Hanging By a Thread: Europe’s Coming Gas Crisis.
Winter is Coming and Europe Lacks the Capacity to Replace Russian Gas.
If you judge a man’s credibility by the length of his title, then Robert Habeck is an incredibly credible man: He is The Vice Chancellor of Germany, and the Federal Minister for Economic Affairs and Climate Action. And when Germany’s gas storage reached 90% in late September, Habeck proclaimed that Germany can "comfortably" get through the winter despite the lack of Russian Gas.[i] To survive without Russian gas, Habeck (who ironically is a Green) now pushes Germany to reduce natural gas use, even if Germany uses more coal. It seems that when gas is scarce, Germany would rather use coal than freeze to death in the name of fighting global warming.
But how bad is the gas crisis in Europe? Can Europe physically get natural gas no matter the price it’s willing to pay?
The last Blue Cow Report covered how dependent Europe is on Russian gas. Despite an extensive history of Gazprom shutting off gas or threatening to reduce gas flows Europe, Europe ignored those warnings for years and instead increased its dependence on Russian gas. This was done, in part, to phase out coal, reduce nuclear, ban fracking (in some of the EU), and expand wind and solar. As late as 2021, Europe still wanted to expand its dependence on Russian gas. In 2021, President Biden waived his predecessor’s sanctions on the Nord Stream 2 pipeline, paving the way for Germany to become more dependent on Russian Gas.
Yet in the wake of the Russian invasion of Ukraine, Europe’s choices came back to haunt them. Gas prices rose significantly during the wind drought of 2021, greatly reducing the output of wind turbines before the invasion of Ukraine. This set the stage for a gas shortage as high gas costs and supply constraints reduced Europe’s buildup of gas storage for the 21/22 winter. Then came the war: gas prices surged even higher as the EU faced the possibly that Russia might shut off its natural gas. Over the past months, the EU panic purchased nearly every molecule of gas it could to to replenish the already low gas storage.
But what happens if Russia turns off the gas? The gas storage system only covers peaks in winter demand and it only works if the gas continues to flow throughout the winter.
Putin [ii] warned months ago that Russia might shut off gas flows to Europe. Some, believing that Russia needs the money, argued that Russia would never stop the gas flows.
But there are several reasons why Putin might have the valves turned off.
First, the EU needs Russian gas more than Russia needs the EU buying gas. Russia has other customers, Indian and China for example. Russia produces 10% of the globe’s oil. Oil is much easier to sell and transport than gas and so Russia’s customer base is much larger and broader than Europe’s lopsided dependence on Russian gas. To illustrate, President Biden waived sanctions on the Nord Stream 2 pipeline and warned that if Russia invaded, the Nord Stream 2 would be stopped. Did Russia care? Apparently, not enough to stop a war. Unfortunately, the West exaggerated Russia’s desire to do business with the EU.
Second, the EU announced a phase out of Russian gas by 2027. [iii] Do we really expect Russia to patiently hold the EU’s hand through this transition while the EU actively cuts off Russia? Meanwhile, the EU supplies weapons and money to Ukraine so that Ukraine can kill tens of thousands of Russian troops. While Blue Cow Reports strongly supports Ukraine’s right to defend its borders, you can bet that Putin doesn’t feel the same way.
Third, Russia does not want to be paid with money that can be sanctioned. Instead, Russia wants to be paid in Rubles. In light of the financial sanctions, why would Putin sell in gas in Euros or Dollars if he can’t control the currency? Recently, Hungary and Russia agreed increase gas flows from Russia to Hungary. [iv] The catch is that Hungary broke ranks with the EU and agreed to pay in Rubles.
Before the explosion of the Nord Stream pipelines, Russia reduced gas in major pipelines to Europe. As you can see in the chart, gas flows were significantly reduced or completely stopped by July of 2022.
