Saving drowning people: will the EU be able to avoid gas shortages this winter
The European model of preparing energy for winter is bursting at the seams. Reserves in underground gas storage facilities (UGS) are much lower than historical levels. It turned out to be by no means accidental — with the current cost ratio, it makes no sense to buy fuel in advance. Now, in the event of a cold winter, EU countries will have to face exorbitant prices and shortages, and Europeans are already thinking about creating state-owned strategic reserves like those of the United States, China and Japan. The implementation of such a program will require huge expenses and may face a lack of unity in the region. One way or another, the crisis can go far beyond the EU. Details can be found in the Izvestia article.
It doesn't work without a pipeline.
In the past decades, when the era of the dominance of pipeline supplies was in the yard, UGS operated due to price differences at different times of the year. In summer, demand was falling, and gas was cheap. Traders took out loans, bought back the surplus, pumped it underground, and in winter, at the peak of demand, sold it at a high premium. The difference more than covered the cost of renting UGS and interest on loans. Future contracts have always been more expensive than current ones.
This scheme doesn't work right now. First, pipeline supplies from Russia, which accounted for about 20% of all European gas consumption in the 2010s, stopped. And this year, transit through the Strait of Hormuz has stopped and there has been intense competition for LNG from Asia. All this has led to the fact that summer gas prices in Europe have skyrocketed. Spot quotes at the TTF hub in July and August consistently exceeded €70 per MWh, or about $800 per thousand cubic meters.
At the same time, the European Central Bank maintains a tight monetary policy to combat accelerating inflation (for example, in Spain it jumped to 5%). The cost of borrowed capital for traders remains high. It has become an unprofitable business to purchase super-expensive summer gas with very expensive loan money, pay for storage and have no guarantees that winter futures will bring an adequate premium. The private sector, which has historically provided up to 80% of storage capacity, refuses to take on such commercial risks. As a result, UGS facilities are currently 71% full, which is 15% less than the average for this time of year.
Half-empty storage facilities pose a threat that can be fully realized if weather problems occur. If the coming winter turns out to be mild, Europe will get through it by directly supplying LNG from wheels (or rather, from tankers), balancing on the edge of profitability.
However, in the event of the arrival of persistent cold weather (they do not happen every year, but the probability is always non-zero), a low stock level will play a role. The main parameter of UGS in cold weather is not the total volume of stored gas, but the rate of its daily extraction. When its quantity decreases, the intraplastic pressure decreases. A half-empty storage facility is unable to quickly supply the necessary amount of fuel to the grid to cover a sharp spike in household and power plant consumption. That is, there will be a deficit that cannot be closed for any money.
A blow to the Global South
In the event of a "weather crisis" and the emptying of storage facilities, Brussels will be forced to aggressively buy up any available LNG shipments on the global spot market. European importers, relying on the financial strength of their economies, will offer prohibitive prices to intercept tankers going to other regions. Of course, the price tags for private consumers, and especially businesses, may increase significantly at some point.
But the main victims of European underinvestment in stocks will be developing countries. The countries of South Asia and Latin America (Pakistan, Bangladesh, India, Brazil) will not be able to compete with European price bids. The gas they critically need to operate power plants and fertilizer plants will go to Rotterdam and other European ports.
The EU is actually exporting its internal management crisis to the Global South. For developing economies, this will result in widespread power outages, industrial shutdowns and a new round of social instability triggered by rising food prices due to a shortage of nitrogen fertilizers. To be fair, in many countries the situation can be stabilized by coal-fired power (with its attendant damage such as environmental degradation).
Grasping at straws
European gas managers and politicians have now initiated a discussion on the creation of strategic gas reserves, similar to the state oil reserves in the United States (SPR). The idea is for special government agencies to purchase gas from underground storage facilities, regardless of the current price, based solely on national security considerations. Germany plans to start working on such a program in 2027.
The implementation of this plan will not be the cheapest. Billions of euros of available funds will be needed to purchase tens of billions of cubic meters of gas at current extreme prices. In Germany alone, they are planning to allocate about 1.5 billion euros for the state reserve program, but it must be understood that in this country different projects tend to shift to the right both in price and in terms of timing.
The budgets of the key EU economies — France, Italy, and to a lesser extent Germany — are burdened with high deficits and rising public debt servicing costs. The issuance of additional sovereign bonds to finance gas reserves will inevitably lead to an increase in their profitability and an even higher cost of debt servicing. At the moment, the European establishment does not have the political will to reduce social programs in order to buy gas. The second option is a special tax, for example, on gas consumers. One can imagine how "grateful" they will be for this.
National selfishness
The most vulnerable point of European energy solidarity remains the internal political climate. The statements about the single energy market of the European Union are working until the first serious shortage.
The history of the coronavirus pandemic, when EU states unilaterally blocked the export of medical masks and ventilators, intercepting cargo at the borders, clearly demonstrated the mechanisms of national egoism in conditions when it is necessary to act quickly and decisively.
In the event of a winter gas collapse, the situation can easily repeat itself. If there is a threat of a shutdown of the chemical industry in Germany or a shutdown of heating networks in Bavaria, Berlin will block the operation of cross-border interconnectors. The reserves accumulated in German UGS facilities will remain inside the country, forcing neighboring countries (for example, the Czech Republic or Austria) to cope with the problem on their own. The single market will break up into isolated national clusters, where each government will save only its own taxpayers.
In general, the current situation clearly shows that the security of energy supply can no longer be ensured by commercial methods. The Europeans have abandoned Russian pipeline supplies in favor of the global spot market (primarily because of politics, but also because of the recently widespread perception that "price flexibility" remains on the spot), but this has deprived them of the ability to plan for the long term. The unwillingness to shift costs to government budgets in the summer guarantees Europe a major failure in industry in the winter, despite the fact that there are enough problems in this sector in the region as it is.
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