Europe’s energy crisis is just beginning | Popgen Tech
Despite the successful filling of its gas storage before 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 supplies will be at best a trickle.
European households and businesses have already seen a rise in total energy costs by $1.06 trillion (1 trillion euros), according to estimates by the European economic think tank Bruegel published by the International Monetary Fund (IMF). According to Bruegel’s analysts, if governments in Europe did nothing but provide financial support, and if they covered the price increases, this sum would represent a massive 6% of the annual GDP of the EU.
“Massive government support can delay adjustment to a new price equilibrium and create the need for even more support,” say Bruegel’s experts.
Instead, the EU needs a “grand bargain” to encourage savings while increasing supply.
The next 12 to 24 months will determine whether Europe will be able to deal with the energy crisis without resorting to mandatory rationing or without losing too much competitiveness in the industry.
Europe’s energy systems were already put to the first real test this month amid an Arctic blast that swept through most of northwest Europe, bringing freezing temperatures, snow to the UK and reduced wind speeds in Germany.
Natural gas storage sites in the EU have started to drain, with storage at 84% from December 17, according to Gas Infrastructure Europe. Inventories are higher than last year at this time, but the real test for Europe will come next year when it will need to replenish gas storage facilities sufficiently to meet 2023/2024 winter demand.
This is where the planning becomes more difficult, depending on how low inventories will be after this winter and whether the EU has the ability to procure continued record volumes of LNG and continue to outperform Asia, especially if demand in China recovers after ‘ a reopening of strict Covid curbs.
With lower gas consumption and not much Russian gas flowing through pipelines, the EU continued to reduce its dependence on Russia, from around 40% of imported gas supplies before the Russian invasion of Ukraine, to less than 9%according to EU figures from September.
However, the significant drop in Russian gas supply this year only occurred in June.
Before winter 2023/2024, the gas supply gap in Europe will be much larger without Russian gas. Europe will not import much Russian gas – or none at all if Russia cuts deliveries via the one link that is activated via Ukraine and via TurkStream – compared to relatively stable imports from Russia in the first half of this year before Moscow gradually increases volumes started cutting. via Nord Stream in June and then shut down the pipeline in early September.
According to s recent report from the IEA, if Russian gas supplies fall to zero and Chinese LNG demand recovers to 2021 levels, the EU could have a gas supply-demand gap of 27 billion cubic meters in 2023.
With the plunge in Russian pipeline gas deliveries, Europe will need “large volumes” of LNG next year, commodity trader Trafigura said earlier this month.
“Looking ahead, we expect gas and LNG markets to remain volatile,” Trafigura said in its statement annual report for the year to 30 September.
“While Europe needs to avoid a blackout this winter by drawing on stockpiles and reducing demand, it will need to import large volumes of LNG in 2023 given the massive reduction in flows from Russia,” Trafigura said.
Natural gas prices in Europe will need to remain high for the continent to continue to attract most of the LNG cargoes in competition with the other key demand centers, according to Trafigura. The commodities trader expects Europe to prioritize security of supply “through next winter and beyond”.
Major uncertainties with weather and the EU’s ability to compete with a potential increase in LNG demand in Asia will determine how Europe fares next winter.
“Behind us now are two months of ‘buyer’s market’ with peak inventory, hot weather, a long queue of LNG ships and suppressed TTF prices,” commodity analysts Ole Hvalbye and Bjarne Schieldrop of SEB Bank said early December.
“Ahead of us is the big Q1 uncertainty and at least 12 months of ‘seller’s market’ as the race is on to fill EU wet gas stocks to a satisfactory level by October 2023.”
By Tsvetana Paraskova for Oilprice.com
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