Mon. Jan 30th, 2023

Prof. ST Hsieh

Director, US-China Energy Industry Forum

626-376-7460

[email protected]

December 19, 2022

Europe’s energy crisis is obvious and challenging, but it is amazing that no one in Europe seems to address the root cause of their problem. The “concern” of over reliance of Russian energy was the driving force of the war in Ukraine. The immediate sanctions after the war in Ukraine broke out were to punish Putin and cut off the Russian energy supply to Europe. The simple rationale is that Russia just is not a trustworthy nation for Europeans to do business. Unfortunately, European politicians never had any back up plan to replace Russian energy, even now. Nor, they have no exist strategy for ending the war in Ukraine.

So, the real bad news for Europeans is not “Europe’s Energy Crisis” will be worse the next year, rather their leaders do not accept, or realize, that war in Ukraine must end soon. Of course, ending the war in Ukraine is not an easy task, nor it will resolve Europe’s energy crisis overnight. But as the war in Ukraine rages on uncontrolled, Europe will not be in peace, crisis will never end, energy crisis, economic crisis, humanity crisis…essentially Europe will be consumed by this war.

Unfortunately, the world is interconnected now and whatever happens in Europe does impact the world. No one is shielded from good news or bad news.

Europe’s Energy Crisis Is Just Getting Started

Editor OilPrice.com

Mon, December 19, 2022 at 12:38 AM PST

Despite successfully filling its gas storage ahead of winter this year, Europe’s energy crisis is far from over. The situation for Europe could, in fact, be worse next winter when Russian pipeline gas supply will be down to a trickle, at best.

European households and businesses have already seen a rise in total energy costs by $1.06 trillion (1 trillion euros), according to estimates by European economic think-tank Bruegel published by the International Monetary Fund (IMF). According to Bruegel’s analysts, if governments in Europe do nothing except offer financial support, and if they cover the price increases, this sum would represent a massive 6% of the annual GDP of the EU.

Instead, the EU needs a “grand bargain” to encourage savings and increase supply at the same time.

The next 12 to 24 months will determine whether Europe will be able to cope with the energy crisis without having to resort to mandatory rationing or without losing too much industry competitiveness.

Natural gas storage sites in the EU started to drain, with storage at 84% as of December 17, according to Gas Infrastructure Europe. Inventories are higher than at this time last year, but the true test for Europe will come next year when it will have to refill gas storage sites adequately enough to meet the 2023/2024 winter demand.

This is where the planning becomes trickier, depending on how low inventories will be after this winter and whether the EU has the capacity to haul in continued record volumes of LNG and continue outbidding Asia, especially if demand in China rebounds after a reopening from strict Covid curbs.

However, the significant drop in Russian gas supply this year occurred only in June.

Ahead of winter 2023/2024, the gap in gas supply in Europe will be much wider without Russian gas. Europe will not be importing much Russian gas—or none at all if Russia cuts off deliveries via the one link left operational via Ukraine and via TurkStream—compared to relatively stable imports from Russia in the first half of this year before Moscow started gradually cutting volumes via Nord Stream in June and then shut down the pipeline in early September.

According to a recent report from the IEA, if Russian gas supply drops to zero and Chinese LNG demand rebounds to 2021 levels, the EU could have a gas supply-demand gap of 27 billion cubic meters in 2023.

Looking forward, we expect gas and LNG markets to remain volatile,” Trafigura said in its annual report for the year to September 30.

Natural gas prices in Europe will have to remain elevated so that the continent can continue to attract most of the LNG cargoes in competition with the other key demand centers, according to Trafigura. The commodity trader expects Europe to prioritize the security of supply “through next winter and beyond.”

By Tsvetana Paraskova for Oilprice.com

Analysis-The hardest part is yet to come for gas-hoarding Europe

Susanna Twidale, Marwa Rashad and Emily Chow

Mon, December 19, 2022 at 6:58 AM PST

(Reuters) – Europe faces a much tougher task to rebuild gas stocks next year compared with this winter, meaning energy bills are likely to stay high and governments could have to implement painful rationing measures they have so far avoided.

The expense of buying gas on the open market rather than through contracts negotiated at favourable prices will also be harder to bear for governments weakened by months of steep energy costs that have driven inflation to mutli-decade highs.

“Many of the circumstances that allowed EU countries to fill their storage sites ahead of this winter may well not be repeated in 2023,” Fatih Birol, Executive Director of Paris-based International Energy Agency (IEA) said last week.

PIPELINES VERSUS LNG

Before Russia invaded Ukraine in February, prompting Western sanctions, Russia provided around 40% of Europe’s gas.

Shipments via Ukraine continue, but are at risk as the war with Russia shows no sign of ending, while gas deliveries through Nord Stream have stopped since the end of August.

Analysts at Wood Mackenzie forecast up to 25 bcm less Russian gas will reach Europe for the 2023 filling season from April to end September when summer temperatures reduce heating demand.

That means the levels left in storage at the end of this winter will determine the scale of the challenge for the following winter.

Based on an average gas price forecast of 95 euros per megawatt hour (MWh) for 2023, Izbicki said it will cost around 58 billion euros for Europe to meet the target, similar to the filling costs analysts calculated for this year.

