Mid-June was a highly eventful period on the gas market. In Norway, several liquefied natural gas (LNG) terminals failed, and the Dutch government’s plan to shut down Europe’s largest gas field, which has been in operation for decades, from October was leaked. Together, these developments led to major price fluctuations and a 20 percent rise in prices on the Dutch gas exchange. What are the implications?
One conclusion is that the energy crisis, which is a result of supply-side shortages, is not over. It is not yet clear whether Europe will be able to meet its energy needs with existing non-Russian capacity in the aftermath of decoupling from Russia. Of course, everyone is now wondering whether the EU will be able to bridge this period and what is to be expected when the next winter sets in. The answer depends on a variety of factors.
Firstly, it is subject to the development of the geopolitical situation, in particular the possible further deterioration of Europe-Russia relations. At present, there are two pipelines from Russia to the continent: TurkStream, with an annual capacity of 31.5 billion cubic meters, and the Brotherhood pipeline (also known as the Urengoy-Pomary-Uzhhorod pipeline), with a theoretical capacity of around 60 billion cubic meters. While TurkStream continues to operate uninterrupted, a branch of the Brotherhood pipeline was shut down by Ukraine in May 2022, leaving a theoretical capacity of around 18-19 billion cubic meters in the first half of the running year. By June, the pipeline had received 10.4 bcm of gas, meaning it was operating at only about 55 percent of capacity.
Although the volume of Russian gas entering the continent decreased by around 80 billion cubic meters in 2022, current deliveries still represent a very significant volume, especially if we add that Russia was the second largest supplier of LNG to Europe in 2022, with around 22 billion cubic meters of Russian LNG arriving at European terminals. By further escalating the conflict, access to this capacity is also at risk, which could result in disastrous consequences with view to the current gas market situation.
Secondly, the energy supply situation depends on the performance of energy-intensive industries. High energy prices have resulted in energy-intensive industries investing in energy efficiency and cutting back or rescheduling production. Of course, investments in energy efficiency have a lasting effect in the long term, but they take several months or even years to implement, meaning that a significant share of companies have been able to save energy in the short term by limiting their production. This, however, is not sustainable in the long term, as it could lead to bankruptcies or to the relocation of production. As a result, companies across Europe are receiving rebates and subsidies that, on the one hand, help them survive, which is essential to keep the European economy functioning and remain competitive, but on the other hand, could have the unintended effect of increasing Europe’s industrial energy demand to previous levels.
Thirdly, this year’s energy supplies are also subject to ongoing energy infrastructure developments. New terminals to receive liquefied natural gas are needed, the construction of which has already started in Germany and Poland, among others. The capacity expansion of the Polish LNG terminal in Świnoujście is scheduled to be completed this year and will reach 7.5 billion cubic meters once the development is completed. The regasification terminal in Gdansk is planned to begin operation in 2027 or 2028, meaning that it will be of no help this year. In Germany, three floating terminals are currently in service (Wilhelmshaven I, Lubmin I, Brunsbüttel) and three more are planned to be commissioned by the end of this year (Stade, Wilhelmshaven II, Lubmin II). Germany also plans to build three permanent LNG terminals, to be completed in 2025, 2026 and 2027 respectively. In the current stressed situation, delays around ongoing construction, combined with other problems, could lead to supply problems.
The fourth factor to be mentioned in the issue of capacity of the extraction side. The only viable solution to the current energy crisis is to increase the amount of energy available on the market. In the context of the European Union’s push for decoupling from Russia, this means, of course, increased access to non-Russian sources. Currently, the US is the largest supplier of LNG to the European market, accounting for 40 percent of Europe’s total LNG imports in 2022. In volume terms, this means that exports of US LNG to Europe increased by 140 percent to 56 billion cubic meters in 2022 compared to the same period last year. The International Energy Agency forecasts that US natural gas production will increase by 15 percent and liquefied natural gas (LNG) exports will rise by 152 percent between 2022 and 2050. As both the US and the EU have an interest in increasing trade, it is quite likely that increasing US LNG exports will also mean increasing European LNG imports.
The third largest supplier after the U.S. and Russia was Qatar with 19 billion cubic meters, accounting for 14 percent of total European LNG imports. Our trade relations with Qatar could also have a major impact on Europe’s energy supply. Agreements are complicated by diverging economic strategies: some European countries do not want to commit for the long term, continuing to pursue the idea of a fully liberalized energy market, while Qatar, as an exporter, wants contractual guarantees that its investments in increasing production will pay off. The exception is Germany, with which a 15-year gas supply contract was agreed last November, and the Hungarian government is likely to have negotiated along the same lines with the Gulf nation recently. China, on the other hand, unlike most European countries, is unhesitant to sign its second 27-year contract with Qatar. Unless energy exporters like Qatar can be persuaded to invest in increasing production, or other parties tie up the surplus in the long term, the energy crisis will continue to impact Europe.
Fifth, energy supply depends on the performance of Asian economies. Last November, the International Energy Agency (IEA) forecast a shortfall of 30 billion cubic meters of gas to meet annual consumption this winter. Since then, we know that we were extremely lucky that the winter of 2022/23 was unusually mild, allowing around 11 bcm more gas to remain in storage as spring arrived and reducing gas demand by 12 percent in 2022 compared to the average of the previous three years, according to European economic think tank Bruegel. So, all in all, we are currently “just about there”, the gas market is extremely tight, which means that any news of a minor technical failure, as mentioned above, or any loss of capacity, will be priced in immediately. At the end of 2022, the NEA predicted the Chinese economy to expand by 13 percent, which would mean an additional 12 bcm of gas consumption. This compares with a 5 per cent expansion currently, which means only 4-6 bcm of surplus gas going to China.
Last but not least, energy supply is weather-dependent. In summer, the number of hot summer days is the main factor determining how much gas we use. Heat days increase the demand for cooling, which means electricity consumption, 19.6 percent of which is produced with gas. Energy supplies also depend on the severity of winter. Low average temperatures during the winter will result in 10-15 billion cubic meters more gas being used on the continent.
As we can see from the above, the risk of energy supplies being compromised depends on a variety of factors and an unfortunate combination of future developments could have disastrous impact. However, there is only one way forward: we need to increase the amount of energy available.
