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Global energy crisis may worsen in the coming months, IEA chief says

Speaking at the World Economic Forum in Davos in May, Dr Fatih Birol, the executive director of the International Energy Agency (IEA), said we are “in the middle of the first global energy crisis.”

And last week at a global energy forum in Sydney, Australia, the chief of IEA cautioned, “A global squeeze on energy supply that’s triggered crippling shortages and sent power and fuel prices surging may get worse in the months ahead.”

“The world has never witnessed such a major energy crisis in terms of its depth and its complexity,” observed Dr Birol.

“We might not have seen the worst of it yet – this is affecting the entire world.” he added.

Energy crisis in Europe is perilous as Russia may completely cut Europe’s gas supplies this winter

The four major crises that governments and corporations around the world are attempting to tackle or stay out of range of are the COVID-19 pandemic, global supply chain disruptions, rising inflation and Russia’s invasion of Ukraine.

Against these interlinked and challenging factors, the energy markets have been roiled in recent months, with soaring oil and gas prices and concerns over security of supply heightened following Russia’s war in Ukraine.

“The situation is especially perilous in Europe, which is at the epicentre of the energy market turmoil. I’m particularly concerned about the months ahead,” noted Dr Birol.

The gas crisis in Europe has been building for a while. In September 2021 – five months before Russia’s invasion of Ukraine – the IEA pointed out that Russia was preventing a significant amount of gas from reaching Europe.

In January 2022, the IEA raised the alarm further, highlighting how Russia’s large reductions in supplies to Europe were creating “artificial tightness in markets” and driving up prices at exactly the same time as tensions were simmering over Ukraine.

After Russia declared war on Ukraine in February, the series of economic sanctions imposed on Russia upset the oil supply-and-demand balance, disrupting fuel shipments, stoking inflation and creating fresh problems in Europe. Many European Union (EU) members backed a proposed ban on oil from Russia despite being highly dependent on Russian oil and gas shipments.

A few weeks ago, Russia halted gas flows to Europe. Russia temporarily shut down the Nord Stream 1 pipeline, the biggest single gas pipeline between Russia and Europe, for what Russia says is planned maintenance (annual maintenance) that is due to end on July 21. 

According to a recent story in CNBC, “Russia has reduced its gas flows to Europe by about 60%, and it is not yet known when or if Nord Stream 1 gas flows will return to normal levels.” This has given rise to concerns of further disruption to gas supplies that would undermine the EU’s efforts to prepare for winter.

Some experts and leaders believe that Russia may use planned maintenance works to turn off the gas taps for good.                                                                              

“To understand the challenge Europe faces, let’s consider a scenario in which gas flows through Nord Stream return after 21 July to the low levels they were at before the current halt – but at the start of the winter heating season on 1 October, Russian gas supplies to Europe are cut off completely. In this situation, the EU would need to have filled its gas storage facilities to above 90% of their capacity by then to get through the coming winter. And even then, it could still face supply disruptions in the latter part of the heating season,” warned Dr Birol in his latest statement dated July 18.

“Achieving that 90% storage level is still possible, but Europe needs to act now and make every remaining day count,” forewarned Dr Birol.

Last week, President Emmanuel Macron of France warned his country’s people to prepare for a total cutoff of Russian gas by supporting alternatives, turning off public lights at night when they aren’t useful and engaging in a period of nationwide energy “sobriety”.

According to a recent article published in the Wall Street Journal, Shell PLC Chief Executive Officer Ben van Beurden told an energy conference that Europe might need to ration energy and faces the prospect of sharply escalating prices, as the continent gears up for a “really tough” winter.

Options available to Europe to prepare for a tough winter and the future

Europe is also turning to the US to supply greater volumes of expensive liquefied natural gas (LNG). The EU can also work with the UK to secure imports via their LNG terminals. European governments are also attempting to get more piped gas from Norway and Azerbaijan and ramp up the use of renewable energy.

European Commission President Ursula von der Leyen and Europe’s energy commissioner, Kadri Simson, were in Azerbaijan on Monday to finalize a new gas deal. The deal, aimed at doubling imports to help move away from Russian fossil fuels, includes Azerbaijan’s commitment to deliver at least 20 billion cubic meters to the EU annually by 2027.

Even though the EU relies on Russia for almost 40% of its imported natural gas to help heat millions of homes, generate electricity and power factories, and replacing Russian gas with alternative gas suppliers and green energy is near impossible in the short term, Europe needs to stay the course on its clean energy transition and accelerate the adoption of renewables.

The IEA also sets out pragmatic actions that the EU could take to reduce its reliance on Russian natural gas.

“The first immediate step towards filling European gas storage to adequate levels before winter is to reduce Europe’s current gas consumption, and to put the saved gas into storage,” recommends the IEA.

According to new IEA analysis, the extra gas that needs to be saved over the next three months is in the order of 12 billion cubic metres – enough to fill about 130 LNG tankers.

Dr Birol, IEA chief, proposes five concrete actions that European leaders need to take to prepare for the coming winter.

  1. Introduce auction platforms to incentivise EU industrial gas users to reduce demand.
  2. Minimise gas use in the power sector. 
  3. Enhance coordination among gas and electricity operators across Europe, including on peak-shaving mechanisms.
  4. Bring down household electricity demand by setting cooling standards and controls.
  5. Harmonise emergency planning across the EU at the national and European level.

“Every action counts. Simple steps such as turning down the heating by a couple of degrees in Europe can save the same amount of natural gas that is supplied over the winter by the Nord Stream pipeline,” suggests Dr Birol.

The European Commission will soon outline a handful of measures for corporates on how to reduce energy consumption. The gas-conservation guidelines will suggest “limiting the temperature in office buildings across the bloc to 19 degrees Celsius, or about 66 degrees Fahrenheit,” as has been reported in the Wall Street Journal. The plan aims to raise awareness for what could be a long and hard winter in the region if gas supplies are restricted.

Conclusion

As Europe prepares for a worsening gas crisis, its cities are witnessing an unrelenting heat wave that has set all-time temperature records and increased the demand for energy to cool the continent’s homes and businesses.

The historic heat wave has compounded the energy crisis. Prices for Dutch natural gas, the European benchmark, rose 3% from Friday to €165 ($167) per megawatt hour on Monday, according to data from the Intercontinental Exchange. Concerns of a significant gas cut off can drive them to a higher level.

As Europe prepares for the worst, it may be a good idea to heed the advice of Dr Birol: “This winter could become a historic test of European solidarity – one it cannot afford to fail – with implications far beyond the energy sector. Europe may well be called upon to show the true strength of its union.”

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