Europe is currently experiencing a natural gas crisis due to low reserves and high prices. Utility customers are being hit with higher bills, as Gazprom, the foremost Russian supplier, is not selling gas as usual.
In the European Union, home to 447 million people, here is how they are trying to deal with the crisis: The problem lies in low storage levels as utilities turn to underground cavern storage to handle sudden additional demand for gas for heating or electricity.
The benchmark price in Europe is around $350 per megawatt-hour, more than four times its level of $80 at the start of 2021 and up from as low as $20 in 2020. Prices have relaxed from as much as 9x their level at the start of last year. That price shock feeds utility bills, alarming consumers and politicians.
Analysts at Rystad Energy used vessel-tracking data to watch several LNG tankers traveling to Asia only to turn around in the middle of the voyage to take advantage of lucrative opportunities in Europe. With prices this high, traders were tempted to divert cargo to Europe even if they had to offer 100% of the price as a penalty.
It’s not that LNG is 100% necessary, but it will play a vital role in Europe’s energy solution. Depending on how much Europe is willing to pay, Russia hasn’t sent as much gas through its pipelines crossing Poland and Ukraine. It hasn’t filled as many of its European storage tanks as usual. Analysts believe Russia may be trying to make a point by underlining its desire for Europe to approve the Nord Stream 2 pipeline project to Germany that bypasses Poland and Ukraine. There are also increased tensions between Russia and Europe over Russian troop deployments near the Ukraine border.”
Storage caverns falling too low can be a problem: as the storage falls toward the end of winter, the pressure falls, and gas comes out more slowly. That means that the reserves might not fall to zero but might deliver gas too slowly to meet a sudden surge in demand. In the short term, European governments offer cash subsidies to consumers to soften the blow. Sweden became latest Wednesday by announcing 6 billion kronor ($661 million) to help households most affected by higher electric prices.
The solution for the longer term is more investment in renewables such as wind and solar. Officials concede that gas will play a role for years during the transition. Still, political unrest in Kazakhstan isn’t contributing to the problem. The resource-rich Central Asian nation provides oil to the EU. The oil flow wasn’t affected by the protests that began over rising fuel prices but spread rapidly, reflecting wider discontent over Kazakhstan’s authoritarian government.
In January 2009, a pricing dispute between Gazprom and Ukraine led to a two-week shutoff in southeast Europe. This cut off gas heat to over 70k apartments in Sarajevo, forcing people to stay with family members and emptying stores of space heaters.
EU legislation requires countries to help each other in the case of such a shortfall. Governments can declare an emergency and shut off industrial customers to spare households, hurting the economy but sparing a humanitarian and political disaster.
Europe has more reversible pipeline connections but not enough to cover the entire continent, leaving some countries more exposed than others. In theory, they can demand cross-border gas supplies from one another, yet the system has never been tested. The European Commission, the EU’s executive branch, is revising the rules to include joint gas purchases but voluntarily.
Fleming said the revision indicates that even those who installed the mechanism don’t think it would work very well.