Europe’s energy crisis is far from over [LNG2023]
Europe got through last winter avoiding energy shortages and the sharp decline in natural gas prices over the past six months has provided a welcome reprieve for consumers. But the continent’s energy crisis is far from over, Didier Holleaux, president of the Eurogas association and vice-president of France’s Engie, tells NGW, warning that risks will remain over the next four winters and authorities must avoid complacency.
The front-month gas contract at the Dutch TTF hub is currently trading at €20-30/MWh. This is a far cry from the peak of €340/MWh that was seen in August 2022, following a drastic cut in Russian pipeline gas supply over the summer. EU authorities have taken steps to bring down gas prices over the past year, although Holleaux believes the 2022 prices and an unusually mild winter, rather than policy, are largely to thank for relatively low prices now. And he also stresses that current prices are still significantly higher than what was considered normal in the years prior to the COVID-19 pandemic.
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“The main factor in rebalancing the market in Europe has been very high prices,” he tells NGW. “That attracted all available LNG globally, but also significantly reduced industrial demand. And then there was the mild winter.”
The European Commission’s enforcing of gas storage requirements ahead of last winter also played a role, he says. The EU executive introduced a bloc-wide obligation of 90% gas storage utilisation by November 1, 2022, and this target was far-surpassed, with the level reaching nearly 95%.
Though “helpful,” the EU storage rules were so rigid that at times this triggered price spikes, he adds.
The European Commission recently hailed the first tender of its newly- launched joint purchase platform for acquiring gas ahead of the next winter as a “remarkable success.” According to media reports, buyers placed orders for 11.6bn m3 of gas, while suppliers offered 13.4bn m3.
However, Holleaux cautions that it is still too soon to say whether the platform can be considered successful.
“So far buyers and sellers have only been matched up. They still have to negotiate and come to an agreement. It’s like speed dating - it’s good that people turned up, but unless they leave the room with a decision to meet again, we don’t know what the success is.”
He also notes that given that a lot of the gas was requested on the network rather than at the LNG terminals, much of the volume bid for was remarketed rather than marketed.
“That means that it was gas that had already been dedicated to Europe and remarketed, rather than new gas supply,” he says. “It means that only 20-25% maximum of the gas bought is really new gas coming to Europe,” he says. “That’s why we consider the success modest. But in a crisis, every bn m3 of gas counts.”
He also praised the joint purchase platform for enabling smaller market players to participate on a level playing field with larger players.
The view of Eurogas, Holleaux says, is also that the TTF price cap that the EU introduced after the August 2022 spike in prices was set so high and so late in the season that it had no impact on the market. But a lot of market players consider it was designed poorly, and therefore it would have been inefficient or even had an adverse impact on the market if triggered.
He also regrets that natural gas was only included in the EU taxonomy of what should be considered as “transition investments” with such restrictive conditions that very few projects such as gas-fired power plants can be included.
Unrealistic forecasts
Holleaux also points to mixed messages in the bloc’s energy forecasting, which has hindered the signing of longer-term contracts for new gas supply. In its RepowerEU working document released last year, the European Commission projected that bloc gas demand would fall to only 135bn m3 of gas by the end of the decade, and Holleaux stressed that this forecast should be revised.
“If you believe this figure, then you don’t need any new contracts and you don’t even need to find replacements for the missing Russian gas,” he says.
The key focus should be facilitating buyers signing new long-term contracts. In the wake of Russia’s invasion of Ukraine last year, the European Commission reached a deal with Washington on securing an additional 50bn m3 of US LNG. But Holleaux believes little in practice has been done to achieve such goals, describing the deal as “not yet materialised.”
The majority of long-term LNG contracts helping to underpin investment in new supply have been mostly with Asian buyers or large LNG portfolio companies. Holleaux notes that for example there are only two projects in the US set to reach a final investment decision mostly as a result of European contracts – Port Arthur Phase 1 and Rio Grande LNG.
“The commission has not taken any concrete steps to help European companies reach those long-term contracts, and it’s also a problem with national governments,” he says.
He adds that the joint gas purchase platform could have also been focused in part on attracting longer-term gas supply.
The lofty vision for a downsized role for natural gas in the European energy mix in RepowerEU partly relied on targets for a significant expansion in the use of renewables and the production of biogas and later hydrogen. Holleaux views the forecast for biogas production – 35bn m3 by 2030 – as “absolutely achievable.” But he is less confident about the projections for hydrogen output – 10mn metric tons produced domestically and an equal amount imported by the end of the decade. “Some of these targets are overambitious – they cannot be achieved within this timeframe,” he says.
All told, Holleaux warns that the energy, and particularly gas crisis, for Europe, is far from over, and the risk of high prices and potentially shortages will persist for at least the next four winters. That is until the next wave of global LNG supply arrives, from projects such as Qatar’s North Field East project. Cold weather this coming winter, coupled with high Asian demand, could spell serious problems, he warns.
“We are out of winter and the price of gas on the spot market started to go down, so politicians seem to believe that the crisis is over,” he says. “No, the crisis is not over, and the next four winters are still high-risk winters. And the current price is still very high compared with the average price of previous decades, and this is a big challenge for European industry, which is competing with other industries in other parts of the world.”
This interview was originally published in the LNG2023 Daily, produced by NGW during the LNG2023 conference in Vancouver July 10-13.