Europe’s race to secure new energy sources is on a knife edge

As Russia tightens its grip on natural gas supplies, Europe is looking everywhere for energy to drive its economy. Coal-fired power plants are being revived. Billions are spent on terminals to transport liquefied natural gas, much of which comes from shale fields in Texas. Officials and heads of state travel to Qatar, Azerbaijan, Norway and Algeria to strike energy deals.

Across Europe, fears are growing that a Russian gas cut will force governments to ration fuel and companies to close factories, moves that could put thousands of jobs at risk.

So far, the fuel hunt has met with considerable success. But with prices continuing to soar and the Russian threat showing no signs of abating, the margin for error is slim.

“There is a very big and legitimate concern about this winter,” said Michael Stoppard, vice president of global gas strategy at S&P Global, a research firm.

Five months after Russia invaded 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 scramble to get through the coming winter.

The amount of natural gas coming from Russia, once Europe’s biggest source of fuel, is less than a third of what it was a year ago. This week, Gazpromthe Russian energy giant, cut already sharply reduced flows in a key pipeline linking Russia to Germany, sending European gas futures prices to record highs.

Less than a day after Gazprom’s announcement, the European Union called for a 15% reduction in gas consumption across the bloc.

This move away from Russian natural gas — almost unthinkable after a decades-long embrace of Siberian gas delivered via pipelines stretching thousands of miles — is sending shockwaves through factories and forcing governments to seek energy sources. alternatives.

The multi-pronged effort to discover alternatives to Russian gas more than made up for the shortfall. Despite Gazprom’s cuts, natural gas supplies in Europe in the first half of 2022 were about equal to the same period last year, according to Jack Sharples, a fellow at the Oxford Institute for Energy Studies.

The most notable player in this comeback has been liquefied natural gas, cooled in condensed liquid form and transported on ships. LNG has essentially switched places with piped gas from Russia as the main fuel source in Europe. About half of the supply comes from the United States, which this year became the first the world’s largest fuel exporter.

As for the end of the year, European countries are pushing energy companies for filling salt caverns and other storage facilities gas to provide a margin of safety in case Russia closes the pipelines.

Gas storage in Europe has now reached around 67% of overall capacity, more than 10 percentage points higher than a year ago. These levels provide reassurance that European countries could achieve something close to the European Union’s target of 80% infill before winter.

But concerns continue to grow and there are plenty of reasons why the European effort could fail as colder weather approaches.

Russia is well aware of the European Union’s campaign to store enough gas to avoid a blackout this winter and wants to prevent it, analysts say, by causing a drop in pipeline flows. And all kinds of weather problems – an unusually cold winter, a storm in the North Sea that knocks out Norway’s gas production or a busy Atlantic hurricane season that delays LNG tankers – could tip Europe into energy shortages.

“We are getting closer to the danger zone,” said Massimo Di Odoardo, vice president for gas at Wood Mackenzie, a research institution.

Reflecting these concerns, European gas futures prices have doubled in the past two months to around 200 euros per megawatt-hour on the Dutch TTF exchange, around 10 times the levels of a year ago.

The astronomical cost of energy in Europe is putting a wide variety of industries on the defensive, forcing changes that could help meet the European Union’s voluntary 15% gas savings target. The International Energy Agency recently predicted that gas demand in the region will fall by 9% this year.

For example, a steel mill owned by ArcelorMittal in the bustling port of Hamburg in Germany has for years used natural gas to extract iron which then goes into its electric furnace. But recently, she has turned to buying metal inputs for her plant from a sister plant in Canada with access to cheaper energy. North American natural gas prices, while high by historical standards, are about one-seventh of European prices.

“Natural gas is so expensive that we cannot afford” to operate in the usual way, said Uwe Braun, managing director of ArcelorMittal Hamburg.

Few analysts or executives expect the situation to improve in the coming months. Instead, winter may well prove difficult with energy-intensive industries such as metal foundries and manufacturers of fertilizers and pressure glass.

News of factory closures or production cuts are already arriving. In Romania, the ALRO group recently announced that it was closing production at a large aluminum plant and laying off 500 people because high energy costs made it uncompetitive.

In some countries, including Britain and Germany, energy companies have yet to fully pass these costs on to their customers, meaning the hardest hits are yet to come.

“The biggest risk at the moment is an explosion in household and industrial energy prices this winter, which the public and industry can barely cope with,” said Henning Gloystein, director of Eurasia Group, a political risk company.

Shipments of liquefied natural gas, the main alternative to piped gas from Russia for much of the continent, remain a costly alternative. And Europe’s growing appetite for LNG could harm other parts of the world that depend on this fuel.

Europe mainly sold liquefied gas to other markets, mainly in Asia, where China, Japan and South Korea are the main customers. Europe is “taking LNG away from markets that aren’t willing to pay the prices Europe might be willing to pay,” Ben van Beurden, chief executive of LNG supplier Shell, told reporters on Thursday. “It’s a very uncomfortable position.”

Countries like Germany and Romania are also taking other measures, including reviving coal-fired power plants or delaying their decommissioning. The idea is to minimize the amount of gas used in power plants to generate electricity and save it for essential needs like home heating or running factories. Thursday, the International Energy Agency predict that global coal demand this year will reach nearly nine billion tonnes, matching its 2013 peak.

Many uncertainties remain. Although Europe has around two dozen terminals for receiving liquefied natural gas, none are in Germany. Berlin is working to build up to four such facilities and has earmarked 2.5 billion euros ($2.55 billion) to lease four LNG processing vessels, but it is unclear whether the one will be online soon enough to provide plenty of help this winter.

The weather can also be crucial, and not just in Europe. A freezing winter in Asia, long the leading market for liquefied gas, would strengthen competition with Europe for what analysts say is a limited global supply of LNG

It’s also hard to see where any other big increases in gas would come from. “If we lose Russian supply entirely, there is not much room to increase supply from elsewhere,” said Mr Sharples of the Oxford Institute.

There are other jokers. Until the gas crisis hits, the Dutch government has a plan in place to shut down the massive Groningen field in the north of the Netherlands – one of the few major sources of natural gas in mainland Europe. – due to local anger over earthquakes caused by gas extraction.

Some observers question the government’s continued reluctance to wake up what S&P Global’s Mr Stoppard called a “sleeping giant” that could reinject massive amounts of gas – possibly 40% of the country’s annual consumption. Germany – in the network.

The Dutch government has decided to permanently suspend the closure of gas wells due to “uncertain geopolitical developments”, but it insists that it will only consider using Groningen “in the worst case, if people’s safety is at risk”.

This position could be tested in the coming months.

Melissa Eddy contributed report.

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