Yves here. It’s been hard to miss the way gas prices have been rising in the US. Of course, per Washington, rising energy charges are dastardly Russia’s fault. From the Financial Times:
The US has vowed to support European countries hit by an energy supply crunch blamed by some officials and traders on Russia, and said it would “stand up” to suppliers accused of manipulating prices.
Surging gas costs due to tight supply and low reserves have forced European governments to draw up plans to provide emergency aid to households and utilities. Energy market participants said moves by Kremlin-controlled energy giant Gazprom to restrict supply have contributed to fears of a crippling energy crisis this winter.
Perhaps some readers are well informed enough to have a basis for disagreeing, but I don’t see how “Russia,” let alone one very large oil and gas company, can squeeze prices on a global basis. I am not aware of any Brent/European analogue to Cushing and the WTI, where it is possible to manipulate index prices due to storage capacity constraints.
By Irina Slav, a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice
It was only a matter of time, really. In a globalized world, energy crunches can hardly remain regionally contained for very long, especially in a context of damaged supply chains and a rush to cut investment in fossil fuels. The energy crunch that began in Europe earlier this month may now be on its way to America. For now, all is well with one of the world’s top gas producers. U.S. gas exporters have enjoyed a solid increase in demand from Asia and Europe as the recovery in economic activity pushed demand for electricity higher. According to a recent Financial Times report, there is a veritable bidding war for U.S. cargos of liquefied natural gas between Asian and European buyers—and the Asians are winning.
Coal exports are on the rise, too, and have been for a while now, especially after a political spat had China shun Australian coal. But supply is tightening, Argus reported earlier this month. In July, according to the report, U.S. coking coal exports dropped by as much as 20.3 percent from June. The report noted supply was constrained by producers’ limited access to funding and a labor shortage that has plagued many industries amid the pandemic.
All this should be good news for U.S. producers of fossil fuels. But it may easily become bad news as winter approaches. The Wall Street Journal’s Jinjoo Lee wrote earlier this week high energy prices could be the next hot import for the United States. Lee cited data showing gas inventory replenishment was running below average rates for this season, and gas in storage in early September was 7.4 percent below the five-year average.
Coal inventories are also running low because of stronger exports, with prices for thermal coal three times higher than they were a year ago. According to calculations from the Energy Information Administration cited in the WSJ report, coal inventories in the United States could fall to less than half last year’s inventory levels by the end of the year. Last year, energy demand was depressed because of the pandemic. This year, the U.S. economy is firing on all cylinders once again.
No wonder electricity prices are already going up.
In a way, the events in Europe could be seen as a trailer of what might happen in the United States. It is a trailer because it shows all the worst bits. The United States is much more energy independent than, say, the UK, and that’s a big plus. Yet exports bring in revenues, and it would require government intervention to make gas producers cut exports.
In an alarming move, such intervention was requested last week by a manufacturing industry group. Industrial Energy Consumers of America, an organization representing companies producing chemicals, food, and materials, asked the Department of Energy to institute limits on the exports of liquefied natural gas in order to avoid soaring prices and gas shortages during the winter, Reuters reported on Friday.
Opinions seem to differ on whether rising LNG exports are in fact hurting U.S. consumers. But the fact is that gas prices are already double what they were a year ago. According to the IECA, they are not, however, high enough to motivate a ramp-up in natural gas production. Therefore, in order to stockpile enough gas for the winter, the U.S. government must force a reduction in exports.
The LNG industry is, of course, against this. The executive director of Center for Liquefied Natural Gas told Reuters most LNG exports are shipped under long-term fixed-price contracts that have no relation to benchmark gas prices and their movements. Yet some cargos are sold on the spot market.
“Buyers of LNG who compete for natural gas with U.S. consumers are state-owned enterprises and foreign government-controlled utilities with automatic cost pass through,” Paul Cicio, president of IECA, said, as quoted by Reuters. “U.S. manufacturers cannot compete with them on prices.”
Traders are already getting jittery, and this will likely contribute to price uncertainty; regardless of how the fundamentals situation develops. Again, Europe is at the heart of the uncertainty – or rather the certainty that prices have higher to climb. But now, China has added to concern about gas supply and the potential for shortages.
For now, China’s biggest problem seems to be coal rather than gas. A recent Bloomberg report said that China coal power plant operators are struggling to buy enough coal to keep their plants running, and some are being forced to shut down their boilers because of insufficient coal supply. This, however, might lead to stronger gas demand to ensure enough electricity and heating for the winter. This will further exacerbate the difference between global demand and supply.
