Europe’s self-induced energy crisis

Europe is in an unprecedented energy crisis. Some call it a crisis, which, if left unaddressed, could be similar to the… Arab oil embargo of the 1970s with serious economic, social and political consequences. Brent oil is at its highest point in 5 years $84 per barrel while spot prices for natural gas are rising more than 500% year on year, forcing the highly polluting switch from gas to coal and slowing down the EU’s transition to green energy. Resurgent energy demand after Covid, extreme weather conditions (unprecedented heat waves and prolonged winters), supply chain disruptions and poor regional and global supplies have all contributed to the current crisis in Europe. Russia’s supremo Vladimir Putin may have a reason to pop a champagne bottle ahead of EU sanctions against the Kremlin. He says Europe has inflicted a self-inflicted wound. He may be right.

Per Samer Moses, Manager of Global LNG Analytics at S&P Global Platts:

Europe is between a rock and a hard place. With global liquefied natural gas (LNG) markets tight for nearly a year and Russia facing its own upstream and infrastructure challenges, Europe’s two main sources of flexible gas supply have failed to show up. Given how depleted the storage situation in the region is, any flurry of bullish news, be it weather or supply failure, has the power to send markets looking for ever-higher price anchors, with fundamentals dictating that the market must balance. to the destruction of demand, a dynamic already visible in industry in both Asia and Europe.

This unfortunate coincidence, though rare, illustrates the concerns of many energy experts (including this author) about Europe’s hasty transition from traditional baseload sources (gas, coal and nuclear) to intermittent renewable generation. Europe’s master plan for carbon neutrality has pushed member states away from long-term purchase agreements and towards short-term prices, making the crisis even more costly for energy companies and other consumers now seeking alternative fuel sources. Gas exporters like Russia and Qatar are ready to raise money.

The Qatari Minister of Energy, Saad Al-Kaabi stated: we have a huge demand from all our customers and unfortunately we cannot cater for everyone. Qatar prefers East Asian customers who pay a premium. The EU is no longer the top market. This trend is consistent with exporters around the world. In combination with a decline in domestic production, such as the depletion of the gigantic Groningen gas field in the Netherlands, the EU has to bid ever higher on imports. This coincides with the general rise in demand for LNG around the world in an effort to use it as a bridging fuel away from hydrocarbons.

At the same time, China is also experiencing an energy crisis exacerbated by unprecedented flooding across the country, supply chain disruptions after Covid and a resurgent demand. To compensate for the lack of domestic coal production, China has: doubled their LNG import last year (another reason why Europe is dealing with a lower than normal supply). More than 20 provinces have introduced rationing to deal with the deteriorating situation. Provide energy at any cost, the ruling Politburo ordered, emphasizing the economy’s massive reliance on imported coal and gas.

However, Russia does not appear to be an outright market manipulator and is well positioned to take advantage of the unfolding market conditions as Europe seeks out all gas supplies at exorbitant prices. Indeed, the gas shortage is being used by the Kremlin to tout the need for Nord Stream 2, an ambitious (and highly controversial) geostrategic move by the Kremlin to pump 55 bcm of gas directly to Germany through an undersea pipeline. The project may be presented by certain German manufacturers and Russian policymakers as a boon to Europe’s energy security, the reality is that the pipeline will only make the EU more dependent and vulnerable to the whims of Russian state-owned company Gazprom.

A while ago, Alexei Miller, CEO of Gazprom, stated in my presence that his company is half company and half state policy. Since then, the shift to 40-60 is likely in favor of the state.

European leaders were quick to claim that Russia is now arming the gas markets to get approval from Nord Stream 2. Currently, Gazprom pipelines natural gas through Ukraine. A new pipeline would bypass the disputed country. By law, Russian power producers must meet domestic demand before exporting, meaning a lack of export volume can be attributed to domestic stock shortages.

IEA Executive Director Fatih Birol has claimed that Russia could do more to increase gas availability to Europe and ensure storage is adequately stocked in preparation for the upcoming winter heating season. Birol went on to say that Russia could immediately supply another 15%.

A staunch pro-Russian actor, former Chancellor of Germany Gerhard Schrder published a article claims that the Russian government is incapable of manipulating the markets: “Anyone who conducts a serious study argues: The reasons for the price increase must be sought in the international market – increased demand, global trends in the world market and the weather.”

While the EU tried to decarbonise their energy infrastructure, Brussels failed to establish reliable basic electricity generation capacity. Today, without the ample nuclear, coal and gas plants, Europe would indeed be a dark and cold place. In addition, they have no energy sources for periods with little renewable energy, such as the windless summer of the past year in the UK. Low wind speeds and cloud cover are becoming more unpredictable as climate change progresses, and the lack of baseload generation has led to the current crisis.

Some of the responses have been to buy alternative fuels such as coal, a fuel source that produces double the CO2 emissions of natural gas. This defeats the purpose of energy transformation.

The United Kingdom, France and Spain have all issued new price caps. France has gone one step further and announced that 1 billion euro investment in nuclear power by the end of the decade. Better late than never.

Germany, for all rationality, will shut down almost all its reactors next year, betting on wind and sun, and may soon be forced to bow to Russia, and thus to Lord Putin, by embracing Nord Stream 2 for their energy needs. Jack Sharples, a researcher at the Oxford Institute of Energy Studies, had this to say:

The only way we’ll know for sure is when we see it [Russia] are suddenly pulling some spare gas out of their back pockets that we didn’t know they had once Nord Stream 2’s commercial operation is approved. Conversely, if/when Nord Stream 2 is approved and launched, we suddenly see gas transit through Ukraine drop to very low levels, that could be an indication that Gazprom really has nothing left and that Nord Stream 2’s goal is to just take Ukraine to displace.

Relying on Russia to fill the energy supply gap is a risky proposition. But perhaps even more short-sighted is Europe’s unwillingness to work with the United States outside of short-term contracts. The refusal to enter into long-term purchase agreements has left Europe behind Asia as the top destination for LNG in America.

The energy crisis unfolding in Europe has many drivers, but the hubris of the EU’s green policies and the hard hitting Russian energy poker are the watchwords. The most important lesson is: one cannot achieve the energy transformation without building sufficient, reliable and economically viable basic generation capacity.

With help from Sean Moroney and Sarah Shinton