As Russia tightens its grip on the natural gas supply, Europe is looking everywhere for energy to keep its economy going. Coal-fired power stations are being revived. Billions are spent on terminals to bring in liquefied natural gas, largely from Texas shale fields. Officials and heads of state fly to Qatar, Azerbaijan, Norway and Algeria to negotiate energy deals.
Fears are growing across Europe that a shutdown of Russian gas will force governments to ration fuel and companies to shut down factories, moves that could put thousands of jobs at risk.
So far, the hunt for fuel has been achieved with considerable success. But as prices continue to rise and the Russian threat shows no signs of abating, the margin of error is small.
“There is a very big and legitimate concern about this winter,” said Michael Stoppard, vice president for global gas strategy at S&P Global, a research firm.
Five months after the Russian invasion of Ukraine, Europe is in the throes of an accelerated and increasingly irreversible transition in the way it gets its energy to heat and cool homes, run businesses and generate electricity. A long-term shift to more renewable energy sources has been overtaken by a short-term struggle to get through the coming winter.
The amount of natural gas from Russia, once Europe’s largest fuel source, is less than a third of what it was a year ago. This week, Gazpromthe Russian energy giant, slowed down already severely reduced flows in a major pipeline from Russia to Germany, pushing European gas futures prices to record levels.
Within a day of Gazprom’s announcement, European Union called for a 15 percent reduction in gas usage across the block.
This move away from Russian natural gas — almost unimaginable after a decades-long embrace of Siberian gas delivered through pipelines thousands of miles long — sends shockwaves through factory floors, forcing governments to seek alternative energy sources.
The multiple effort to discover alternatives to Russian gas has largely made up for the shortfall. Despite Gazprom’s budget cuts, the supply of natural gas in Europe in the first half of 2022 was about the same period last year, said Jack Sharples, a fellow at the Oxford Institute for Energy Studies.
The standout performer in this comeback is liquefied natural gas, cooled to a condensed liquid form and transported on ships. LNG has essentially switched places with pipeline gas from Russia as Europe’s main fuel source. About half of the supply comes from the United States, which this year the world’s largest exporter of the fuel.
Looking to the end of the year, European countries are putting pressure on energy companies to fill salt caverns and other storage facilities with gas to provide a margin of safety in case Russia shuts down the pipelines.
Gas storage in Europe has now built up about 67 percent of the total capacity, more than 10 percentage points more than a year ago. Those levels provide some consolation that European countries can achieve something close to the European Union’s target of 80 percent full before winter.
Our coverage of the war between Russia and Ukraine
- Grain Blockade: A breakthrough deal aims to lift a Russian blockade on Ukrainian grain shipments and thus alleviate a global food crisis. But in the field of Ukraine, farmers are skeptical.
- An ambitious counterattack: Ukraine has laid the foundation for recapture Kherson from Russia. But the endeavor would require enormous resources and could take a heavy toll.
- Economic havoc: As food, energy and commodity prices around the world continue to rise, few countries are feeling the bite as much as Ukraine.
- Within a siege: For 80 days, a relentless Russian attack at the Avtostal steel plant met unyielding Ukrainian resistance. So it was for those who were there.
But concerns are still mounting, and there are many reasons why European efforts could fail as the colder weather approaches.
Russia is well aware of the European Union’s campaign to stockpile enough gas to avert a shutdown this winter and, according to analysts, wants to hinder it by reducing pipeline flows. And all kinds of weather problems — an exceptionally cold winter, a storm in the North Sea shutting down Norwegian gas production or a busy Atlantic hurricane season slowing down LNG carriers – could send Europe into energy shortages.
“We’re getting close to the danger zone,” said Massimo Di Odoardo, vice president for gas at Wood Mackenzie, a research facility.
As a result of these concerns, European gas futures prices have doubled in the past two months to about EUR 200 per megawatt hour on the Dutch TTF exchange, about 10 times the level of a year ago.
Europe’s astronomical energy costs are putting a wide variety of industries on the defensive, forcing changes that could help make the European Union’s voluntary 15% gas savings target achievable. The International Energy Agency recently forecast that gas demand in the region would fall by 9 percent this year.
For example, an ArcelorMittal steel plant in the busy port of Hamburg in Germany has been using natural gas for years to extract the iron, which then goes into its electric furnace. But recently it has switched to buying metal inputs for its plant from a sister plant in Canada with access to cheaper energy. Natural gas prices in North America, while historically high, are about one-seventh of European prices.
“Natural gas costs so much that we can’t afford it” to operate in the usual way, said Uwe Braun, CEO of ArcelorMittal Hamburg.
Few analysts or executives expect the situation to ease in the coming months. Instead, winter could prove to be a nail-biter with energy-intensive industries like metal smelters and fertilizer and glass makers under pressure.
The news of factory closures or production restrictions is already trickling in. In Romania, ALRO Group recently said it was going to close production at a large aluminum plant and lay off 500 people because high energy costs made it uncompetitive.
In some countries, including Britain and Germany, energy companies have not yet fully passed these costs on to their customers, meaning the biggest blows are yet to come.
“The biggest risk right now is an explosion in residential and industrial energy prices this winter that the public and industry can barely deal with,” said Henning Gloystein, director at Eurasia Group, a political risk firm.
Shipments of liquefied natural gas, the main pipeline alternative from Russia to much of the continent, remain a costly alternative. And Europe’s growing demand for LNG could harm other regions of the world that depend on the fuel.
Europe essentially offers liquefied gas away from other markets, mainly in Asia, where China, Japan and South Korea are major customers. Europe is “taking LNG away from markets that are unwilling to pay the prices Europe may be willing to pay,” Ben van Beurden, chief executive of Shell, a supplier of LNG, told reporters on Thursday. “That’s a very uncomfortable position to be in.”
Countries like Germany and Romania are also taking other steps, including: reducing coal-fired power plants or delaying their retirement. The idea is to minimize the amount of gas used in power plants to generate electricity and store it for essentials like heating the house or running factories. On Thursday the International Energy Agency expects global coal demand to reach nearly nine billion tons this year, matching the peak of 2013.
Many uncertainties remain. Although Europe has about two dozen terminals to receive liquefied natural gas, there are none in Germany. Berlin is struggling to build as many as four of these plants and has set aside €2.5 billion to rent four LNG processing vessels, but it’s not clear if any of them will be online soon enough to provide much help this winter.
The weather can also be crucial, and not just in Europe. An icy winter in Asia, long the primary market for liquefied gas, would intensify competition with Europe for what analysts say is a limited global supply of LNG
It is also difficult to see where otherwise large gas increases would come from. “If we lose Russian supplies completely, there isn’t much room to increase supplies from elsewhere,” said Oxford Institute’s Mr Sharples.
There are other wild cards as well. Until the gas crisis hit, the Dutch government drafted a plan to phase out the huge Groningen field in the northern Netherlands — one of the few major sources of natural gas in mainland Europe — amid local anger over earthquakes caused by gas extraction.
Some observers have questioned the government’s continued reluctance to awaken what S&P Global’s Mr. Stoppard called a “sleeping giant” that could return very substantial amounts of gas – perhaps as much as 40 percent of Germany’s annual consumption – back to the grid. to deliver.
The Dutch government has decided not to close the gas wells for the time being due to “uncertain geopolitical developments”, but insists it will only consider Groningen “in the worst case scenario, if people’s safety is endangered”.
This attitude could be tested in the coming months.
Melissa Eddie reporting contributed.