Thursday

2nd Dec 2021

Opinion

Why did gas prices suddenly spike?

  • With only around 72 percent of Europe's needed-storage volume filled, Russia is likely to start the operation of Nord Stream 2 with some of the most unbeatable gas prices in the industry's history (Photo: jiva)
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Though natural gas prices have been constantly escalating since the beginning of 2021, this September managed to surprise many of industry experts around the world.

With the 30 August price being around $600 [€518] per thousand cubic metres, the mid-September gas trading raised it to $800, and the 29 September ICE Futures Europe registered the all-time history record of $1,000.

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This record, however, is likely not to be the final one for this year, as the European economies are still in desperate need for filling their storage facilities to get ready for the upcoming winter.

Due to the gas market chaos, many companies in Europe's business ocean are facing challenging times and those reliant on natural gas are currently amidst perfect storm.

For instance, in the UK, the country with some of the highest gas market prices in Europe, small energy firms and fertiliser producers fell the first victims of the price spike and either shut down or went bankrupt.

The economies of continental Europe also do not seem to be comfortable with this new turbulent reality. But could this perfect storm have been predicted? Or more importantly, could it have been prevented?

Blame it on climate change…

The consumption of natural gas normally varies throughout the year. In temperate zones, where it is used for heating, it grows during the winter season, while in the tropical and subtropical areas, where it is often consumed to produce electricity for cooling, it escalates in the summer.

Although energy industry professionals usually tend to be quite good at predicting seasonal demand, last winter in Europe was unusually long. As a result, gas storage facilities that would normally be replenished during the spring and summer in preparation for the upcoming winter were hit by one of the coldest Aprils in two decades.

In the US, on the other hand, the unprecedented heat of last summer stoked air conditioning demand. That is why more gas was used to generate electricity and thus less methane was stored for winter months.

The shifted seasonal patterns and generally colder winter and hotter summer were not the only climate related anomalies that the world experienced this year. Specifically, due to the unusually still air in the first half of the year, wind farms in such prominent champions of the European energy transition as Germany and Denmark were not able to generate enough renewable power.

As a result, fossil fuels, in general, and natural gas, in particular, were often used as a back-up option to balance the electrical grid. This further depleted the storage facilities and created prerequisites for the gas price turmoil the world is experiencing at the moment.

However, were these the only factors, the current gas price shocks would be a lot easier to handle in Europe.

… and geopolitics

While the skyrocketing prices for natural gas seem to offer a bounty of blessings to Russia, they definitely look like a perfect storm for Europe.

Indeed, the current price shock would not be that devastating if Europe managed to secure enough gas imports on time.

Unfortunately, this summer, while Russia – Europe's main methane supplier – was reportedly fighting a fire at a gas processing plant in Siberia, natural gas flow from Norway – the second-biggest gas exporter to Europe – was limited due to work on improving the country's infrastructure.

In addition, after the hot summer, substituting natural gas with LNG from the US also appeared to be quite challenging, as the amount of gas in America's own storage was still 7.6-percent below the five-year average.

On the other hand, if Europe had not allowed the Nord Stream 2 project to be finished, the ramifications of the changing climatic patterns would not be that harsh for the region's economies, even with the technical problems discussed above.

In fact, just a month before the reported fire in Siberia, Russia refused to book the transit pipeline capacities through the Polish segment of the Yamal-Europe pipeline – one of the key infrastructure pieces delivering Russia's natural gas to Europe.

This was likely to have been done in anticipation of the upcoming launch of Nord Stream 2, which was declared a 'fait accompli' by the US secretary of state a month prior to that.

Had it not happened, Russia would not be that sure about the future of its gas exports to Europe and would thus need to secure new revenue streams for the national budget via booking the old transit facilities.

Here, even with decreased supplies through one of the pipelines owing to the declared technical problems, the required amount of gas could have been pumped through alternative routes (e.g. through TurkStream).

Russian bonanza

Due to the slowly rising gas prices during the summer, Europe was hesitant in filling its storage capacities at a greater expense, especially given that last year's prices were record low.

Now, because of that hesitation, in order to make sure that the upcoming winter is comfortable, it will have to pay through the nose.

In fact, with only around 72 percent of Europe's needed-storage volume filled, Russia is likely to start the operation of Nord Stream 2 with some of the most unbeatable gas prices in the industry's history.

Hence, although this perfect storm for Europe was hard to predict, its negative consequences could have been avoided.

Author bio

Aliaksei Patonia is a visiting research fellow at the Oxford Institute for Energy Studies and a ReThink.CEE fellow of the German Marshall Fund of the United States. He currently focuses on the global energy transition and policies to incentivise 'green' hydrogen production.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

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