Spain have all issued new price caps. France went further and announced a 1 billion euros of investment nuclear power by the end of the decade. Better late than never.

Germany, despite all rationality, will dismantle almost all of its reactors next year, while focusing on wind and solar power, and may soon be forced to bow its knees to Russia, and therefore Lord Putin. , by embracing Nord Stream 2, for their energy needs. Jack Sharples, a researcher at the Oxford Institute of Energy Studies, said this:

The only way for us to know for sure is to see that [Russia] are suddenly pulling spare gas out of their back pocket that we didn’t know they had as soon as the Nord Stream 2 business operation is approved at very low levels, this could indicate that Gazprom really has nothing available and that the goal of Nord Stream 2 is simply to displace Ukraine.

Depend on Russia to fill the energy supply gap is a risky proposition. But perhaps even more shortsighted is Europe’s reluctance to partner with the United States beyond short-term contracts. The refusal to engage in long-term purchase agreements has led Europe to fall behind Asia as the Americas’ first destination for LNG.

The unfolding energy crisis in Europe has many drivers, but the EU’s pride of green policy and uncompromising Russian energy poker are key. The main lesson is this: one cannot turn energy into reality without building a sufficient, reliable and economically viable benchmark production capacity.

With the help of Sean Moroney and Sarah Shinton




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