WEATHER AND PRICE DETERMINE DEMAND

The cost of energy has focused minds on reducing gas consumption, which fell by around a quarter in October and November year-on-year, analysts said, through a wide range of measures such as fuel switching, efficiency, and curtailing production.

“The focus will continue to be on demand-side reductions next year, with the scale of the challenge dependent in part on where stocks sit coming out of winter,” Luke Cottell, senior analyst at Timera Energy, said.

A large dent has also come from industrial sectors forced to curb output as high gas prices make production uneconomic with some firms shifting production to regions with cheaper energy.

“We still see the reduction in industrial gas demand owing to lower economic activity as mostly reversible in 2023 if prices drop, but the longer prices stay elevated the more likely it is that businesses will permanently offshore their gas-intensive production,” Energy Aspects’ Izbicki said.

As temperatures plunged in Europe earlier this month, the German energy regulator, the Federal Network Agency said Europe’s largest gas consumer had fallen short of its gas saving targets for the first time.

FIGHT FOR SUPPLIES

The obvious way to boost supplies is through liquefied natural gas (LNG).

Countries such as Germany, Poland and the Netherlands built or expanded LNG regasification terminals that receive seaborne cargoes of LNG from around the world, and reheat it to pump into domestic gas networks.

Europe and Britain’s LNG import capacity will increase around 25% by the end of 2023 compared with 2021 levels, data compiled by the U.S. Energy Information Administration showed.

But having capacity is no guarantee of supplies.

That may not happen next year, meaning Europe would face fierce competition for LNG that would drive up the cost.

“Asia consumption could shift from a tailwind to Europe to a major headwind for European buying,” said Sean Morgan, director at U.S. banking firm Evercore ISI.

Europe’s efforts to introduce a cap on gas prices in the European Union could further hamper EU attempts to secure cargoes, countries, such as Germany, which have opposed the plan, say.

Record high prices in Europe, however painful, helped the region to secure record volumes of LNG imports this year.

“Next year will be a constant headache for prices rather than the pain of the being punched in the face, migraine attack we saw this August,” Henning Gloystein, a director at consultancy Eurasia, said.

Europe’s $1 Trillion Energy Bill Only Marks Start of the Crisis

Bloomberg News

Sun, December 18, 2022 at 12:30 AM PST

Europe got hit by roughly $1 trillion from surging energy costs in the fallout of Russia’s war in Ukraine, and the deepest crisis in decades is only getting started.

After this winter, the region will have to refill gas reserves with little to no deliveries from Russia, intensifying competition for tankers of the fuel. Even with more facilities to import liquefied natural gas coming online, the market is expected to remain tight until 2026, when additional production capacity from the US to Qatar becomes available. That means no respite from high prices.

While governments were able to help companies and consumers absorb much of the blow with more than $700 billion in aid, according to the Brussels-based think tank Bruegel, a state of emergency could last for years. With interest rates rising and economies likely already in recession, the support that cushioned the blow for millions of households and businesses is looking increasingly unaffordable.

“Once you add everything up — bailouts, subsidies — it is a ridiculously large amount of money,” said Martin Devenish, a director at consultancy S-RM. “It’s going to be a lot harder for governments to manage this crisis next year.”

Government fiscal capacity is already stretched. About half of European Union member states have debt exceeding the bloc’s limit of 60% of gross domestic product.

A rush to fill storage last summer, despite near-record prices, has eased the supply squeeze for now, but freezing weather is giving Europe’s energy system its first real test this winter. Last week, Germany’s network regulator warned that not enough gas is being saved and two of five indicators, including consumption levels, have become critical.

With supply tight, businesses and consumers have been asked to reduce usage. The EU managed to curb gas demand by 50 billion cubic meters this year, but the region still faces a potential gap of 27 billion cubic meters in 2023, according to the International Energy Agency. That assumes Russian supplies drop to zero and Chinese LNG imports return to 2021 levels.

“Getting gas is an absolute necessity and we will likely see widespread European hoarding,” said Bjarne Schieldrop, chief commodities analyst at Swedish bank SEB AB, predicting a “seller’s market” for at least the next 12 months . “The race is on to fill EU natural gas inventories” before next winter.

LNG imports into Europe are at record levels and new floating terminals are opening in Germany to receive the fuel. Government-backed buying has helped Europe attract cargoes away from China, but colder weather in Asia and a potentially strong economic recovery after Beijing eased Covid restrictions could make that more difficult.

China isn’t Europe’s only problem. Other Asian countries are moving to procure more gas. Japan, the world’s top LNG importer this year, is even considering setting up a strategic reserve, with the government also looking to subsidize purchases.

“The nature of the support will change from an urgent, all-encompassing approach to more targeted measures,” said Piet Christiansen, chief strategst at Danske Bank A/S. “The numbers will be smaller — but it will still be there through this transition.”

For the likes of Germany, which rely on affordable energy to make products from cars to chemicals, high costs mean losing competitiveness to the US and China. That puts pressure on Chancellor Olaf Scholz’s administration to maintain support for the economy.

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