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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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The Harsh Truth Behind Europe’s Energy Crisis

Europe’s energy crunch is continuing, as gas storage volumes have shrunk to 10-year lows. A possible harsh winter could lead to severe energy shortages and possible shutdowns of large parts of the economy.

While the main discussion is currently focused on the potential role of Russia in the energy crisis, a new narrative could soon make the headlines. In a surprise move, the Dutch government has indicated that in a severe supply crunch situation, the Groningen gas field, Europe’s largest onshore gas field, could partially and temporarily be reopened. It seems that the term Dutch Disease could get a new meaning, from being the paradox of a rentier state suffering from plentiful resources to a show of Europe’s lack of realism when it comes to energy transition risks and current market powers.   Dutch Minister Stef Blok has indicated that he is considering the potential reopening of the Groningen field, in particular five wells, especially the one at Slochteren, as indicated by Johan Attema, director of the Nederlandse Aardolie Maatschappij (NAM), the operator of the Groningen field. The reopening of the field, even in the case of an emergency or an energy crisis, is politically controversial.

Until recently, the plan was that Groningen would be closed completely by 2023, ending the large-scale gas production and export by the Netherlands with a bang.

The Dutch media is speculating that minister Blok will be asking for a possible reopening of the Groningen field, a decision that must be made before October 1. If the Minister decides to change the current shutdown plans, the whole Groningen debacle, as some see it, will be prolonged. It is clear, looking at the current deplorable situation of the European energy sector, that Groningen is still needed. The ongoing energy crunch could have grave consequences for the economies and wellbeing of EU member states, changing the narratives in Brussels and the respective European capitals.  

The lack of supply of natural gas by Russia (or the political will to supply more), the difficulty of ramping up Norwegian gas or other gas imports quickly, is jeopardizing Europe’s energy situation. At the same time, a possible shutdown of several electricity-intensive industries in Europe, such as fertilizers, chemicals, and steel/aluminum production is on the table.

Related: Could Oil Pipelines Solve America’s Water Crisis? Political leaders will have to face the direct implications of higher energy bills or possible energy deficits for consumers and the industry. Both could lead to protests or political landslides during upcoming elections. Threats of an energy crisis are being discussed widely, but no real solutions except lower taxes are available. Due to higher energy costs, a possible record price level of $100 MMBtu or $250 per barrel of crude oil equivalent is very bad news for politicians, especially in the Netherlands, Germany, France, and the UK.  

It remains unclear, however, whether European politicians are aware of the role that their own policies have played in creating this crisis. Even with the partial restart of the Groningen field, which could relieve some of the pain in Western Europe, there is a larger problem that must be addressed. 

By opening up the gas market for liberalization, without giving the necessary tools to parties, and pushing for a spot market, instability was introduced into the system. Geopolitical powers are still at play, while utilities and European suppliers have seen little support from their governments.

At the same time, when oil price-indexed long-term contracts with Russia were thrown out of the window, many did not understand that this could mean handing over full market powers to NOCs, such as Gazprom. Putin has been celebrating, knowing that he has been handed the key to European markets, with the option of manipulating fundamentals and prices at the same time. In the meantime, Europe has failed to sufficiently diversify supply.  

European leaders desperately need to reconsider their position towards Russian gas supplies and the future role of NordStream 2, which is still being threatened by US sanctions and Eastern European opposition.

It seems that Russia’s leader Vladimir Putin, however, is holding all the cards when it comes to natural gas in Europe. Without substantially more natural gas supply to Europe, consumers and industry may well be facing a winter of discontent. Europe’s gas supply diversification strategy has been a failure, not only due to EU tactics and regulations but also because of the ongoing one-sided emphasis on a rapid energy transition, hydrocarbon divestment, and full-scale investments in renewables, without realizing that the backbone of the European economic system is still hydrocarbon fueled.  

Related: China Oil Consumption Seen Peaking In 5 Years

The current situation shows one main fact of life, the success of the energy transition is not based on a one-sided approach. By relying too much on renewables, the market became destabilized, but politicians and others didn’t want to admit it. Destabilization could and should be prevented, by acknowledging the fact that for the foreseeable future hydrocarbons, including coal, will be playing a significant role in the European energy market.

