European energy crunch likely to intensify next year

Europe largely rebuilt its energy stores after the Russia-Ukraine war broke out, but this year’s tactics may not work next year, says Zeba Mirza, senior research analyst with Foyston, Gordon & Payne in Toronto.

Mirza said the continent managed to reclaim 90% of its liquid natural gas (LNG) capacity before the start of winter, but that accomplishment hinged on several one-time factors.

“There is a belief that the reflow actually happened through miraculous new supplies,” she said. “And that is a bit of a misconception. Only a third of the additional LNG that went to the EU actually came from increases in supply.”

She said the balance of new flows was diverted from China, which has had the lowest energy demand in a decade due to Covid lockdowns and anemic economic growth. In addition, flows of LNG to Europe had been close to normal for the first two quarters of 2022, so supply was not really an issue until Q3.

“The reason I stress all this, and the reason I talk about energy complacency, is because there were factors that helped the EU refill gas this year that may not be repeated next year,” she said. “As the war carries on, we should be thinking about how this [LNG delivery] is going to be executed for next year.”

Speaking on the Soundbites podcast this week, Mirza pointed out that European energy prices are “soul crushing” — reaching a high of US$90 per metric million British thermal unit (MMBTU), about 15 times higher than normal. Prices have recently come down somewhat, but they remain historically elevated.

Mirza said European leaders have encouraged energy savings in an effort to minimize hardship, but efforts have not met the self-imposed target of a 15% decline in consumption between August 2022 and March 2023. Year to date, they’ve managed a reduction of about 12%.

“They still need to do more,” she said.

The largest consumer of energy after the residential sector is industry.

“Industries where natural gas is a higher share of the energy mix are going to be especially hurt. Industries like fertilizer, like steel, like aluminum — they’re all going to have very hard years in front of them,” she said.

Long term, she expects the oil and gas crunch to snap the world out of its energy complacency. More treatment facilities and delivery methods need to be developed to restore global capacity and prevent future crises.

She said the current LNG shortage will only be stabilized with new flows, and those are most likely to come from new liquefaction facilities in proximate markets.

“Even before the war happened, there was a very solid growth outlook for LNG,” she said. “The people who will be able to feed that demand will actually be the Atlantic basin’s LNG suppliers. That would mainly be Qatar and the U.S.”

She added that the U.S. is likely to benefit significantly from European demand because it is politically allied with Europe, has adequate supply to export and can bring complex new facilities online fairly quickly.

As for Russia, which caused the crisis with its aggression, Mirza said it is not being noticeably penalized by reconfigured supply chains.

“It’s not hurting them at all,” she said. “Year to date, when we look at the flows on [European] pipelines, they were down by about close to 60%. But the price [Russia] is getting for that is absolutely astronomical. Their gas revenues this year are actually higher than they have ever had in prior years.”

She said they are exporting the same amount of oil and gas now, just to new customers: mainly China, India and Turkey.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.