The European energy crunch is spilling over into other regions. The blame game has begun with culprits ranging from years of underinvestment in local gas production to a Gazprom scheme to get Nord Stream 2 approved by Germany. For now, it is still unclear how much of the price surge is due to a gap between demand and supply and how much of it is due to market nervousness, at least according to RBC commodity strategist Christopher Louney, as quoted by the WSJ’s Lee. This question is less important than another, however, and it is a scary one:
Just how bad could things get this winter?
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Pepe Escobar’s take: https://twitter.com/RealPepeEscobar/status/1440881453680578568
His tweet makes no sense whatever.
Gazprom owns a high proportion of the storage capacity in Europe and is at least partially responsible for running stores down so low (why Europe allowed this monopoly ownership I’ve no idea). They have been trying to get Germany to break EU regulations for gas pricing and supply which would increase their near monopoly control over the market. Germany isn’t having any of it. Its the normal to and fro in the gas market which is always plagued by an imbalance of power between the suppliers and purchasers due to the need for rigid and fixed infrastructure. The idea that Germany has somehow just thrown out some good deal is a gross simplification.
There has been a three way struggle between Russia(Gazprom), Germany and the EU over the implications for Nord Stream II, although its not yet clear to just what extent Gazprom has been deliberately manipulating the market for its own ends.
I’ve no insider knowledge on this, but my understanding of the criticism of the Russians is that while they are fulfilling all their contracts, they are refusing to use any spare capacity available to increase supplies to Europe in order to drive up the price in Europe, which in turn is driving up spot prices for LNG. Even if it is true, I doubt there could be too much spare capacity due to chokepoints in production and distribution. There is only so much gas you can push through a pipeline.
A crunch like this has been predicted for many years (at least since the ‘dash for gas’ in the mid 1990’s that followed deregulation of energy markets) – its one reason why the EU had as a strategic priority the construction of additional LNG terminals and more storage for several years. But not enough obviously.
A further driver for this is that what are described as Covid related delays has resulted in an unprecedented number of power stations shutting down out of schedule. Currently 5 of 13 UK reactors are shut (only two scheduled), and in Ireland the two biggest CCGT plants are closed for at least 6 months for unspecified repairs – Covid related supply chain issues are being blamed for the delay. There has been a high pressure zone over Europe for most of the summer and early autumn which has meant low wind energy contribution. There is not enough solar capacity to make a significant contribution.
Already, a lot of industrial gas users have shut down, maybe indefinitely as they are not viable with high prices. The first to shut were the fertiliser plants, I suspect a lot of plastics and construction material plants will follow. This will have serious supply chain and inflationary impacts next year. If farmers can’t get nitrates, thats a lot less milk in 2022. If the construction industry can’t get mineral wool, thats unfinished construction. As for plastic….
I suspect that as many industrial users roll back, the supply will ease – in most cases electricity companies will outbid industrial users – its much easier to furlough a fertiliser factory for a winter than a key power plant.
All in all, bad news for the planet. I suspect this will lead to a lot of old coal plants taken out of mothballs, and will give fracking a belated boost. LNG will get another major injection of money.
I’ll leave the macroeconomic impacts of this to others to discuss. It reminds me of the 1970’s, where energy crunches at least indirectly led to stagflation.
Does there being 2 pipelines change the spare capacity point in your first paragraph or are the choke points sitting on top of both the new and old pipelines?
Nord Stream II is essentially a whole new source and is independent of any chokepoints, at least until it gets to Germany, although it doesn’t overcome the problem in Europe with storage (which as I’ve noticed above is largely owned by Gazprom). I don’t understand the full details, but it seems Gazprom is trying to get around EU competition law by doing a separate deal with the Germans, but the Germans aren’t buying into it (not that they could if they wanted).
The problem for Europe is that they’ve become too dependent on Gazprom which is doing its best to operate as a monopoly. So its difficult to disentangle genuine physical chokepoint issues from, shall we say, political or commercial chokepoints.
My personal suspicion is that Gazprom could pump more gas if it really wanted to, but it doesn’t have an incentive now, as the existing situation is good for them. But thats just a guess on my part, understanding gas supply in Europe is a like learning a language, every time you think you understand something a whole new layer of complexity opens up.
I haven’t read the whole report but this analysis argues that Russia is sending all the gas they can while trying to fill their own reserves.
Big Bounce: Russian gas amid market tightness
The seaborne LNG import business in EU did not hesitate to play rough trying to torpedo competition from pipelines, despite higher cost.
