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David Blackmon

David Blackmon

David Blackmon is an independent energy analyst/consultant based in Mansfield, TX. David has enjoyed a 38-year career in the oil and gas industry, the last…

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Europe’s Winter Of Discontent Isn’t Over Yet

The devastating consequences stemming from 20 years of counterproductive government policies related to energy are coming home to roost across the European continent this winter. Everywhere you look, there is more bad news for Europe’s consumers and policymakers. Russia’s ongoing threats of an invasion of Ukraine have only served to compound insult upon Europe’s self-inflicted energy-related injuries.

Here are some examples of the bad news that piled up on Europe in just the past few days:

  • On February 9, Rystad Energy issued a new report warning that the ongoing tensions between Russia and Ukraine now threaten to disrupt as much as 30% of the continent’s natural gas supplies. Conceding that a total shutdown of Russian gas supplies into Europe seems unlikely, the big energy analytics firm notes that “European gas markets are entering the final stretch of winter in a precarious position. Gas stocks are at five-year lows, international LNG prices are highly volatile, and the Nord Stream 2 pipeline from Russia to Germany is not expected to be operational until the second half of this year.”

  • And what of that Nordstream 2 pipeline and its future? The line’s infrastructure is essentially completed now, as Vladimir Putin’s government awaits the final approvals to start moving product through it from Germany and the EU. But during a rare press availability on February 8, U.S. President Joe Biden warned that his government and presumably NATO would take action to “end” the project, saying “If Russia invades, that means tanks and troops crossing the border of Ukraine again, then there will be no longer a Nord Stream 2. We will bring an end to it.”

    Exactly what Biden and NATO officials would do to “end” a Russia-owned pipeline designed to carry natural gas beneath the Baltic Sea for ultimate delivery into Germany remains an open question. During the same press availability, German Chancellor Olaf Scholz would only offer that “It’s necessary for Russia to understand that a lot more could happen than they’ve perhaps calculated with themselves.”

  • Should Russian natural gas imports into Europe via existing pipelines be cut off, Rystad notes that LNG imports from the U.S. and elsewhere, already rising to high levels over the past two months, could help fill the gap. However, the analysts warn that the continent’s LNG regasification capacity could restrict further increases. “Western Europe’s regasification capacity was operating at 100% last month, and spare capacity to accommodate a future increase in import volumes is minimal,” the firm said.

  • On February 10, meanwhile, Reuters reported that the growing global shortages of commodities like oil, natural gas and coal are now moving downstream, creating shortages of refined products like gasoline and diesel fuel. Noting that “U.S. and Asian diesel imports on which Europe relies have been limited in recent weeks due to higher domestic consumption for manufacturing and road fuel purposes,” Reuters goes on to state that Gasoil inventories at Europe’s Amsterdam-Rotterdam-Antwerp (ARA) refining and storage area fell by 2.5% to their lowest seasonal levels since 2008. Europe’s desperation scramble in recent months to reactivate mothballed natural gas and coal-fired power generation capacity since last October stems from a failure by its wind industry to deliver on promises made as governments in many EU nations and the UK invoked policies during this century to force a premature “energy transition” across the continent. These policies have had the effect of leaving the continent dangerously reliant on imports of these fossil fuels, dramatically weakening its energy security.

  • This looming shortage of diesel and other refined products stems largely from a similar set of factors. As the IEA reported in mid-January, efforts by governments and ESG-oriented investor groups resulted in the first net decline in global refining capacity in 30 years during 2021. The UN-affiliated agency reports that 1.6 million barrels of oil per day of capacity was retired last year, while investments in new capacity resulted in just 850,000 bopd coming online. With Europe’s transportation fleet tilted heavily towards diesel, this shortage of fuel will inevitably result in higher costs for European consumers already beset by skyrocketing utility bills.