Then, Russia shut off all gas ‘indefinitely” via the Nord Stream 1 pipeline. If the sanctions were lifted, the gas would flow, Putin said. Russia claimed the sanctions prevented maintenance on the pipeline.
Shortly before the explosion, Gazprom sent a force majeure letter to Germany in an attempt to waive Gazprom’s supply commitments. Germany said no, you’re still on the hook.
Then the Nord Stream pipelines blew up.
Russia may have zero intention of resuming gas flows to Europe. This is not a prediction: this is simply stating that Putin has reasons enough to keep the gas off. It also is possible that Russia could resume gas shipments.
Can the EU replace Russian gas if Russia does not turn the pipes back on?
As a stop-gap effort, Europe rented floating natural gas ships while the Europe builds permanent import plants. At Eemshaven (Netherlands), two leased regasification ships should be at full capacity by winter. During this rapid ramp-up, Eemshaven received its first LNG shipment in September and very quickly sold-out its capacity.[v] There are other, very similar stories throughout Europe. But floating gas ships have limited capacity.
As a permanent solution, the EU is planning and building onshore LNG plants, often at the same locations as the FLNG ships. [vi] But even if the permanent facilities are built, the EU will still lack the capacity to replace Russian gas. The trade group Gas Infrastructure Europe estimates that by 2030, Europe’s import capacity will have expanded by about 6.3 Bcf/d. This is roughly 50% of Russian pipeline exports to Europe in 2021.
If Russian gas stays off, Norway is one of the last threads holding Europe from falling into an energy abyss. In September, officials turned a black valve on a yellow section of pipeline, ceremonially commissioning the Baltic pipeline. “Baltic Pipe gas calms European nerves over Russian shortfall,” Reuters Reported. [vii]
However, the Baltic pipeline does not increase Norway’s export capacity to Europe. The new pipeline is simply a branch from the existing Europipe 2 which already brings gas from Norway to Germany. The Baltic pipeline re-directs capacity away from Germany to Poland.[viii] [ix] This benefits Poland since Russia already cut off Poland’s pipeline connection (via the Yamal Pipeline). However, the Baltic pipeline does not replace the Nord Stream 1 which brought gas from Russia to Germany.
In fact, it is estimated that Norway’s pipelines have less than 1Bcf/d of spare capacity. While in theory Norway might add compressors to boost gas flows, Norway currently lacks the capacity to replace the Nord Stream system (which sent 5-6 Bcf/d), let alone all of Russian gas.
Production capacity matters too. Much of Norway’s gas is located offshore in the North Sea, a place notorious for harsh weather. It’s difficulty to quickly bring in deep sea oil rigs, drill new wells, and connect them to gas processing on the mainland. Yes, Norway is on track to increase production by about 8% over 2021 levels. But to replace Russian gas, Norway would need to go from about 11 Bcf/d to around 23-24 Bcf/d. [x]
Other headlines trumped the new Greek pipeline connection to Azerbaijan. Unfortunately, it’s small. Azerbaijan recently signed a memorandum of understanding with the EU. The goal is to boost Azerbaijan’s exports to the EU by approximately 0.38 Bcf/d. By 2027, Azerbaijan also pledged to increase gas 1-2 Bcf/d. But there are serious doubts if Azerbaijan could handle that increase without significant investment in both pipelines and production. [xi]
We turn now to Spain. Spain has massive gas LNG import capacity and significant pipeline connections to Africa.[xii] But there’s a catch: Spain doesn’t have good connections with the rest of Europe. A pipeline was proposed in 2013 only to be cancelled. Now, Germany is eager to see a pipeline from Spain. However, France’s President Macron rebuffed the idea. Why? For Macron, a gas pipeline doesn’t fit with Europe’s grand plans to de-carbonize.[xiii]
What about Africa? While there is talk of a Trans-Saharan Pipeline,[xiv] such a pipeline could be years from completion, if the countries involved commit to building it. Libya used to be a significant gas producer. Yet with political instability, Libya is a risky bet.