To what they thought was their own benefit, they also managed to stop EU from securing long term pipeline supply when storage started running below trend spring of last year. But possibly the LNG guys just wanted more business locked in for themselves, so that the pipeline supply would secure the risk of a low-demand season. This is because storage can also fill up completely in a low-use season, in which case someone among the suppliers has to provide the flexibility to cancel. Double edged sword.
@PlutoniumKun, 5:13
I don’t have any special knowledge about EU gas supplies either, however when I see people complaining that the nefarious Russians are honouring their contracts and this is the reason they are manipulating prices I find it a bit hard to take. I saw the same odd assertion in an article by Eric Reguly in the Globe and Mail earlier this week although he indicated the alleged manipulation might not be true.
I was once deeply involved in contract negotiations. If both parties honour their commitments it’s dishonest to fault one of the parties if circumstances change over time. If the EU failed to provide for some flexibility due to future changes in demand or storage or something else, it’s entirely on them. The “Russia done it” blame game sounds to me that those truly responsible are trying to cover up their incompetence.
Is there something wrong in the way that article is displayed? At the time I write this the first three paragraphs are show twice.
It was only a matter of time….
Coal exports are on the rise……
All this should be good news…..
Aargh, I have no idea how that happened, but fixed.
The part about China struggling to get enough coal is interesting. China just announced they will stop building new coal power plants abroad, to meet green targets. Perhaps these events are related.
China wind & solar (with grid capacity to match) are growing so fast, their coal capacity utilization for fell below 50% in the 2020 year. By 2025 a 50% reduction of Chinese coal use is expected. New construction is (was?) still happening for replacements and upgrades.
At the same time, nuclear and hydro are bringing up the capacity for no-solar no-wind days. The rate is one new nuclear power plant in China every 3 months, and expect this to continue for the next 20 years.
While they are making noise trying to pull the plug on Australia’s coal industry sooner than originally planned, what we’re seeing are gyrations in spot prices. As the article points out, most energy is priced via long term contracts or financial instruments.
According to the data I’ve read about China.
Coal plants in the pipeline 40GW
nuclear plants in the pipeline 37GW
installed solar in 2020 40GW
( 40 GW of solar is about the same on a daily basis as 8 GW of constant energy)
Now 40 GW is about 3 times what the US installed last year. That’s good. That 15GW US installation equates to about .3% of our electrical consumption.
To view it another way, there is about 100 GW of solar in the US that produced about 2.3% of our electricity according to the EIA.gov. Or about 50GW per 1%.
To offset the 60% that’s fossil fuel means about 300-500 GW per year for the next 10 years and that doesn’t include transportation, heating, industrial, which is another basically double the electricity number. Hard to stay hopeful.
Solar and wind growth figures I recall are 30%+ yoy depending on how yoy look at it. But looking at a linear growth pattern like you have is more useful for the 5-year-plan system, once the buildout has ramped up.
Here’s a link from pv- magazine.com citing official Chinese sources. Claims in 2020 China added +48GW solar / +71GW wind, on existing capacity around 250GW / 280GW respectively.
A straight-line projection has this roughly doubling/2.5x existing capacity in 5 years, resulting in combined solar+wind of 1.1TW+ at end of 2025. For reference, current capacity is 2.2TW for all electric. As you say, the fraction will be quite a bit lower in TWh terms.
The +40GW coal capacity is on around 1000GW currently installed. They must maintain this capacity for another generation until someone comes up with something like 2-4 TWweeks worth of battery storage. Still, supposedly late this decade, the capacity utilization of coal in China will fall to on par with wind/solar, to fall even further in the 2030s.
Chinas problem is at least infrastructural as supply based. China has vast reserves, but they are deep inland, not on the coasts where its needed. China has invested a vast amount on HSR, but not learn enough on old style goods railways, this is why its so dependent on importing US, Canadian and Australian coal.
“This year, the U.S. economy is firing on all cylinders once again…”
????
Reading about supply chain issues, labor issues, assorted crapification and more all year and yet this statement appears.
Propaganda… everything is fine, nothing to see here, get back to work and keep shopping.
Yeah but shopping will make you sick and poor.
It is much better to install solar, get a home battery, and weather the energy chaos under your pillow with a good book.