At the same time, European politicians also should acknowledge that without hydrocarbons, not only does energy supply become threatened, but the hydrocarbon economy suffers. It is not yet fully understood by most, but without hydrocarbons, especially natural gas and oil, food and other primary sectors will be hit hard. The first shutdowns of fertilizer and steel companies have already been reported.  

Brussels, London, Berlin, and even The Hague, should start to change their approach to energy and the economy of the future. Politicians should start to listen to market analysts that have been warning of a disruption in energy markets. The European long-term energy strategy should acknowledge the position of hydrocarbons as a backbone while investing in renewable options at the same time. Investments in storage, diversified supply, and domestic production are crucial.  Without these, supply giants such as Putin’s Russia are holding all the cards.  

By Cyril Widdershoven for Oilprice.com

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Leave a comment
  • Carlos Everett on September 25 2021 said:
    Great article, Cyril.

    Just to reinforce your comments, consumers need to be told and then told again, the energy industry started in 1870, or 150 years ago, it cannot be replaced by renewables by 2030.

    Currently, the world energy market, consumes 100 million b/d of crude oil and 92 trillion cubic feet per day. Politicians need to remember these statistics so when trying to implement new policy.
  • Mamdouh Salameh on September 26 2021 said:
    The European Union’s (EU’s) ineptitude and politicizing energy have been behind Europe’s energy crisis. The crisis could continue even through winter unless the EU changes course.

    The recipe to solve the crisis calls for:

    1- The EU should accept that energy transition is a gradual process and that without huge contributions of natural gas and possibly nuclear power it could never succeed.
    2- Renewables on their own aren’t capable of satisfying energy demand of the EU because of their intermittent nature.
    3- Fossil fuels (oil, gas and coal) will remain the backbone of the EU’s economy and its energy needs well into the future.
    4- The EU’s dependence on Russia will continue well into the future and Russia’s share of the EU’s gas market is bound to increase from an estimated 40% currently to 45% in less than 5 years partly as a result of the completion of Nord Stream 2.
    5- Incessant pressure on the global oil industry to divest of its fossil fuels affects very adversely oil and gas production without affecting global demand for them thus creating a deficit and skyrocketing prices like the ones the EU is currently experiencing.
    6- The global economy will pay a heavy price for that because it has to transfer funds earmarked for investments into paying higher prices to satisfy its energy needs.
    7- The EU should stop politicizing energy specifically creating one excuse after another for delaying the operation of Nord Stream 2 either in response to continued plotting by the United States or Poland and the Baltic States calling for investigating Gazprom for what they claim as manipulation of gas prices

    Therefore. The EU has to take immediately the following measures:

    1- Instead of playing politics with Nord Stream 2, the EU should facilitate the issuing of at least a temporary operational licence to Nord Stream 2 thus enabling it to bring 50 billion cubic metres (bcm) of additional Russian gas supplies to the EU.
    2- The Dutch government should reopen the Groningen gas field as a short-term measure to alleviate the energy crisis during the winter months
    3- The EU should slow down hasty energy transition

    The EU needs Russia far more than Russia needs it. It can’t replace Russian gas shipments while Russia has all the choices it needs. It can easily shift its earmarked supplies to the EU to China instead and also to Japan and India as well.

    The reality of the 21st century—as Putin sees it—is that energy is a political instrument. Political alliances and the rise and fall of the international importance of particular countries will change in accordance with the energy supply routes.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Steve Bull on September 27 2021 said:
    Perhaps the 'truth' is even more straightforward than complex geopolitical intrigue that serves more to keep the focus off of our own misguided policies and actions. Perhaps chasing perpetual growth on a finite planet and depending primarily upon a one-time and limited cache of ancient fossil energy was not such a great plan. Perhaps creating financial/monetary/economic systems that have become for all and intents and purposes gargantuan Ponzi schemes reliant upon infinite growth to keep them from collapsing was not such a great plan. Perhaps it's just simply ecological overshoot finally catching up with us. Perhaps infinite growth is simply not compatible with life on a finite planet.

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