And yes, the UK reversed its ban on fracking. But they’ll need to find and train a workforce that actually knows how to do fracking. Plus, the UK currently lacks the supply chain for fracking sands, etc.
Plain and simple: the EU can’t replace Russian gas anytime soon.
If Russian gas stays off, the IEA predicts that the EU will need to reduce gas consumption by 13% to make it through this winter. If the EU has a cold winter (or if Asia has a cold winter which would pull LNG shipments away from the EU), those reductions will need to be steeper. And what if there’s a major ‘accident’ in Norway’s gas system? [xv]
Let’s do a simple analysis based on the chart above. If gas flows (net of demand reductions) are off by 2 Bcf/d, the EU will need an additional 300 Bcf of gas. If the EU is short gas by 12 Bcf/d (roughly the size of Russian gas), then EU will be short 1800 Bcf.[xvi] Either they will drain storage or significantly cut back on consumption.
Here is one last chart: It compares 2021 Russian gas flows to EU’s storage capacity. Without Russian gas, It will be extremely difficult to fill storage for the 2023/2024 season.
While Minister Habeck (the one with the very long titles) claims that Germany can “comfortably” get through the winter, we can comfortably say that the EU does not have the capacity to replace Russian gas.
Thank you for reading.
[i] https://www.dw.com/en/german-gas-storage-90-full-ahead-of-winter-despite-russian-cuts/a-63178397
[ii] https://oilprice.com/Energy/Natural-Gas/Russian-Gas-Flows-To-Europe-Even-After-Putins-Gas-For-Rubles-Deadline.html
[iii] https://www.cnn.com/2022/03/11/energy/europe-russia-energy-end-date/index.html
[iv] https://www.reuters.com/world/europe/hungary-working-solution-pay-russian-gas-may-foreign-minister-2022-04-06/
https://www.eia.gov/naturalgas/storage/basics/
scenarios
https://insight.factset.com/are-europes-natural-gas-storage-fears-overblown
FLNG
https://www.oilandgasiq.com/fpso-flng/articles/guide-to-flng
[v] https://www.tankstoragemag.com/2022/08/03/all-capacity-at-eemshaven-lng-terminal-sold/
[vi] https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/natural-gas/081022-feature-europes-dash-for-new-lng-import-infrastructure-picks-up-pace
[vii] https://www.reuters.com/business/energy/baltic-pipe-gas-calms-european-nerves-over-russian-shortfall-2022-10-07/
[viii] https://www.gassco.no/en/our-activities/pipelines-and-platforms/europipe/
https://www.gassco.no/en/our-activities/pipelines-and-platforms/europipe/
https://www.gassco.no/en/our-activities/pipelines-and-platforms/europipe-II/
[ix] https://www.euronews.com/2022/09/27/baltic-pipe-norway-poland-gas-pipeline-opens-in-key-move-to-cut-dependency-on-russia
[x] https://www.norskpetroleum.no/en/production-and-exports/the-oil-and-gas-pipeline-system/
[xi] https://oilprice.com/Energy/Natural-Gas/Will-Azerbaijans-New-Gas-Pipeline-Be-Enough-To-Ease-Europes-Energy-Crisis.html
https://eurasianet.org/azerbaijan-and-eu-agree-to-strategic-energy-partnership
[xii] https://oilprice.com/Energy/Energy-General/Europes-Latest-Natural-Gas-Pipeline-Plan-Wont-Solve-Its-Current-Crisis.html
[xiii] https://abcnews.go.com/International/wireStory/frances-macron-building-iberia-gas-pipeline-91108590
[xiv] https://www.libyaobserver.ly/economy/libya-could-join-nigal-gas-pipeline-project-extends-nigeria-europe
[xv] https://www.marketwatch.com/story/europe-faces-unprecedented-risk-of-gas-shortage-warns-iea-01664780693
[xvi] ). draw-downs typically continued until late May/April. This assumes a cold season from Nov-May/April.