Putin's gas warfare might galvanize Europe [GGP]
Think back 12 months to when the world was beginning to emerge from the Covid lockdowns. It was a time when energy demand surged dramatically, and oil and gas producers were struggling to meet this demand. As a result energy prices soared.
Through the autumn of 2021, the European benchmark gas price – known as the Title Transfer Facility or TTF – continued to climb and it became clear something was up with Russian pipeline gas supplies.
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The International Energy Agency pointed out in October 2021 that Russia could and should export more gas to Europe to demonstrate its reliability as a supplier. Gazprom, however, would only meet its contractual obligations and no more. The Russian state-owned company withdrew from the European spot market and the rise in the price of energy carried on.
In 2021, the European Union had imported about 60 per cent of the energy it consumed, with 40 per cent of that coming from Russia. Natural gas made up the largest proportion of this Russian supply at 41 per cent of total consumption. Oil made up a further 36 per cent and coal another 20 per cent. Some 75 per cent of this Russian gas was delivered through fixed pipelines.
Since Vladimir Putin ordered the invasion of Ukraine last February, however, the level of Russian gas consumed by EU countries has fallen dramatically. As of this autumn, it had dropped to about 9 per cent. As news of the invasion emerged, the gas market responded with a spike in price. Since then, Russia and Europe have engaged in a game of chicken.
The level of EU sanctions has escalated in protest at Russia’s illegal war on Ukraine, while Moscow has found means to ‘weaponize’ its gas flow into Europe. At the start of September, Russia closed down the Nord Stream-1 pipeline into Europe indefinitely – all the while benefiting from increasing revenues for lower volume of exports.
It is against this backdrop that Europe is entering the winter months with huge uncertainties surrounding its gas security, a situation compounded by a wider crisis in its power generation capacity driven by extreme weather and ageing infrastructure.
The successful drive to store gas
The good news is that the EU has made real progress filling up its gas storage facilities for the winter, now exceeding its 80 per cent target. Full storage would mean a supply that could last up to three months. This eases the need to pay for gas at any price and has come about largely because European buyers have attracted high volumes of liquefied natural gas (LNG) to its shores, mostly from the United States.
No doubt LNG plants around the world are cashing in on record prices and working at maximum capacity. Europe’s liquefied gas terminals have been working flat out at the same time.
Britain has played a role here. In the absence of significant domestic storage of its own, LNG deliveries have passed through the country via two interconnector pipelines to Belgium and the Netherlands.
It has also increased its export of electricity to the EU as output from France’s nuclear power stations has significantly decreased due to routine summer maintenance and age-related problems that affect many reactors. Whether any of this gas or electricity will return to Britain in the winter will depend on how much we are prepared to pay for it, and how the EU responds to any emergency now that Britain is outside its internal energy market.
The drive to fill Europe’s storage facilities has been helped by a drop in China’s energy demands due to the severe economic impact of its ‘zero Covid’ policy, with LNG imports falling as much as 22 per cent year on year. But that may change if China suffers a harsh winter.
Other countries have been hit by the high gas prices triggered by Europe’s billing war with Pakistan, India and Bangladesh failing to secure the liquefied gas they need. Europe has exported its energy insecurity with little concern for the consequences with many countries seeing the crisis as a ‘European war’. India, for example, has been only too ready to strike deals to import Russian oil and gas, as has China.
While seeking alternative sources of supply, the EU and its member states have been busy developing short-term contingency plans and longer-term strategies to get through the winter and plan for a future without Russian gas. These include the May RePowerEU plan, with objectives to diversify gas supply and increase storage before winter, increase renewable energy output and greater energy efficiency and become independent from Russian fossil fuels well before 2030.
Europe is weaning itself off Russian gas
The prospect of little or no Russian gas flowing to Europe is fast becoming a reality. In July targets were adopted to reduce European gas demand by 15 per cent, with more draconian actions if there is significant gas shortage. Further plans were proposed in September to reduce electricity consumption, particularly at peak time, as well as cap the prices renewable energy and nuclear generators can charge to help ensure major fossil fuel producers making huge profits pay their fair share.
The British government has announced measures to limit the bills of domestic customers for two years and retail consumers for six months. The production of gas and oil, both offshore and on-land with a lifting of the ban on fracking, is being encouraged. It also intends to put in place measures that will make Britain a net energy exporter by 2040. The emphasis here is on the supply side, with little being said about reducing demand this winter or next.
In Germany, floating liquefied gas terminals are being secured and new onshore LNG import capacity is being built. Across Europe, where possible, coal-fired power stations are being readied.
Questions are also being asked about Germany’s remaining nuclear power stations. It had hoped to phase out nuclear power by the end of the year but is now reconsidering the decision to shut down its last three nuclear plants. It is also thinking about bringing three plants retired last year back online.
Britain is looking to reinstate the Rough Gas Storage facility closed in 2017 to provide greater resilience, with plans to accelerate the deployment of nuclear, offshore wind, hydrogen and carbon capture and storage, all part of its existing Net-Zero strategy. The decarbonization of the EU’s power sector is leading to the greater use of renewable and a switch from coal to gas. Consequently in 2021, a combination of primarily hydro, solar, biomass and wind provided 37 per cent of its power, compared with 21 per cent in 2010 and 12 per cent in 1990.