We just had a recent post on rationing and this is what may have to happen here – gas rationing. Running out of gas has all sort of implications as Lebanon has found out which only now is being eased through a combination of the efforts of Hezbollah, the US, Syria and Iran. This is probably a worse case scenario depending on how different countries source their energy supplies but it is sobering–
https://theowp.org/reports/the-devastating-effects-of-lebanons-energy-crisis/
In spite of the desperate need for more gas supplies, Poland’s energy company is claiming that Russia’s Nord Stream 2 gas pipeline does not meet EU requirements which may delay even further any gas flow through those pipelines which is at the moment reckoned to be at least four months. As they are a part of the group responsible for granting certification, they have the power to delay it. They have also threatened to launch legal action if any gas goes through before certification is complete.
So Russia is still fulfilling their long-term contracts and letting the pressing need for more gas make the EU serious by certifying Nord Stream 2. Certainly they see no need to short either themselves or their Asian customers to bail out the EU so Russia will sit back and let the EU get itself into a twist about desperately needing that gas while trying to punish Russia at the same time. Consider this video to show how the Russians may feel-
https://twitter.com/claredalymep/status/1438139489239633925
It takes an Irishwoman to talk truth to power and that Clare Daly let them have it both barrels.
“Could ye back off on the Russia-phobia …” Ouch!
Ireland hasn’t been absorbed in the U.S. empire yet.
Culturally and economically ireland is a US colony, it’s the European entry point for American firms, young middle/upper middle class kids practically sound like they’re Americans now.
I guess I overstated the situation. Ireland has had its share of bad neoliberal policies, but it does also seem to produce people like Daly or Robinson, which makes me think it doesn’t have the kind of political monopoly you have in the U.S. or Britain.
& then there is this – the old blind eye.
https://truthout.org/articles/shannon-airport-ireland-s-gateway-to-torture/
These are the seedy standards many governments seem to adhere to, unfortunately.
Maybe it is time for Europe to import more fuel from Iran.
It is my understanding that since the 1970s, France has been the most energy independent country in the EU.
But neither in this article nor any other have I read anything about how France might fare if the crisis escalates,
Can someone out there enlighten me (and other members of the NC commentariat).
Thanks.
France isn’t the most energy independent country in the EU. That honor probably belongs to Norway, which generates over 90% of their electricity with hydro and has massive petroleum and natural gas reserves.
That said, France will probably do better than most because 70% of their power generation comes from nuclear. Because of this, there is less need to pass massive fuel cost increases onto customers, and they are less likely to experience highly disruptive utility bankruptcies like we’re seeing in the UK. The customers who directly burn natural gas on-site in furnaces, boilers, or other industrial equipment are most likely to be impacted.
At behest of the Greens, and for other good reasons, German decommissioned it’s nuclear plants, France didn’t.
This insulates France until the costs of decommissioning at end of life for its nuke plants comes up.
Then, there’ll be a bill to pay. Till then, with Uncle Sam’s help it’s smooth Sahel-ing.
The French made a big investment in nuclear power plants, including a fuel reprocessing plant which is used by a number of other countries. The plants I’ve seen look a bit tatty with rusting steel on the outside but they appear to be well run according to industry people I used to know. A few years ago they were producing half of France’s electricity.
In the energy world you hear is about problems and the occasional crisis. France has neither… so far.
Anybody on here know where Russian exports to China fit in?
If Poland tries to hold up deliveries through Nord Stream the rest of Europe will be seriously unhappy, especially since Poland is refusing to shut down the big lignite coal plants the EU Court has ordered them to close.
If you’ve ever played Rail Barons you understand the situation.
Hopefully someone living in France can add here, but a quick search for spotprices gave that France had among the highest in Europe today, 50% higher than the in Sweden (and the current price in Sweden is very high).
This is really unsurprising as the systems are connected and the price is set on the margin.
An outfit (Carbon Engineering) was getting off the ground a year or two ago with the claim that it could suck carbon dioxide out of the air and turn it into oil. They have since gotten significant funding although they seem to be moving more into the “carbon storage” realm. Too bad. Seems like turning CO2 into oil is exactly what is needed now. It would break the monopoly oil giants, provide potentially cheaper fuel for smaller nations and remove gigatons of carbon. Once the oil giants are mortally wounded, it would be easier to ramp up the conversion to non-fossil fuels. And there will always be a non-fuel use for oil.
https://carbonengineering.com/our-technology/
Does this process consume energy? This will be at least the difference between the energy of the final state(oil+???) and the initial state(CO2+???). Since burning oil releases energy, I would expect a process like this to consume energy.
Here is the bullet-blurb about how this company plans to turn carbon dioxide and water into fuel.
