Mar 29, 2023
Next Chapter in Europe’s Energy Crisis — Summer Risks for Gas
(Bloomberg) -- Europe has negotiated through the winter of a crisis that threatened to choke energy supplies and overwhelm its economy, but officials are warning that the squeeze may not yet be over.
Fears of blackouts and freezing homes have faded for now, and gas reserves remain far fuller than normal. The region is entering a crucial period of replenishing those stockpiles, and avoiding a crunch next winter hinges on its success. It won’t be able to rely on the usually massive supply of pipeline gas from Russia, and EU officials are leaning on companies to end LNG imports from the country.
The perils from a year ago will be fresh on policy makers’ minds. Heat waves, the worst drought in centuries, nuclear outages in France and overall panic about Russia’s dwindling gas exports resulted in a record surge in prices. They’ve fallen more than 80% since then, and the outlook holds few worries for the months ahead. BloombergNEF sees enough supplies available to fill inventories to the EU’s goal of 90% by the end of October.
The market remains wary a repeat of last year’s events will flip the balance once again. There are also new worries about a rebound in Chinese demand, and an even deeper curtailment in Russian supplies — pipeline and liquefied natural gas, said Andrew Walker, a vice president at major LNG provider Cheniere Energy Inc.
“There are a lot of key risks sitting out there,” he said at the European Gas Conference in Vienna.
With summer coming and small volumes of gas already starting to be sent into storage sites, here are some of the biggest concerns for the continent.
China and Fight for LNG
Record LNG imports formed the backbone of Europe’s efforts to tackle the crisis over the past year. But the jostling for cargoes could start increasing.
The International Energy Agency has warned that Europe still faces a risk of supply shortages this year, unless it further curbs consumption, with China’s LNG demand being the biggest unknown. The agency has a 40 billion cubic meters difference between its highest and lowest estimates for the nation’s net LNG imports this year. That’s the equivalent of about 8% of Europe’s total demand last year.
Some industry watchers, like Wood Mackenzie, are not very bullish, at least for now. The consultant expects China’s booming domestic gas production and continued increase in Russia’s pipeline supplies to limit the need for LNG imports, and keep them below the peak of 2021 even in a high-growth scenario.
On the other hand, cheaper LNG is also bringing back appetite from smaller buyers in Asia, which increases competition, according to trader Vitol Group.
Industrial Demand Recovery
Signs are emerging that gas use by industry — which made up almost half of total demand reduction in Europe last year — is rebounding. A recovery is showing in the oil refining and petrochemical industries in Spain, the Netherlands and France, where it is easier to switch fuels than in other sectors.
Analysts at Goldman Sachs Group Inc. and SEB AB have warned that gas prices may more than double from current levels if industrial demand returns. But how big will the rebound be? Many manufacturers shut or relocated some operations last year as energy costs turned prohibitive, and there’s no certainty they will return. An unfolding banking crisis could also hit European industries.
Declining gas prices are making it attractive again for Europe’s power stations, in comparison to alternatives like coal or oil.
Coal power generation in Europe increased last year, ending a run of steady declines. It has been lower so far this year — as has gas — because of higher renewables output, primarily wind. But, gas use for electricity outstripped coal at times over the past month, according to consultant Rystad Energy AS. The shift is also aided by more expensive carbon permits, which are needed by power stations to spew emissions.
Electricite de France SA’s troubles are quickly turning out to be one of the biggest risks to Europe avoiding another crisis next winter. The beleaguered utility’s nuclear stations have suffered from technical errors, contributing to a record number of reactors going offline last year in the country and pushing atomic output to the lowest in 30 years.
As a result, power was the only sector in Europe where gas consumption remained relatively steady last year even though overall electricity demand declined, while wind and solar output jumped.
EDF has found new defects that have caused energy prices to spike several times this month. While the company has left its nuclear power production forecast for this year unchanged, more problems would further strain power networks and increase demand for gas. Widespread strikes in the country haven’t helped either.
Memories of the arterial Rhine River drying up and becoming impassable last year are still fresh, as is the record heat and droughts that limited hydroelectric and nuclear production. Climate change is making severe weather events more likely.
The hydrological balance in the Alps — or the amount of energy stored in reservoirs and snowpack compared with seasonal norms — already shows the biggest deficit since 2017 for the time of year. Hot weather could boost demand for gas for cooling, and if the Rhine dries up again, it can disrupt the movement of coal and oil products to Germany.
Russia’s share of total gas demand in the European Union dropped to under 10% by the end of last year from 40% in 2021 as most nations switched to alternatives such as US LNG. Even that little supply, especially the part coming by pipelines crossing Ukraine, has been under constant risk as the war moves into its second year.
While pipeline flows have dwindled, imports of LNG — which aren’t restricted — from the country have surged. But there’s now growing pressure on European companies to end these purchases. Some like the UK and the Baltic nations have already banned these imports. The EU is targeting a way to allow members to follow suit but it isn’t implementing any new sanctions or announcing specific measures.
Spain, one of Europe’s top buyers of the Russian fuel, has directly urged companies to reduce these purchases, but a blanket ban would be challenging to achieve.
Russia accounted for 14% of total European LNG imports last year, said Leo Kabouche, an analyst at Energy Aspects Ltd. If the region were to ban those flows, the loss would be “significant and would be extremely challenging to replace.”
The possibility of a total cut off from Moscow, risks of infrastructure sabotage or unplanned outages at major projects this year — as well as competition with China — could put the gas market under pressure again, Matthew Baldwin, deputy director general of the European Commission’s energy department, said at the conference in Vienna.
“We experienced unprecedented, volatile energy prices last year, it looks better but we are not complacent,” he said. “We are not out of the woods. So we stay vigilant, we stay together.”
©2023 Bloomberg L.P.