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| Inside the Bovanenkovo gas supply facility on the Yamal Peninsula, Russia. (Source: AFP) |
Last winter passed without serious gas shortages thanks to the timely and urgent actions of EU members. However, in a recent article on The Conversation , Michael Bradshaw, Professor of Global Energy at Warwick Business School, University of Warwick, UK, warned that the gas supply problem is far from solved in the coming winters.
Russia’s military intervention in Ukraine (since February 2022) has caused an unexpected energy shock to Europe. With the prospect of a severe shortage of Russian gas, there are concerns that Europe’s energy infrastructure will not be able to meet demand for the winter of 2022-2023, causing economies to collapse.
However, a mild winter and the gradual implementation of the EU's plan to reduce energy consumption and buy more from alternative suppliers have kept the region from being defeated in the energy shortage, despite some supply difficulties.
Germany, Italy and other countries have weaned themselves off Russian gas without suffering serious power shortages.
Since then, there has been more positive news for Europe. Energy prices have fallen steadily into 2023, while the continent’s gas reserves reached 90% of capacity three months ahead of target (November) and could even reach 100% this September.
Politicians like German Energy Minister Robert Habeck say the worst of the energy crisis is over. But, as we shall see, it is still a bit early to be so confident.
New vulnerability
The EU's share of pipeline gas imports from Russia has fallen from 39% to just 17% between early 2022 and early 2023. In response to this shift, the EU has become more dependent on liquefied natural gas (LNG) shipments than before.
The union’s total LNG import share has increased from 19% in 2021 to around 39% in 2022, amid rapid infrastructure upgrades that are expected to add a third of LNG capacity between 2021 and 2024. In fact, 13% of LNG imports into the EU still come from Russia, whose exports have also increased significantly since the start of the conflict in Ukraine.
This surge in LNG has left European countries vulnerable to market fluctuations – especially as 70% of imports are bought on a short-term basis rather than using the long-term contracts common in Asia.
For example, European benchmark gas prices have risen in recent weeks amid concerns about strikes at several Australian LNG plants, suggesting that supplies remain tight and more likely to be disrupted in today’s highly interconnected global market.
To synchronise LNG demand, the European Commission (EC) has launched initiatives such as the EU Energy Platform, an IT platform that makes it easier for suppliers in member states to buy fuel together. However, it is unclear to what extent supplies can be channelled through this tool as it has yet to be tested. There are also concerns that this type of state intervention could backfire and undermine the functioning of the market.
In terms of pipeline gas, Norway has overtaken Russia to become Europe’s top supplier, meeting 46% of the continent’s needs by early 2023 (up from 38% a year earlier). However, this additional load has put a strain on Norway’s gas infrastructure.
In May and June, delayed pipeline maintenance work slowed flows and sent prices soaring, again showing how tight the European market is now. Extended maintenance work in Norway, leading to more disruptions in the future, is clearly a possibility.
Meanwhile, the EU is still expected to buy around 22 bcm (billion cubic metres) of gas from Russia this year, a large portion of which passes through Ukraine, and with the current Russia-Ukraine transit agreement unlikely to be extended beyond its expiry in 2024, the supply route is at risk of being disrupted.
As part of its pivot away from Russia, the EU has managed to reduce its gas consumption by 13% by 2022 (against a target of 15%), according to the International Energy Agency (IEA). In the coming months, conflict-weary EU states may not fare well on this front.
Falling prices and the failure of some countries to cut consumption last winter have not helped matters. Only 14 of the 27 EU members have introduced mandatory energy cuts, while eastern countries such as Poland, Romania and Bulgaria have done little to reduce consumption. If there are gas shortages in Europe this winter, it could undermine calls for unity within the bloc.
What will happen?
The reality is that if Europe is to avoid a gas price spike, it will have to hope for mild weather across the Northern Hemisphere for at least two or three more winters without major disruptions to global LNG supplies.
Even as things stand, gas prices in Europe are still around 50% higher than their long-term pre-conflict average, which is causing economic pain for both households and businesses.
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| Gas pressure will ease from at least the mid-2020s. |
The issue is particularly important for Germany, the EU’s industrial powerhouse, with its energy-intensive auto and chemical industries. There are growing concerns that continued high energy prices could spur deindustrialization as energy-intensive industries move elsewhere.
The good news, however, is that the pressure on gas will ease from the mid-2020s at least. Significant new LNG supplies will emerge from the US and Qatar, and the market will rebalance. Under the planned energy cuts, European gas demand will also fall significantly – by 40% by 2030.
There are even rumors of a supply glut later this decade, depending on the increased deployment of renewable energy in Europe and the new generation of nuclear power plants coming online. This would significantly reduce Europe’s need for gas imports, but only if the bloc works together effectively.
What EU countries can achieve was seen in the months after Russia launched its military campaign in Ukraine, when France supplied gas to Germany, helping Berlin reduce its dependence on Russia, and then Germany supplied electricity to French cities to overcome blackouts caused by maintenance on its nuclear power plant.
Challenges remain for the bloc, though. While France is trying to drum up support for modernizing its nuclear fleet both at home and elsewhere in Europe, it is facing opposition from groups like the German-led Friends of Innovation, which favors building and developing only renewable energy. This division could be a serious obstacle to achieving a faster energy transition away from fossil fuels.
So, despite its efforts to move away from Russian pipeline gas, Europe will still face volatility in global markets unless countries significantly reduce demand in the coming years.
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