While the share of natural gas in total electricity production increased from 8.6 per cent in 1990 to 23.6 per cent in 2010, it then fell to 20 per cent in 2021. By comparison, in the same year gas accounted for 40 per cent of power generation in the UK. Nuclear power’s contribution has remained relatively constant, but ageing plants in some countries threaten supply.
In the medium-term, finding alternative sources of supply will probably mean liquefied natural gas, which should become more readily available in the second half of the 2020s. It also means reducing gas demand on a permanent basis through fuel-switching, improved efficiency and demand reduction. This should be coupled with accelerating the rate of decarbonization and electrification.
The journey towards energy security can become a force for good. More broadly, Europe’s success in accelerating the move to a low-carbon economy serves as a model for elsewhere.
Greater cooperation between EU states - and Britain?
Europe’s new reliance on liquefied natural gas could ultimately lead to climate action in Africa, as it will require the building of new energy relationships on the continent as LNG-exporting projects begin to be developed there.
In return, Europe can invest in supporting domestic gas power generation, the deployment of low-carbon technologies and nature-based solutions in these new exporting countries.
How feasible this is remains to be seen. Ideally, by 2030 Europe will no longer be consuming Russian gas. It will also be consuming less gas than might have been the case, alongside lower carbon emissions and increased clean-power generation.
There will also be renewed commitment to the EU’s ‘Fit for 55’ targets to cut greenhouse gas emissions by at least 55 per cent by 2030, and greater cooperation between member states. It is even possible that Britain will be welcomed as a partner and that the critical role of the British gas infrastructure will be recognized.
Thus, despite having to weather challenging times in the next couple of winters, the horrible tragedy of war and its impact on European and global energy prices could lead to greater energy security and much needed climate action.
Best and worst energy scenarios
Gas security emergencies are usually short-term events triggered by technical failures or extreme weather, not the kind of geopolitical blackmail that Europe now faces. Here, Mike Bradshaw sketches out two scenarios at opposing ends of the spectrum. Reality hopefully lies somewhere in between.
The worst scenario
The current electricity supply problems continue throughout the autumn, resulting in more gas-powered generation than usual and making it difficult to keep storage full for the winter. A demand-reduction tactic is applied, and energy rationing becomes necessary in winter.
The European Union sets a price cap on Russian gas, and Moscow responds by ceasing all flows of gas to the EU for the foreseeable future.
A hard winter in Europe and northeast Asia drives up demand and a prolonged period of Dunkelflaute – literally a ‘dark lull’ in the conditions needed to generate wind and solar power – across north-western Europe reduces renewable power generation at a critical time. This results in an increased demand for gas and a further draw-down on storage.
A cold winter in Asia increases competition for the limited amount of flexible LNG deliveries – not tied up in long-term deliveries that must be delivered to a given market – driving prices even higher in Europe. Beijing lifts it zero-Covid policy and industrial output surges, with increased LNG imports into China, adding further stress to the market.
Following on from these events, emergency measures must be taken in Europe to reduce gas demand through physical reductions in supply earlier than expected. The European Commission imposes targets on member states.
Despite all the talking, in the face of a real crisis, the EU member states demonstrate a distinct lack of solidarity, hoarding gas and reducing electricity exports, exacerbating the situation. Britain closes the gas interconnectors at critical times to maintain the integrity of its domestic pipeline system.
Record high prices and energy shortages drive Europe into recession, energy poverty skyrockets, people die in cold homes and many businesses are forced to close. Social unrest erupts across Europe, undermining consensus on support for Ukraine – just what Putin hoped for.
The best scenario
As autumn arrives the crisis in the power sector eases and less gas is required to keep the lights on, allowing storage levels to remain high going into the winter heating season.
Despite numerous interruptions and uncertainty in relation to Russian gas pipeline deliveries, and despite the rhetoric on both sides, gas flows are resumed through Nord Stream 1 pipeline and through Ukraine. Flows are nowhere near ‘normal’ but, as gas continues to flow, storage levels remain adequate and are only drawn down late in the heating season, as usually occurs.
A mild, windy winter in Europe increases wind power generation and reduces heating demand and mild weather in northeast Asia reduces seasonal gas demand and the winter heating season starts late and finishes early. Although the global LNG market remains tight, Europe is able attract the cargoes it needs to balance supply and demand without breaking the bank.
In China, the continuation of the zero-Covid policy results in a muted recovery of industrial demand and gas imports are still well below 2021 levels.
The EU demand-reduction measures make a difference and most, though not all, member states do not have to resort to supply restrictions, and power outages are avoided. Britain can keep both gas and electricity interconnectors open all winter to the benefit of all.
Energy prices remain high and volatile, but efficiency savings and demand reduction soften the blow, and Europe avoids a widespread recession.
The various support packages put in place by national governments and adjustments to electricity markets mean that the cost of intervention and support is manageable and most households, while stretched, can heat their homes and businesses are able to open.
This piece was first published in the October-November 2022 issue of The World Today magazine (Chatham House). The original article can be found here, and the World Today magazine can be found here.
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.