Murphy’s law states, “Whatever can go wrong, will go wrong.” A theatrical adage takes another view, “It will be alright on the night.”
Europe has taken the second adage as its natural gas supply position, and it isn’t going well. European countries bet that natural gas spot prices would be low and that they could pick and choose and contain any commercial bad manners from supplier Russia with their combined market power. In short, “alright on the night.”
But Murphy’s law has prevailed.
Now Europe, from the Mediterranean Sea to the Arctic Circle, is wondering how it could all have gone so wrong so quickly and why European countries are facing the highest prices for gas and electricity in history, leading to economic damage, and possible blackouts and frozen homes and businesses this winter.
The temptation is to blame Russia for manipulating or, as some say, weaponizing the supply of gas to Europe. But didn’t Europe know what would happen? Russia isn’t known as a benevolent nation.
If Russia is to blame — which prima facie appears to be the case, as Europe gets fully half its natural gas from Russia — then the Europeans are to blame too. The gas buyers of Europe and their political masters bet that Russia needed their market more than they needed Russia’s gas.
It was a gamble and Europe lost. Russia won and has been cutting flows of gas into Europe, sometimes by two-thirds; then, capriciously, increasing them after the damage was done — increasing them to keep the markets see-sawing and prices and the future unsteady.
At the heart of that bad bet was the belief of many gas buyers that they could do better in the spot market than they could if bound to long-term, fixed contracts, some of them take-or-pay. Now the buyers who have long-term, fixed contracts are safe but worry if their suppliers will call force majeure and cut supplies.
So far, I am told in extensive telephone calls with traders, facilitators, lawyers, and an expert on global energy and diplomacy, that fixed contracts are holding firm. Even Gazprom, Russia’s giant energy company, needs to have some security in its gas exports.
Here are the elements of the energy crisis, which began in Europe but is buffeting the rest of the gas-dependent world.
First, world economic activity bounced back from its forced hibernation as a result of Covid-19 with more vigor than expected. From Brazil to China, factories and commercial activity boomed, increasing electricity demand and concurrently natural gas demand.
Then Europe suffered a wind drought. For most of the summer and the fall, wind speeds have been at some of the lowest levels for the past 60 years.
European Grid Destabilized
This has brought the stability of the European grid, with its growing wind dependence, into question and has been particularly damaging in the United Kingdom. There, where it was an act of faith that its offshore wind farms were dependable. But starting in April, the wind gave out, even in the North Sea — its gales transformed into zephyrs.
All this pointed up that the UK’s energy policy has been in chaos for decades. New nuclear has been delayed, and there was never much natural gas storage built in the UK, partly due to confidence in the spot market and the reliability of wind power. “They were caught at the end of the Russian pipeline,” one London trader told me.
At the other end of the scale, Malta (population about 540,000) in the Mediterranean has been an example of how a liquefied natural gas (LNG)-to-power and hedging strategy can avoid chaos and price spikes.
Malta doesn’t have much land for wind farms or utility-scale solar. When it decided to switch from heavy fuel oil to natural gas to fuel its power stations in 2013 (implemented in 2017), it realized that it needed to do a thorough examination of the perils of life as a gas-dependent nation.
The small island-state demanded a five-year, fixed-price for electricity and natural gas – the key was a fixed-supply contract with the State Oil Company of the Azerbaijan Republic (SOCAR), although none of the contracted gas comes from Azerbaijan. As a result, according to a source familiar with Maltese energy affairs, the island isn’t emitting 2 million tons of carbon annually at today’s price of 120 million euros a year. The source attributes this carbon emissions reduction to the 2013 set contract price for LNG.
Dorian Ducka, Albania’s former deputy minister of energy and industry, now a global gas consultant, says that Malta is in a better position than other EU islands which haven’t switched to gas. He singled out Spain’s Canary Islands for which, he says, LNG would have been a natural conversion. At present, power generators in the Canaries are emitting substantial carbon and particulate matter into the atmosphere and have some of the highest electricity prices in Europe.
The wind shortage this fall has unnerved Europe. Suddenly, gas is seen as vital to the future, not as a resource on the way out the door because of its climate-change impact.
Across Europe, renewables have lost ground in public acceptance as fuel bills have gone up and winter approaches. Nuclear is getting a fresh look, and France has already committed to boost it.
Last winter was particularly severe across Europe, which led to a larger drawdown in gas reserves than normal. While this winter is predicted to be less severe, already prices for gas, which are four times what they were in March, will make for a hard winter for many.
U.S. Role in European Crisis
The United States has also played a role in the European energy crisis. When President Donald Trump trashed the Iran nuclear deal, signed in 2015 by the United States, Iran, China, Russia, the UK, France, and Germany, and reimposed sanctions, anticipated Iranian gas didn’t flow into Europe.
Likewise, long U.S. opposition to Nord Stream 2 affected certification of the Russia-to-Germany pipeline. In May, the Biden administration reversed policy and waived its objections. The pipeline is now finished and awaits German certification — now in doubt with a new, greener government in Germany. Russia may choose to force that issue.
China has become a voracious consumer of global gas supply and much gas that would have gone to Europe has been diverted to the Asian market. The message from the Chinese government has been than gas should be secured at any price to keep China’s industry humming.
This flood of Chinese demand hadn’t been anticipated by world gas traders. They have responded by diverting LNG to Asia — gas that would otherwise have been sold on the sport market in Europe.
Spain has unexpectedly come into the LNG market because of a dispute between Algeria and Morocco, through which the Maghreb-Europe pipeline runs. That pipeline is shut down: a geopolitical event that no one expected, and one that has added to the pressure on natural gas.
Just recently, Russia increased its gas flow in some pipelines, further roiling Euro markets. The heart of Russia’s unhappiness is its desire to reduce Ukraine’s role as a gas shipment point into the rest of Europe and the delay of Nord Stream 2.
Europe has bet wrongly on the spot market, Russia, and the wind. Just about everything that could go wrong, has gone wrong.
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November 28, 2021 at 09:05AM
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How Europe Triggered An Energy Crisis, And Now Is Paying Dearly For It - Forbes
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