Sep 16, 2022
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US refuses to save Europe in winter

Washington has been saying for years that it wants to rid Europe of “bad” Russian gas. The American dream is coming true – the road for American gas has been cleared. Now Europe really needs the help of an overseas partner. US Secretary of State Anthony Blinken promised that he would “not leave his friends in the cold.” However, reality looks different.

Just last week, US Secretary of State Anthony Blinken said the United States would not leave its European allies in the cold. “Of course, we will not leave our friends in the cold. While the cost of resisting the Kremlin’s aggression is high, the cost of inaction will be even higher,” Blinken said while in Brussels.

However, the help will be provided in clear words, because the US gas and shale oil companies have said the exact opposite – that they will not be able to increase supplies to Europe this winter. “It doesn’t look like the US can pump more… There will be no help. Not from gas producers, not from oil producers,” said Wil Wen Lo, head of private equity group Quantum Energy Partners, according to the Financial Times. Scott Sheffield, chief executive of oil company Pioneer Natural Resources (one of the largest oil producers in the United States) takes the same position. “We’re not opening new rigs and I don’t see anyone else doing it,” he said.

None of the producers can increase supplies to Europe as quickly as Gazprom can, Oleg Aksyutin, Deputy Chairman of the Board of Gazprom, said at the St. Petersburg International Gas Forum.

“There is simply no full-fledged alternative to the supply of Russian pipeline gas for Europe. No country is able to provide resources comparable to the resources and deposits of Siberia and the Yamal Peninsula. No one can increase supplies using pipeline systems on the terms offered by Gazprom. LNG does not appear on the market by magic either. In 2023-2024, a significant increase in the supply of LNG on the market is not expected,” said Gazprom Deputy Chairman.

What’s more, the US even reduced its LNG exports this year because it was forced to shut down the Freeport LNG plant in June due to a fire, and it still hasn’t started up.

“Almost 75% of the LNG that the US supplies to foreign markets is already coming to Europe. Europeans are now pulling in LNG from all markets simply because they have the highest prices in the world,” says Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund. But this is still not enough. And additional new LNG will not appear on the world market until 2024-2025, as evidenced by the investment decisions made.

“It is expected that several new LNG plants will appear in 2024, but the main wave of commissioning of new capacities for liquefying gas for export will begin in 2025 and will last until 2030. This will be the second wave, the peak of the first wave was in 2019 and ended in 2021. A new supply in the LNG market from 2025 will be provided mainly by the United States and Qatar. Now Australia is also among the top three LNG exporters,” says Igor Yushkov.

The construction of a large-capacity LNG plant is a complex technological process that takes five to seven years. In order for the US or Qatar to be able to increase LNG exports today, they should have planned for this and invested in construction a few years ago.

Why haven’t investors done this? After all, today you can literally get rich on the sale of LNG. Paradoxically, the reason lies in Europe itself.

“Europe has created this global energy crisis that started back in 2021. It passed the last heating season with prices above $1,000 per thousand cubic meters. Even if there were no water supply system, there would still be an energy crisis, but the prices might not be $3,000, but $1,500-2,000 per thousand cubic meters.

Europeans are now suffering from their own policies. Because they themselves intimidated investors in the gas industry with their energy transition to carbon-free energy, that soon no one would need gas,” Igor Yushkov believes.

Europeans even forced banks to refuse companies in lending to energy projects due to high greenhouse gas emissions. There is a story about how a Dutch court sued Shell for having a decarbonization program, but, as the court pointed out, not ambitious enough, the expert recalls.

If the EU did not intimidate gas producers, then, perhaps, new LNG projects would be launched now, and there would be more gas supplies on the world market.

“Europe is still lucky this year because it does not have a strong LNG competitor from China, where consumption has decreased. For many years in a row, Beijing has been sucking any surplus LNG into its market, ”the FNEB expert notes. Firstly, economic rates are slowing down against the backdrop of lockdowns due to outbreaks of coronavirus, and secondly, China has begun to produce more coal and consume it. Europe itself has increased its consumption of coal, forgetting about the climate agenda, and China has taken advantage of this to its advantage. All this reduced the demand for LNG. Therefore, China assigns some of the contracted LNG volumes in favor of Europe, where resource prices are much higher. Thus, Chinese traders also earn on this.

The EC assures that there is no magic pill to bring down gas prices, but this is not entirely true. There is a quick way to bring down prices – this is the launch of Nord Stream 1 (but due to technical problems, it will not be possible to quickly bring it to full capacity). Nord Stream 2 could have solved the problems more quickly, but so far politicians are against it.

The tragedy of the situation in Europe is that even if it miraculously returns Russian pipeline gas to its market, this will not fundamentally change the situation, that is, it will not remove the energy crisis. But the level of risks will be significantly reduced, plus the injection of Russian gas into the European market will have an impact on prices.

“If Russian volumes of gas return, the pressure on gas will decrease. Roughly speaking, if gas prices are expected to rise to $4,000-5,000 per thousand cubic meters in winter, then after the launch of Nord Stream, the price may fall, roughly, by $1,000. But the energy crisis will remain,” the interlocutor notes.

Europe’s pride that they manage to fill their underground storage facilities with gas at the level of 80% by winter does not actually reduce the risks of the upcoming heating season. Because gas in storage has never been the main source of gas in winter, it is needed as a backup and to meet demand spikes during cold spells.

“Even close to the maximum reserves in UGS facilities in large European countries do not guarantee a reliable passage of the upcoming autumn-winter period”,

Gazprom notes. He cites Germany as an example, where in the last autumn-winter period (from October 1, 2021 to March 31, 2022) gas consumption amounted to 57 billion cubic meters, that is, an average of 9.5 billion cubic meters per month. Now German underground storage facilities are 89% full, there are 19.3 billion cubic meters of active gas. “Thus, the volume of gas reserves in German storage facilities is currently comparable to the average consumption during the autumn-winter period for only two months out of six,” concludes Gazprom. That is, Germany’s gas reserves in underground storage facilities will last only two of the six cold months (from October 1 to March 31). It will not be possible to cope without imported gas. Only Russia can provide more imported gas. “But in order to launch Nord Stream, political relations must be established. Therefore, on the contrary, it is more likely that the situation will worsen, for example, in the form of stopping transit through Ukraine,” the expert concludes.

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