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    From the Editor: Brussels lays out gas decarbonisation plans while shortages loom [Gas in Transition]


The European Commission has unveiled ambitious plans to decarbonise the gas system, but many EU member states will be more concerned with energy security. [Gas in Transition, Volume 1, Issue 9]

by: Joseph Murphy

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From the Editor: Brussels lays out gas decarbonisation plans while shortages loom [Gas in Transition]

With winter only beginning, European gas prices have once again soared to record heights in recent weeks, amid renewed concerns about low levels of storage and potential supply disruptions.

The January gas delivery contract at the Dutch TTF hub reached nearly €143/MWh on December 16, or around $1,725/’000 m3 or $47.50/mn Btu. This latest spike has even propelled European prices to a rare premium over prices in Asia, although this premium will be short-lived as it will encourage LNG exporters to divert more supplies to Europe.

There are a number of factors fuelling this latest price surge. Russia’s Gazprom may have sent more gas to Europe this year than it did in 2020, when coronavirus restrictions caused significant demand destruction, but its deliveries have dipped to record lows in recent weeks.

Despite expectations that it would ramp up supplies, Gazprom’s exports to countries outside the former Soviet Union came to only 13.3bn m3 in November, marking a record monthly low for 2021 and down 24% from the 17.6bn m3 it sent in the same month of last year, according to the company’s own numbers. They were down 27% in the first half of December.

There is no evidence of Gazprom failing to meet any of its contractual supply obligations, though the company has faced criticism for withholding spot supply to drive up prices and put pressure on European regulators to allow the launch of the Nord Stream 2 pipeline. But another possibility, which appears more likely, is that Gazprom is at its maximum productive capacity. After all, it is not in Russia’s interest that prices remain this high, resulting in demand destruction and strengthening the narrative that the country is an unreliable supplier that uses gas as a geopolitical weapon.

This perhaps explains why Gazprom’s domestic rival Rosneft has had more success recently in convincing the Russian government to allow it access to the European gas market. Currently only Gazprom is permitted to use Russia’s gas export pipelines. Russian president Vladimir Putin has called for proposals on the plan to be submitted by March.

Escalating tensions at the Russia-Ukraine border, where Russia is reported to have amassed some 120,000 troops, has also propelled gas prices higher. Conflict between the two former Soviet countries could disrupt gas transit via Ukraine, which remains an important route for Russian gas deliveries to Europe, despite efforts by Moscow to bypass it.

Low storage levels in Europe have also led to some justifiable alarm. Storage facilities in the EU and the UK were only 61% full as of December 17, and if they are depleted at the average rate, this will fall to 10% by the end of the heating season. And it is certainly possible that they could run out entirely if Europe endures a particularly harsh winter.

Against this backdrop, the European Commission unveiled on December 15 a package of regulatory and legislative proposals aimed at decarbonising the gas market. The proposals seek to spur the development of low-carbon gases such as hydrogen and bio-methane, as well as reduce emissions of methane in the energy sector. They have been broadly welcomed by the natural gas industry, with some caveats.

Industry associations have praised the commission for recognising the key role of gas as a transition fuel. But they have also urged the EU against pursuing an overly prescriptive approach to reducing methane emissions.

The commission also proposed some measures to beef up energy security, including enhancements to the cross-border solidarity principle, and a strategic approach to gas storage that will look at storage concerns at a regional level and allow member states to jointly procure stocks.

However, the commission also called for an end to long-term contracts for “unabated” natural gas supply by 2049. Some EU member states are likely to perceive this as a threat to energy security and oppose it when the commission’s proposals are negotiated by the European Council and the European Parliament. Several member states, most notably Hungary and Poland, have made clear that they view Brussels’ climate policies as out of step with reality, and it can be expected that some of the commission’s ambitions for making energy cleaner will be reined in. For many member states, ensuring secure and affordable energy has moved much higher up their priority lists in the past year, and decarbonisation proposals will be rejected if they pose too great a threat to this.

In the US, the market is relatively calm. The front-month Henry Hub price has doubled this year, but this growth has now been checked, with the January contract currently lingering below $4/mn Btu – a price that many European gas users relying on spot supplies would very happily accept. Yet the Biden administration has still faced some calls, including from the Industry Energy Consumers of America (IECA), to restrict LNG exports.

Experts have warned of the dire effects such a move would have. It could paradoxically lead to higher US prices, IHS Markit noted in a recent report, as it would curtail investment in supply. This is not to mention the devastating impact it would have on markets in Asia and Europe. After all, only seven years after sending its first LNG cargo overseas, the US is set to become the world’s largest exporter of the supercooled gas by the end of 2022.

Emissions, particularly in Asia, would also soar as countries would be forced to bring coal-fired power plants back online to provide the baseload electricity and heating supply that they need. This is already happening to some extent.

In the US and in Europe, policies need to be well thought out and cautiously implemented when it comes to energy, to avoid making what is already a volatile situation even more volatile. Whether or to protect domestic consumers or tackle climate change, policymakers should tread carefully when considering measures that could stifle investment in energy supply.