  • As if all of that weren’t bad news enough, analysts at JP Morgan warned on Wednesday that the price for Brent crude, already well above the $90 mark, could “easily” rise to $120 per barrel in the coming months if the situation between Russia and Ukraine continues to escalate. The analysts anticipate that any conflict between the two countries could disrupt Russian oil flows, at least in part.

  • On Feb. 10, OPEC said in its monthly oil market report that OPEC+ participant nations were only able to raise their overall production by 64,000 barrels per day, far short of the group’s 400,000 bopd targeted increase, as many countries run out of excess producing capacity. This marks the 6th straight month the group has missed its production targets. Just one more market factor putting upwards pressure on prices.

  • Finally, on Feb. 11, the IEA added to the bad news, warning in its February Oil Market Report that the cumulative undersupply by OPEC+ reached as much as 900,000 barrels per day during January. The Agency went on to project that this ongoing under-delivery has resulted in low crude inventories globally, a situation that will likely cause prices to continue to rise.

What it all adds up to for Europe and its people is a winter of energy discontent, most of which stems from 20 years of wishful thinking and overblown promises forming the basis for energy policy decision-making. A Russian invasion of Ukraine and the major sanctions promised by the U.S. and NATO countries in response to such an event – including Biden’s promise to “end” Nordstream 2 – would put many lives in other European nations at risk. It didn’t need to be this way.

By David Blackmon for Oilprice.com

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  • Mamdouh Salameh on February 14 2022 said:
    Europe’s full blown energy crisis is one of its own making. It is the result of the EU’s hasty policies to accelerate energy transition at the expense of fossil fuels abetted by the hapless IEA, misjudgement of the global gas market, deregulating its gas market and putting its faith in the spot gas market instead of long-term fixed contracts and failure to fill its gas storage ahead of winter.

    And to compound its mistakes, the EU has tried under pressure from the United States to play gas geopolitics with Russia by delaying the certification of Nord Stream 2 gas pipeline but it has proven not to be up to the task.

    The EU is dependent on Russian oil supplies for 27% of needs and 40% of gas needs.

    The entire LNG exports from the United States, Qatar and Australia could hardly replace the almost 200 billion cubic metres per annum (bcm/y) piped by Russia to the EU in addition to an estimated 15-16 million tons a year (mt/y) of LNG. Only Russia can satisfy the EU’s gas demand. However, Russia isn’t going to ship additional gas supplies to the EU until Nord Stream gas pipeline is certified.

    Moreover, Europe has a limited LNG import capacity. This makes ramp-ups of LNG imports quite useless particularly if they are needed to replace Russia’s almost 40% share of the European gas market.

    If the Ukraine crisis flares up into a military conflict, the United States will impose the harshest ever sanctions against Russia including oil and gas exports and Nord Stream 2 gas pipeline. Moreover, it will exert the maximum pressure on the EU to do likewise.

    Germany will never join the United States in ending Nord Stream 2 which cost an estimated $11 bn to build even in the event of an escalation of the Ukraine crisis into an armed conflict. If it does, it will sink more than 150 major German companies which were involved in the construction of the pipeline and which contributed more than half the costs of the pipeline. Moreover, it will be a major loser in economic and energy terms. Germany depends on Russia for 60% of its natural gas and oil needs.

    And while the EU will impose new sanctions on Russia over the Ukraine crisis, oil and gas exports and Nord Stream 2 won’t be among them because Russia will immediately retaliate by halting all oil and gas supplies to the EU thus prolonging and worsening an already damaging energy crisis.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School
  • DoRight Deikins on February 14 2022 said:
    WTI is about to surpass the cost of Brent. Even more good news for the suffering people of Europe. But at least they're doing their part to save the planet and bring about world peace.

    I'm sure the politicos are gathered around their campfires fueled by all the useless agendas and policy statements they have produced in the last 12 years. Hope they're capturing that carbon and ash to put on their cabbage and potato patches when Spring finally breaks anew.

    Oh, wait. they all flew to Ibiza to watch the sunsets from their wind turbine free vistas. That way they can turn the thermostats in their Brussels bungalows down to 22º C.

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