Some European politicians and economists are breathing a sigh of relief after mild temperatures, increasing liquefied natural gas shipments, and above-average natural gas stockpiles have so far averted a worsening energy crisis this winter. Other politicians believe the energy crunch won't be over for many years.
"Gas storage is up and gas prices are down. Inflation is falling and uncertainty is declining," Deutsche Bank AG wrote in a note this week, adding, "We can afford to be more optimistic."
As of late, Europe's biggest economy, Germany, has seen an improvement in business outlook as recession fears recede, according to data from the Ifo Institute, a Munich-based economic researcher.
Ifo President Clemens Fuest told Bloomberg TV:
"The most important risk for the German economy was a gas-rationing scenario ... and that risk is off the table now."
There's a lot to be happy about in Europe: Dutch front-month NatGas, the continent's benchmark, slid as much as 5% to 55 euros a megawatt-hour today, the lowest level since late 2021. Prices have collapsed by more than 83% since peaking at 311 euros a megawatt-hour last August.
However, the optimism could be short-lived because Germany is years from entirely substituting Russian NatGas flows with LNG shipments.
Last week, Chancellor Olaf Scholz told Bloomberg that German learned a hard lesson in its addiction for cheap Russian NatGas. He said the country is now rejiggering supply chains that will increase capacity for LNG imports at major ports.
A new report via the country's Economy Ministry shows Germany will install 56 billion cubic meters of domestic LNG import capacity by 2026. By 2030, capacities will increase to 76.5 billion cubic meters or about 80% of total German NatGas consumption in 2021.
The ministry pointed out that even though current NatGas storage facilities are above normal levels, there are mounting risks later this year that storage could sink to dangerously low levels and result in shortages.
"The truth is, there won't be enough in the next three to four years of LNG production capacity in the world to meet the growing demand. So the unspoken strategy is that Germany will continue to pay crazy prices and other, less rich countries go empty-handed," Christian Leye, a Bundestag Left Party representative, told Bloomberg.
Germany has reduced its dependence on Russian NatGas by importing LNG from other EU countries and increasing NatGas pipeline flows from Norway and the Netherlands. Germany didn't have a choice after explosions rocked Nord Stream last year. An issue we see is that Germany's NatGas storage was filled last summer when Russian NatGas was still flowing -- not so much anymore.
Deutsche Bank expects EU NatGas prices to fluctuate between 50 and 100 euros a megawatt-hour this year. It's only a matter of time before the temporary relief evaporates and the energy crisis resurfaces.
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1- The very factors that that gave rise to Germany’s new-found optimism could change any time. For instance, the weather could still get colder forcing Germans to use an estimated additional 800 million cubic metres a day (mcm/d) of gas and causing the level of stored gas to drop to 10%. With cheap and plentiful Russian gas supplies out of bound, Germany will find it extremely difficult to fill its gas storage from alternative sources.
2- The German economy is paying a very hefty price for LNG supplies compared with the cheaper Russian piped gas. This is adding a considerable financial burden on Germany’s economy.
3- German companies that closed or downsized because of rising energy prices will need hundreds of billions of euros to be rejuvenated. Moreover, other German companies that relocated to countries where energy supplies are cheaper may never return. That will be a huge drain on Germany’s economy and exports.
4- Current global LNG production capacity is fully booked pending Qatar’s raising its capacity from 77 million tons (mt) currently to 110 by 2024/25 and 127 by 2028 and the United States expanding its capacity by 2025. With the global gas market getting tighter, the price of LNG is projected to rise adding to Germany’s financial bleeding. The truth of the matter is that Germany will continue to pay crazy prices for LNG well into the future unless it starts importing Russian gas on which its economy and prosperity were built.
5- The global energy crisis is projected to last many years if not become permanent. This is because of increasing tightness in the global oil and gas markets, robust demand and a fast-shrinking global spare oil and gas capacity resulting from global underinvestment in oil and gas.
6- The return of China to the global oil and gas market will accelerate demand for both oil and gas and lead to a major hike of oil and gas prices.
My conclusion is that Germany along with the EU will continue to face a severe energy crisis well into the future.
And my projection is that it is inevitable that Russian gas will return to Europe sooner than people think.
Europe’s energy crisis hasn’t only accentuated energy security in Europe particularly in Germany but is also changing European public opinion on coal and nuclear energy. It is very possible it will also change Europe’ attitude towards sanctions against Russia and also the Ukraine conflict.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert