Europe’s gas crisis requires a European solution

30 Jun 2022

The UK is no longer part of the European Union, but it is a critical player in the European gas market. As the EU seeks to reduce its dependence on Russian gas, it relies on proximate non-EU states for access to an alternative gas supply, transport, and transit source. This requires cooperation, not competition or exclusion.

Europe must prepare for winter

The reality is that Europe must prepare for the coming winter with the gas infrastructure that it currently has. Furthermore, the global gas market is extremely tight, with little prospect of additional supply in the short term. In such a ‘zero-sum’ world, paying the highest price is the only way to guarantee supply security. Thus, the first line of action should be encouraging increased energy efficiency, managing demand reduction, and preparing for the possibility of physical supply shortages. Such measures figure in national and EU plans, though less so in the UK. More generally, the IEA has been critical of the relative lack of attention paid to energy efficiency over seeking new sources of supply.

Europe’s gas market evolved with the UK as a significant and integral element. The UK exports natural gas to continental Europe via the two interconnectors linking to Belgium and the Netherlands. A further interconnector links to Ireland, supplying Northern Ireland and the Republic of Ireland. The UK provides Ireland with 75 per cent of its natural gas needs. Its weakness is a lack of storage capacity compared to its European counterparts such as Italy and Germany. Historically, it relied on surging production from the North Sea, but this is no longer possible. Things were made a lot worse in 2017 when its only long-term storage facility, a depleted gas field in the North Sea, closed for technical and economic reasons. This decision is now being revisited.

UK exposed to price competition on European gas

In anticipation of a decline in UK production, the industry built three large liquefied natural gas (LNG) import terminals, two at Milford Haven in Wales and one at Grain in Kent. In addition, dedicated pipelines bring Norwegian gas ashore in the UK. In 2021, domestic production accounted for about 40 per cent of the UK gas supply (it fell by 17 per cent that year and imports increased accordingly), pipeline imports from Norway accounted for 39 per cent of the total supply and 64 per cent of imports, LNG imports accounted for 17 per cent of supply and 28 per cent of gas imports, and imports via the interconnectors accounted for the remaining 4 per cent of supply and 8 per cent of imports. Historically, Qatar was the largest supplier of LNG imports. However, in recent years, US and Russian LNG imports have also become significant. In 2021, Russian LNG accounted for 5.8 per cent of total gas imports and 3.6 per cent of the total supply. While Russian gas imports to Northwestern Europe backfill some of the gas imported via the interconnectors, this is impossible to identify and quantify. Thus, the UK Government can state that the UK gets less than 4 per cent of its gas from Russia. However, it remains exposed to price competition on European gas markets, as well as the consequences of the EU’s energy strategy and energy diplomacy.

Until recently, the UK’s National Balancing Point (NBP), the virtual trading point that sets the gas price, was Europe’s benchmark. However, for various reasons, that role is now played by the Dutch Title Transfer Facility (TTF). Thus, for the UK to attract gas from Europe, traders must offer a price that is higher than the TTF, and vice-versa if gas is to flow from the UK to Europe. Equally, because it relies on LNG imports, the UK is exposed to price competition on the global LNG spot market – it has no long-term contracts to speak of. Historically, the UK, and Europe more generally, have served as a market of last resort for global LNG, where cargoes are sent when demand is slack in Asia. But Europe’s role in the global LNG market is changing dramatically because of the war in Ukraine. Now, if the UK and other European importers want to attract LNG, they must outbid other buyers for the limited amount of spot LNG that is available. In 2021, 36.6 per cent of global LNG imports were on a spot or short-term basis. So, what does all this mean for the role of the UK in managing the EU’s gas security crisis?

Companies, not countries, manage gas

The EU has created a liberalised European gas market, in which companies, not countries, orchestrate the flow of gas. For the most part, this has served consumers well. Now things are different, and there are good reasons why cooperation with the UK is critical. First, the UK plays a key role in ensuring the EU’s gas security. Its LNG terminals, pipelines and interconnectors deliver significant volumes of gas imported as LNG, and some Norwegian production, to EU states. For the last month or so, because the TTF price has been higher than the NBP price, the two interconnectors have been flowing gas from the UK to the EU at close to capacity, helping to fill storage in the EU. Also, in the UK, gas is being used to generate electricity that is being exported to France to compensate for problems with nuclear power generation. This makes it strange that when the European Commission announced the EU-US LNG agreement, it included a map of ‘European LNG infrastructure’ that omitted the UK’s three LNG terminals. Furthermore, both sides would benefit from a public clarification of what might happen if Russia were to cut-off exports to major consumers and/or shut down Nord Stream 1 this winter. How might the EU’s solidarity mechanism be applied to the UK? Equally, how might the UK Government respond to a situation whereby high prices on European markets led to gas being exported to the EU, while UK customers went without supply. This also has implications for the Republic of Ireland.

Second, given the tightness of the global LNG market, European states must defuse the current bidding war to secure LNG supplies. The talk of collective purchasing of LNG and state interventions in the market, however impractical they might be, could have unforeseen consequences that could push up prices to the benefit of LNG exporters, including Russia, at the price of consumers. The reality is that, so far at least, the market has functioned to bring more LNG to Europe, albeit at record high prices. This will only push up the price to the benefit of LNG exporters, including Russia, at the expense of consumers. As noted above, Qatar has been a long-term supplier to the UK and owns one of the UK terminals – South Hook. Last autumn, the UK was discussing with Qatar to become a ‘supplier of last resort.’ The German government has also been courting Qatar and is determined to build its own LNG import infrastructure. No doubt Qatar is flattered by this attention, but Qatar Energy’s motivation is to maximise revenue for the Qatari state – and why not. Germany should guard against investing millions in permanent LNG import infrastructure that may create a lock-in or become stranded in the 2030s. A better strategy for Europe is to make the most of the existing import infrastructure.

Not enough LNG on global markets to replace Russian gas

Finally, Europe is also exporting its energy insecurity. Most Asian importers are largely protected by long-term LNG contracts, but importers such as Bangladesh and Pakistan are not. They cannot compete on price and now face their own energy security crises. The simple fact is that there is not enough LNG on global markets to replace the 155 billion cubic metres (bcm) of Russian pipeline gas imported by the EU last year. In 2021 total global LNG imports were 484bcm and 73 per cent went to Asia and the Pacific, leaving 133.3bcm for the rest of the world. The EU’s LNG import capacity is 157bcm, but much of that is in Spain and is poorly connected to the rest of Europe. In 2021, 13 EU countries imported a total of 80bcm of LNG. In 2012, after the Fukushima disaster, the Japanese government created the LNG Producer-Consumer Conference that continues to this day. Before their next meeting in September, to ensure that a difficult situation is not made worse, it would make sense for the EU and the UK to reach a common position on the role of LNG in meeting their current gas security challenges.

Looking to the longer term, EU-UK cooperation on gas security can provide a basis for collaboration on the integration and interconnection of offshore wind in the North Sea. The EU’s RePowerEu Plan contains a European infrastructure map of electricity that again excludes the UK. Notwithstanding Brexit, the EU and the UK share the same energy and climate ambitions, and this should be the basis for cooperation, not competition and exclusion.

This article originally appeared in The Progressive Post.