“ABOUT AIR TO FUELSTM
CE’s process delivers synthetic, ultra low carbon fuels – such as gasoline, diesel, and jet-A – out of air, water and renewable electricity.”
So they are honest about the fact that it takes energy to re-reduce fully oxidised carbon and hydrogen back into de-oxidised fuel ready to oxidise ( burn) to re-extract the energy all over again. And they say they will get the energy from “renewable electricity”. Which is possible in theory, if they can get enough of it to make a difference in practice.
The best form of “carbon capture” is to leave the oil in the ground. Here is what we seem to be looking at:
1) Oil companies sell oil which generates energy and make profits.
2) Develop sources of clean energy to power carbon capture (fusion power?). More energy is needed to sequester the CO2 then the oil produced in the first place.
3) The net result is the oil companies make money, and extra energy must be produced to pay for the net energy loss involved in burning oil and then sequestering the CO2.
Sweden has hardly any gas in the system, and we also have high electricity prices right now – highest in ten years I think. It’s a combination of not much rain in the summer so water is low in the hydro dams, less than average wind in the summer (if you have decent amount of hydro to act as storage, months is the relevant time scale), and nuclear plants being down for scheduled maintenance (they need that, despite propaganda about them running 24/7/365).
And I am going to assume Norway also got less rain for their hydro (it’s the same mountain range). Question is how the hydro situation is in the Alps, because hydro and gas are the power sources that is mainly used for regulating the system, which also means that they are often the price makers. If Europe is running low on hydro, it can run low on gas without there being any disruptions to gas as such.
There’s an insidious feedback loop here in the States where the higher gas prices are sending ISO power markets higher, putting many coal plants deeper “in the money”–and by extension, burning more coal and having to replace it with production priced at the high market (I.e. export) rates mentioned in the article–than would have been expected earlier in the year. And the coal mining industry isn’t exactly nimble in being able to respond to changing market conditions. Although gas/power have eased up a little in the last week.
Considering low gas storage and a relative lack of capital spend by frackers and… well, here’s hoping for a warm, polar vortex event-free winter. Or an Evergrande black swan (technically, white elephant).
> Perhaps some readers are well informed enough to have a basis for disagreeing, but I don’t see
> how “Russia,” let alone one very large oil and gas company, can squeeze prices on a global basis.
> I am not aware of any Brent/European analogue to Cushing and the WTI, where it is possible to
> manipulate index prices due to storage capacity constraints.
Isn’t a gas pipeline in some sense a structural monopoly? If there is no other way to get enough supply in because port facilities and other roads of ingress are insufficient to handle the load, this seems like it grants Gazprom market power to manipulate prices by withholding supply.
https://www.cnbc.com/2021/08/24/russia-is-pumping-less-natural-gas-to-europe-as-nord-stream-2-nears-completion.html
Also, I can only imagine that if gas prices tripled in EU how long it would take other providers to respond. Ships take a while to get there. The gas pipeline is a pretty instant thing. Cut off supply on one end and it stops flowing out the other.
Maybe the Russians are just having unpublicized mechanical problems. Maybe they are playing silly buggers like Enron in the California energy crisis that unseated Davis.
I’m biased, but locally produced renewables are looking better and better all the time.
Can anybody provide a link to a good summary of Russia’s gas flows this summer? I’ve heard all sorts of speculation about Russia intentionally withholding gas (i.e. operating at minimum levels of contracts) in order to force Nordstream 2 online. But there isn’t usually anything to back up that kind of speculation. The big concern for Europe is if Russia reduced investment in gas this past 2 years and just doesn’t have the volumes right now, regardless of real politic. I’d love to know whether that is true.
To Yves’s question about how 1 country/company could corner the world market, it seems very possible that they have done so (is accidentally cornering still cornering?). There has been a large increase in LNG volumes over the past 5 years, but since those are long term contracts it’s reasonable to assume that demands were built for that gas. I think most of that demand has been for power plants and heating needs, rather than industrial purposes, so it’s relatively inelastic. Asia bids have apparently kept pace with European prices, so there is no relief there of redirecting cargoes. Also, Brazil’s drought may be calling cargoes there as well.
Thinking of the global gas infrastructure as akin to oil is way off base. There is not nearly the breadth of facilities and differentiated products that allow slack in the system to naturally occur.
Can Europe turn on coal and nuclear generation for this winter? Changing the supply mix of power production seems like the only feasible option if Gazprom and Father Winter don’t cooperate.