A bitter cold European winter without Russian energy supplies

As the winter is approaching in Europe, pressure is mounting on the governments by their citizens and industrialists and as a result, European leaders are scrambling to find LNG at any cost to keep their citizens warm, no blackouts and factories running.

Just after the start of the Russian-Ukraine war in late February, LNG prices topped to over 300% mark that is unprecedented in the entire LNG history! Continued US-led sanctions against Russia and later its natural gas (NG) supply cut off to Europe through the Nord stream-1 pipeline has created an unparalleled energy crisis, never seen before in Europe.

Due to the sanctions, Russia is not allowed to sell any of its oil & gas in the merchant market, either. This has created re-occurring nightmares for German government and other European leaders.

In 2021, Russia supplied more than 34% of energy (NG) to Europe. As the long and bitter winter is approaching, Germans and other European citizens are getting frantic as they foresee unusually harsh and bleak winter without having enough NG for keeping them warm, having hot meals for their families, and fears of extended blackouts.

These conditions not only have thrown out the supply and demand balance for the Europeans but also for the global citizens. The supply and demand imbalance has created global LNG prices in the territory that is unthinkable as they are traded at more than three times the mark prices that were just before the war.

These conditions are redrawing the global energy map and the USA is coming on the top as the dominant player in the energy supply chain. With the advancements in the shale-gas & -oil technologies, the US has positioned itself as the major supplier of oil & gas in the global market by having the most competitive cost advantages than the OPEC plus members of the fossil fuels cartel.

In the backdrop of the global LNG demand accelerations, the US and its energy companies are expediting building the infrastructure for exploring, extracting, storing, and transporting (pipeline) of LNG by granting the permits on speedier pace for building new export terminals. This has created a sort of new ‘gold rush’ in the US history, and everyone is trying to benefit from the shale-energy revolution and its windfall.

Due to the complete shutdown of the Nord stream pipeline-1 to Europe by Russia in August (initially for the maintenance), most of the LNG cargoes from the USA are heading to European ports. Currently, major European economies (particularly Germany) cannot manage the LNG cargoes due to lack of the infrastructure and experience for handling the gas in its liquefied form at negative 160-170 degree Celsius.

According to 2021 data, Russia’s top five pipeline NG customers were Germany, Italy, Belarus, Turkey, and the Netherlands. Germany was receiving more than 58% of its energy supplies (NG) from Russia through the Nord Stream-1 pipeline. Other major receivers were Italy (42%), UK (40%), and Hungary (39%).

Since Europe does not see any other solution to keep running its power plants, energy supply for heating and cooking for the citizens, and raw materials for its industrial activities (mostly Chemical industry), under desperation and citizens pressures, they have started using the most expensive option. Like Germany, other European countries are settling to use the floating LNG cargoes (FSRU; Floating Storage Regasification Unit) for their NG supplies.

Currently, FSRU chartering rates have skyrocketed to about $300,000 per day from about $100,000 per day just a few months ago! Germany is already chartering several FSRUs to supplement and to diversify its energy needs.

Once the FSRU is arrived at the terminal, after converting (regasification of) the LNG on the ship into normal transmission pressure (500-1400 pounds per square inch) NG, it will be fed into Germany’s gas pipeline network, leading to its storage, and transmission to the end-users (power plants, households, and industries).

According to the industry statistics, in 2021 Russia exported 142 billion cubic meters of NG through the Nord stream-1 pipeline to Europe. Germany consumes about ninety-five billion cubic meters of NG per year and about 58% of its NG was coming from Russia.

To reduce Germany’s dependence on Russia on an expedited basis, the German government has announced that it will spend more than $3 billion on building its LNG infrastructure. To accelerate and to have better control on the project, recently, Germany has nationalized Uniper, one of the major NG players in Germany. Like Germany, other European countries are also building LNG receiving terminals in their ports so they can handle the LNG cargoes without continue to using the most expensive FSRUs.

Building LNG terminal requires 3-5 years but if expedited could be completed in two to three years, from start to finish. In Germany, the first terminal will be built in Wilhelmshaven port and will be ready by 2024 at an estimated cost of about $69 million.

The terminal will have capacity to handle 7.5 billion cubic meters of the NG per year which relates to about 8.5% of Germany’s current annual consumption. There are additional three terminals that will also be built on an accelerated basis to address the most acute energy crisis that Germany is currently facing in its entire history.

During the COP-26, the world pledged to move to the ‘green energy’ for stopping the climate change Armageddon. According to the industry experts, the LNG infrastructure is easily adaptable for the use of the ‘blue hydrogen,’ the next generation of non-fossil fuels.

This strategy clearly shows that the German government is aligning its investments in building the energy infrastructure that will be ready to switch to new energy sources so it can still reach to its net-zero carbon commitment by 2050.

To avoid public unrest during the upcoming winter, the EU has asked its members to increase their NG storage volume to last at least through the winter. Because of that reason, most of the European countries have started storing NG expeditiously to reach to a level of ninety or higher percentage of their storage capacities.

Germany has already reached higher than 90% of its storage level. Other countries are also reporting reaching close to their storage target levels! According to some estimates, to date, the EU members have about ninety-three billion cubic meters of NG in their storage facilities.

Will this stored NG volume be enough for Europe to last through 2022-2023 winter period to avoid major blackouts, and to providing gas for heating & cooking for its citizens? This question has no easy answer. Only time will tell.

Copyright Business Recorder, 2022