Europe and energy

We are heading for an expensive winter. In Europe, natural gas inventories are emptying and worldwide natural gas prices are rising to new record levels every day. In this country, Russia is once again being blamed for the problems. The Russian would supply too little gas and blackmail Europe. A clear lie like 90% of what is written about Russia. The energy crisis came with an announcement and is homemade. In the name of the energy transition, nuclear power plants have been closed and coal-fired power has been shut down without seriously considering how to close the gaps. The consequences of this homemade crisis are global, and the commissioning of Nord Stream 2 can alleviate the crisis, but not eliminate it.

In March 2019, when no one could have guessed that a virus would cripple the world economy a year later, the International Energy Organization IEA prepared a forecast for the European gas market in the next few years. The message was clear. Already for 2020, a supply gap of 48 billion cubic meters of natural gas was predicted for the EU. As is known, the crisis did not materialize, the corona measures caused the industry worldwide to drive on the back burner. Now the economy is back on track and the predicted bottleneck has occurred.

In principle, however, this is less dramatic than it sounds at first, since this gap indicates the difference between the assumed demand and the quantities already covered by long-term supply contracts. In other words, the EU must buy this amount of gas on commodity markets through short-term contracts or on the so-called spot market, where free capacity is traded.

According to the IEA forecast, however, this supply gap will increase from year to year and for the not too distant year 2025, the gap is already 162 billion cubic meters. This is more than the EU currently obtains from by far its largest supplier, Russia, on fixed contracts per year.

IEA: Gasförderung und Import

There are several reasons why this "planned undersupply" includes such high volumes in the first place. On the one hand, domestic production in the North Sea and imports from Norway (blue and purple in the graph) are decreasing year by year, as deposits are slowly running out. While domestic production and imports from Norway accounted for almost 200 billion cubic meters in 2018, the IEA forecasts that this amount will be halved by 2025. On the other hand, the resulting undersupply on the part of the EU could have been compensated relatively easily by new supply contracts with Russia. But we do not want to become dependent on Russia, and in the current political environment, which is characterized by aggression against Russia, such treaties do not seem opportune.

Now, of course, you can not consume more gas in the long term than you promote and buy. Otherwise the memory will empty. This is happening now. In the medium to long term, you either have to reduce consumption or buy the missing quantities on the market. The former would make sense in terms of resource efficiency, but stands in the way of the policy of the energy transition. Not only in Germany, but Europe- and even worldwide - they want to reduce CO2 emissions by shutting down coal combustion. It sounds good to me. However, if the lack of capacity in power generation cannot be fully compensated by renewable energies, this will lead to an increasing share of gas electricity generation. And this is exactly the case at the moment.

In Germany alone, 46.2 percent more electricity generated from natural gas than in the previous year was generated in the first quarter of 2021. In the UK, which is no longer part of the EU but buys gas on the same markets as the EU countries, gas generation accounts for a staggering 40% of total electricity generation. It is not the heating of private households, but the electricity generation of the electricity suppliers and, above all, the energy-intensive large-scale industry that are the largest gas consumers. So the "gas crisis" is not about "our heating" at all, but above all about electricity. The gaps left by the nuclear phase-out and the departure from coal have led to higher demand for natural gas and this gap has not been filled by long-term supply contracts.

So there remains only one other option – to buy the missing amount of gas on the market. But unfortunately there are not only Europeans as customers. Worldwide, gas is a scarce commodity. China alone, the world's largest customer of gas supplies, has doubled its imports this year and not even that is enough to fill the country's gas storage facilities. The situation is even more tense in countries that do not have access to large pipeline systems and rely on the import of liquefied gas (LNG) with tankers. Here the market is as good as dead. The two largest producers, Qatar and the United States, both promote at the limit and have no reserve capacity. While large LNG importers such as South Korea and Japan are fairly well secured by long-term supply contracts, most customers from Asia, South America, the Middle East and Europe need to cover their required capacities in the spot market. And this market responds to the scarcity of how markets react. Prices go through the roof.

Global LNG Hub

Thus, the benchmark for natural gas on the spot market has more than fivefold in one year. The spot market price for LNG is currently US$20.1 for the MMBtu unit for a November delivery in Asia. By comparison, last year it was worth around US$2 – a tenfold increase. The consequences will soon be felt, as Chinese aluminium smelters, Japanese car producers or European fertiliser manufacturers naturally pass on the massively increased energy prices to their products, which are at the end of the supply chain in our markets.

But in this country, the entire crisis has so far only been viewed from the point of view that Russia would allegedly supply too little gas. And even this is wrong. According to Group data, in the current year, gas was exported not less, but 19.4% more than in the same period last year. As a result, gas exports to Germany are said to have risen by as much as 39.3%. This is also not contradicted in Germany, but points out that Russia could deliver more if it only wanted to. So typically unilaterally want to change contracts and wonder that the partner does not participate has also become a new fashion in the West.

That's correct. It is also true, however, that Gazprom emphasises that it would like to deliver more, but would rather tie this down under new, long-term contracts. The completed Nord Stream 2 gas pipeline would indeed be the ideal supply platform for this. But apparently there is hesitation in Germany. This is fatal for industry and for households, as the alternative to new supply contracts with Russia would be to purchase the gas on the completely overheated spot market. And then from whom would you buy? LNG processing capacity is limited and, with the exception of Russia, all exporters that feed into the European pipeline network are already delivering at the capacity limit. So you would buy the same gas at the moon prices of the spot market of Russia and households and industry would have to dig deep into their pockets.

Above all, Germany is actually very comfortable there. We have a pipeline connection to a reliable exporter who is not only willing to meet the demand, but also has the spare capacity. Even if one were so stupid as to replace Russian natural gas with LNG from the United States or Qatar, this is not possible at all, since these two countries have no spare capacity at all. Then you would have to mix with the other interested parties and make up the matter just about the price. In the United States and Qatar, people would laugh at each other, in Germany the price of gas and electricity would literally explode and poorer countries in Asia, the Middle East or South America would just have to stop the power supply. This is madness. And the current coalition negotiations with the concrete heads of the Greens and FDP unfortunately make this madness more and more likely.