Due to a record warm fall season, supressed gas demand, and booming U.S. liquified natural gas (LNG) exports to Europe, average gas storage levels reached the EU-mandated 80 percent target ahead of time. Gas futures at the Dutch Title Transfer Facility (TTF) were trading at around €100/MWh in early November – less than a third of August’s eye-watering prices before the final Nord Stream 1 shutdown.
Spot prices even briefly dipped into the negative when LNG tankers began piling up outside ports with nowhere to offload in mid-October. Given the many warnings from utilities of potential winter energy rationing and blackouts, the swelling gas storages are cause for some relief.
Yet, while the most immediate risks may have been avoided, it is premature to speak of any impending end to the unfolding energy crisis. Temperatures are falling, and the EU’s top gas provider, Norway, has been hit with unplanned outages. Moreover, the International Energy Agency (IEA) has cautioned the EU could face up to a 30 billion cubic meters (bcm) supply gap for 2023 if Russian pipeline exports get further restricted and energy demand rebounds in China. That equates to nearly half the amount needed to refill gas storage levels, calling next winter’s energy security into doubt.
2023 Could Get Worse
While at exorbitant prices and in dwindling volumes, EU member-states have ultimately been able to import significant volumes of Russian pipeline gas throughout 2022. Comparable volumes next year appear highly unlikely, if at all possible, with the Nord Stream and Yamal-Europe pipelines either sabotaged or offline.
Though the Kremlin has already exhausted much of its pressure tactics playbook, it could still choke the remaining trickle flows through the TurkStream and Brotherhood pipelines or possibly rein in the EU’s quietly surging imports of seaborne Russian LNG shipments. As with the G7’s Oil Price Cap, Moscow has threatened to cut supplies entirely if the EU tries to cap gas prices and is negotiating the creation of a new gas hub in Turkey.
There will simultaneously be growing competition for global LNG shipments, particularly as Chinese demand inevitably resumes – no longer suppressed by pandemic lockdowns. Due to stifled domestic demand, Beijing was able to provide 7 percent of European gas imports from January through June, and there are signs this dynamic is already changing.
China halted all EU-bound LNG exports in October to guarantee domestic winter supplies. Moreover, while Beijing officially stands by its “dynamic Zero-Covid” strategy, recent conclusions from a Xi Jinping-led Politburo meeting on optimizing the COVID-19 response include more relaxed quarantine and control measures and explicit calls to minimize impacts on the economy. In a recent report, the IEA cautions that China alone could capture 85 percent of the expected increase in global LNG supply if import demand rebounds to 2021 levels.
Limited Supply-side Solutions
The raging European energy debates, ranging from diplomatic tugs-of-war over price cap proposals, (unfounded) finger-pointing over supposed price gouging by allies, and gas infrastructure disputes, to contentious subsidy schemes, unfortunately, appear far off from arriving at credible common-ground solutions.
Moreover, frictions are mounting both between member-states and EU institutions. Though a swath of new gas supplier deals has been sealed in recent months, they cannot address the underlying problem – scarce global gas supplies.
Beyond European port- and regasification infrastructure bottlenecks, the projected supply gap is too large to solve with imports. Neither the U.S. nor Qatar – the world’s top two LNG exporters – nor pipeline-connected Norway has the needed spare production capacity. Though recessionary pressures and demand destruction will offset some growth in global demand, markets will remain tight in 2023.
Demand Must Be Contained
As the IEA warns, further structural changes and reduced gas consumption is crucial to avoid a worsening crisis. Yet, EU capitals – preoccupied thus far with supply-centered solutions and guaranteeing affordability – pay far too little attention to energy efficiency savings and additional demand cuts. Though pushes for cross-border solidarity mechanisms, joint gas purchases, and alternative pricing benchmarks are encouraging, discourse is becoming increasingly short-sighted and blame-oriented.
The extraordinary Energy Council meeting on November 24 must ensure that the attempts to stabilize prices at lower levels do not again exacerbate demand, contrary to the July reduction pledges of 15 percent. Nor should they – in the event of a price cap proposal – rely on LNG suppliers necessarily prioritizing the EU market ahead of already contracted or higher bidding buyers in Asia.
Such observations offer little consolation for those ringing the alarm bells about deindustrialization. In September, Germany’s Producer Price Index Year-on-Year (YoY) stood at a sky-high 45.8 percent. Yet, one must recall the global nature of the energy crisis. Where some EU energy-intensive industries shut down or even shifted production offshore, frailer emerging economies instead suffer from rolling blackouts.
Though painful, demand cuts are the one side of the supply-demand equation that policymakers can meaningfully address in the short term. Only a clear-eyed discussion of the challenges at hand can provide credible strategies lasting beyond the coming winter.