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More natgas investments needed

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The Group of Seven energy ministers have agreed that new investments in natural gas are needed because of the energy fallout from Russia’s invasion of Ukraine.

The G7 statement, released on April 16, said, “Investment in the gas sector can be appropriate to help address potential market shortfalls provoked by the crisis, subject to clearly defined national circumstances, and if implemented in a manner consistent with our climate objectives.”

What is interesting about this is that four of the seven countries are European.

So, how will the European Commission react, if at all?

Leading industrialists have delivered a damning verdict on EU efforts to prevent companies from shifting investment to the US, warning the bloc’s competitiveness is rapidly eroding.

They have warned that Europe’s Net Zero Industry Act, announced in March, will not be sufficient to compete with $369 bln of green tax incentives and subsidies on offer in the US under President Joe Biden’s Inflation Reduction Act.

“The US has adopted a simple strategy that immediately incentivises businesses to invest, while the EU is coming with a political framework that lacks precise elements and misses simple, clear-cut reasons for businesses to invest.”

It lacks competitiveness.

However, Europe is also on the road from gas shortage to abundance.

Mild winter temperatures – the second warmest winter on record – high prices, and emergency measures curbing gas demand, have left Europe with more than double the gas in storage it had at this time last year.

But there are many warnings to avoid complacency, as next winter may not be as forgiving.

Europe will be facing a costly 2023/2024 winter.

Without enough long-term LNG deals, it will have to rely on the spot market with little control over prices and quantities.

Europe’s climate goals – the EU aims to cut net emissions by 55% by 2030, reduce gas consumption by 30% by 2020, and reach net zero by 2050 – mean its LNG buyers struggle to commit to the timeframes necessary to lock in LNG more cheaply under contract.

Green lobby is wrong

The green lobby in Europe has managed to persuade the European Commission and politicians wrongly that hydrogen can replace natural gas as an energy carrier by 2030.

The International Energy Agency has doubts this can be achieved.

As a result, Europe has shunned long-term contracts and become far too reliant on spot and short-term purchases of LNG.

The Title Transfer Facility  (TTF) gas price is still nearly three times higher than pre-Covid, affecting European industrial competitiveness.

The European Commissioner for Energy, Kadri Simson, is asking all member states and all companies to stop buying Russian LNG and not to sign any new gas contracts with Russia once the existing contracts have expired.

On the other hand, the Dutch finance minister warned of waning public support for climate policies.

Greenhouse gas reduction measures have led to a stand-off between the government and farmers in the Netherlands and a political upset in elections for the Dutch Senate.

A growing part of the electorate believes established politics no longer serves its needs.

The political turbulence in The Netherlands comes as other parts of Europe’s green agenda have been watered down amid political tensions in other capitals, especially Germany and France.

Investments lagging

This week’s warning at the European Gas Conference in Vienna was clear: “Energy markets are heading into a self-inflicted train crash in slow motion.”

At a time of rising energy demand, investment in oil and gas, as well as in renewables, is lagging far behind the fast-rising demand.

Experts are concerned that last year’s energy and natural gas price challenges could be repeated next winter.

We are clearly not out of the woods yet.

BP’s Energy Outlook 2023 states that the prospects for natural gas depend on the speed of the energy transition, with a demand under the New Momentum scenario rising throughout to 2050 by as much as 20% above 2019 levels.

The BP Outlook finds that future natural gas and LNG demand is sensitive to the speed and form of the energy transition.

The EU made it through the winter without suffering supply disruptions, despite the reduction in Russian gas exports to Europe – a major achievement.

A combination of mild weather – Europe had the second warmest winter on record – demand reduction because of the very high prices and the economic slump and timely policy actions led to a 55 bln cu.m. (bcm), or 13%, reduction in gas consumption in 2022.

Record additions of wind and solar power also helped.

The combination of developments led to a substantial reduction in Europe’s gas demand, high storage levels at the end of winter and substantially lower gas prices.

This recipe is unlikely to be repeated in 2023 – especially with the return of China to growth – hence, the calls for caution and avoiding complacency.

To a certain extent, Europe was somewhat lucky that China, under its zero-Covid policy, saw a 20% reduction in LNG demand in 2022, with part of the LNG contracted in the US by Chinese importers redirected to Europe – something that is highly unlikely to be repeated in 2023.

This averted competition and kept prices lower than they otherwise could have been.

Turkey’s gas

Turkey’s natural gas reserves in the Black Sea have now increased to 710 bcm.

TPAO said the installation of the pipes connecting the energy base in the Black Sea to the Sakarya Gas Field Land Facility had been completed.

The company said the inauguration of the start of the gas transmission from the field was expected to occur this week.

Energy and Natural Resources Minister Fatih Dönmez said Turkey’s huge gas finds would be enough to supply all households in the country for 35 years.

The newly developed gas fields are set to go a long way toward Turkey’s energy diversification.

So far, the country has mostly relied on imports to procure energy supply.

The Russian invasion of Ukraine has hit Turkey’s economy and energy prices hard, making energy imports much more expensive.

 

Dr Charles Ellinas is Senior Fellow at the Global Energy Center, Atlantic Council

Tw: @CharlesEllinas