Europe and other regions of the world are facing increasing energy costs. The economic recovery and the rigidity of the supply are causing the price of gas to rise strongly, which in turn is dragging other sources of electricity generation such as coal and now also oil. Brussels is looking for solutions to try to soften a situation that seems critical. Even so, and despite political efforts, the worst could be yet to come. It seems incredible that in the XXI century Europe runs the risk of suffering a full-blown energy crisis.
The Old Continent is already suffering some of the consequences of an energy transition that aims to reduce emissions and pollution in general. The great commitment to renewable energy has left a Europe still dependent on fossil energy in a complex situation in the face of winter. Gas inventories are at historically low levels for this time of year and although they are expected to rise this month, levels will not be high enough to weather an energy crisis if temperatures end up being too low in the Northern Hemisphere.
Massimo Di-Odoardo, vice president of Wood Mackenzie’s research department, wonders in a note if there will be enough gas to cope with the winter in Europe. The answer is at least disturbing: “It depends.”
This expert explains that there are many factors that will influence how the European market will balance this winter: the amount of liquid natural gas (LNG) in cash, imports by pipeline, the levels of inventories available for Europe, how demand responds to these record prices and how much capacity (and actual supply) will be available in Russia. These are the key factors today.
However, there is one factor that prevails over the rest: “The key factor that defines whether the supply will be sufficient to cover the demand is the climatic dynamics, not only in Europe, but also in Asia and Russia, “says Di-Odoardo. A colder-than-anticipated winter in Asia and Russia could concentrate gas in these regions, leaving Europe ‘naked’ and ‘chilled with cold’ .
With the current scenario, the best that can happen is that the winter passes normally, registering temperatures within the average of the last years. The problem is that with climate change they are taking place extreme events that threaten to polarize temperatures globally. “If winter weather conditions are normal throughout the northern hemisphere, Europe will have no problem meeting demand.”
Gas inventories are expected to reach 78% of capacity in October, about 87,000 million cubic meters (bcm), historical lows for those dates. During the winter, these reserves are expected to fall by 58 bcm to meet demand, leaving inventories at delicate levels. Furthermore, LNG imports will be limited this winter as Asian demand remains strong.
An uneven cast
Another problem is that gas reserves in Europe are very poorly distributed. The Netherlands, Germany, France and Italy have large storage facilities, while the rest of the European Union depends on shipments by gas pipeline through its partners. Reuters. To reduce problems and achieve greater bargaining power, Spain and other countries have asked Brussels to create a strategic gas reserve at European level and jointly purchase this source of energy to achieve more attractive prices (as has been done). achieved with covid vaccines). Although this may improve the situation in the future, the die is already cast for this winter.
The importance of climate
That luck largely depends on the climate, which will be the one to decide if there is enough gas. This shortage will have an impact on prices, that have already reached 120 megawatts per hour (Dutch gas one-month futures, price reference in Europe). However, the Wood Mackenzie researcher warns that “the ceiling for gas prices this winter could be in the sky”, a nice metaphor to recognize that gas could rise to unsuspected levels.
“A cold winter in Europe and Asia would mean that there is not enough gas available to meet demand, unless more capacity is available through the gas pipelines that connect Europe with Russia,” say experts from the expert consultancy in raw materials. . But even with Moscow’s will, Russia’s capacity may be insufficient if domestic gas demand is higher than expected. A very cold winter in the northern hemisphere will cause a kind of ‘perfect storm’ that will end up hitting Europe.
“A cold winter in Europe could boost heating demand by as much as 20 bcm, while a colder winter in Asia would add another 10.5 bcm of LNG demand in China, Japan, South Korea and Taiwan. This would take away 10, 5 bcm in LNG imports from the European market “, they assure from Wood Mackenzie. In this way, the EU will have to consume a greater part of its inventories that will reach almost exhausted by March 2022 (about 29 bcm of stored gas).
“With only 29 bcm of gas in storage, there is a risk that storage levels will drop to zero. If this is true, Europe will be totally dependent on Russia may increase its flows above existing capacity, “warns Di-Odoardo. In turn, Russia’s ability to send supplies will also depend on its domestic demand and the approval of Nord Stream 2.
Nord Stream 2
If the Nord Stream 2 pipeline is approved before the end of the year it could give the European market a break, delivering up to 12.5 bcm during the winter. However, “this hypothesis remains somewhat uncertain and may materialize too late so that the market stabilizes before a cold climate “, they indicate from Wood Mackenzie.
“Consequently, Europe would also need winter flows of the additional 12 bcm capacity through Ukraine on top of the current signed agreement. Russia has ruled it out so far, but recent promises by President Vladimir Putin to stabilize the market could mean the arrival of additional flows through Ukraine. “
The problem is that if temperatures are lower than expected in Russia during the winter, Gazprom will only have enough volumes to increase exports through the Nord Stream 2 or through Ukraine, but not both at the same time.
Right now, Russia has the capacity to increase its production, but low storage levels and high winter demand may end up limiting its export capacity to Europe to 106 bcm during winter. It could be said that Europe is ‘hostage’ to Russia in the best case scenario, but perhaps not even Russia has the capacity to supply all the necessary gas in the worst case scenario.
In this scenario the accounts do not come out. “Russia will need an additional 12 bcm (up to 118 bcm of supply) to supply these two additional routes. It seems unlikely that Russia will be able to supply those volumes if its winter is also cold,” says Di-Odoardo.
“This winter could be like no other. A cold winter in both Europe and Asia would risk European inventories falling to zero, leaving Europe totally dependent on the approval of Nord Stream 2 or Russia’s willingness to ship. more gas through Ukraine if demand cuts are to be avoided … however, a cold winter in Russia will limit Gazprom’s capacity for additional exports via Nord Stream 2 and Ukraine, “says the Wood Mackenzie expert.
The great hope
With normal climatic conditions and with the will of Russia, everything should go well. What’s more, gas prices should gradually decline as 2022 progresses, while Europe’s inventories rebound.
Russia will have to use all of its existing capacity, including that provided by Nord Stream, Yamal-Europa, TurkStream and Ukraine. If Russia is willing to cooperate, everything will be much easier for the EU countries and the risk that the energy crisis will deepen will be greatly reduced.
With shipments from Russia, the European Union will be able to accumulate inventories that will be below the average for the last five years, but comfortably above historical lows. This will allow gas prices to relax throughout 2022.