Robert Minter(pictured), Director of Investment Strategy, abrdn comments on the goings on of the European gas crisis:
If your household gas bill were to accurately reflect current gas prices, it would be not just 30% higher, but 10 times more than you paid last year. The current crisis with Russian troops on the border of Ukraine is further bad news for the price of natural gas in the UK and Europe because of the heavy reliance on Russian gas.
For this time of year, we’re experiencing the worst inventory situation for natural gas in Europe, with inventories far below even their lowest point in five years. Currently, the UK and Europe import 40% of their gas from Russia, 16% from Norway, and supplies of liquid natural gas (LNG) are coming in from Algeria, Qatar and the US. There are two LNG terminals under construction in Europe, but many more would be needed to offset the volume imported from Russia. The desire by governments to make the ‘green’ political decisions that electorates want – fund renewable energy and pull out of fossil fuels and nuclear have been unbalanced in favour of removing fossil fuels faster than adding renewables, leading to the current energy deficit.
Europe reduced the quantity of long term natural gas contracts in favour of purchasing in the open market at spot prices years ago. The intent was to keep the contracts from funding the fossil fuel industry, but it also made Europe the destination of last choice for global gas supply.
Germany, which closed three nuclear plants last year, and will close the remaining three this year, is particularly dependent on Russian imports. This decision was made in 2011 after an earthquake generated a tidal wave that caused a nuclear accident in Japan. German power supply options are becoming limited and it seems inevitable that the Nordstream 2 pipeline will be certified and become operational shortly. German rules requiring an independent operator appear close to being met.
One entry point for Russian gas is Mallnow in Germany, where flow dropped to zero in mid-December and has at times turned negative. Russia is in fact occasionally pulling gas out of storage in Europe and back through the pipeline into Russia. Gazprom has announced there are no plans to send gas through the pipeline to Mallnow in February, although daily auctions may change this situation.
The supply of liquid gas to Europe from the US could become meaningful. Last month 7.15 million tons of LNG was exported from the US on 106 vessels and half of this went to Europe. But more facilities are needed to import LNG in bigger volume. Gas has to be liquified for transport, then the process has to be reversed at the importer’s end. The US has lobbied Europe to build more facilities for import.
However, imports from the US could only replace around one third – 60 billion cubic metres – of the annual 180 bcm that Gazprom sends to Europe. And LNG facilities would only be ramped up if long-term contracts were put in place.
Certainly, there is hope that renewable supply will improve in Europe. Scotwind recently completed the largest auction for seabed leasing for offshore wind turbines. But the sun goes in, the wind drops and not enough planning is going into back-up energy capacity.
The recent pullback in European gas price has come from an unfortunate source. China recently increased thermal coal production by 2 million tons per day, allowing for their planned natural gas imports to be sent into the global markets.
This isn’t the green future we are looking for.