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| Fig. 1: Ceremony for completion of Nord Stream Pipeline. (Source: Wikimedia Commons) |
Natural Gas has dominated recent headlines through the ongoing shortage seen in Europe. Seen by some as a transition fuel from traditional fossil fuels to renewables as countries begin to lower their reliance on coal and nuclear energy, natural gas has been in demand to make up for the inconsistency in supply observed from renewable energy sources. [1] In 2020, global primary energy consumption dropped 4.5% (the largest decline since 1945) and natural gas prices reached historic lows: the US Henry Hub natural gas price metric reached $1.99 per million British thermal units (mm btu), and the Asian LNG (Liquified Natural Gas) price reached its lowest at $4.39 per million btus. [2] Prices have since skyrocketed with the EIA forecasting a US Henry Hub Spot Price of $5.53 per million btus in the fourth quarter of 2021. [3] Countries have increased their demand for energy since the peak of the pandemic, and several external factors have caused natural gas prices to increase heavily, a symptom of a politically charged energy landscape in Western and Central Europe. Reliance on natural gas actually increased in 2020 as its share of primary energy sources reached an all-time high of around 25%. [2]
Western and Central Europe relies heavily on natural gas as a primary energy source, and its distribution plays a large part in the current gas shortage. One method for importation of natural gas into continental europe is Liquified Natural Gas (LNG), where gas is cooled to a temperature of -260℉ which allows it to be transported in liquid form, and occupy much less volume. This is useful for transporting across large distances, and in Europe the largest supplier of LNG is from the US, which is responsible for exporting 7.4 billion cubic meters (bcm) to Europe in the second quarter of 2021. [4] The other main source of natural gas distribution is through pipelines, where Russia dominates the natural gas market. 42% of natural gas imports from outside the EU come from Russian pipelines. For context, LNG only accounts for 23% of natural gas imports. [4] The dominating pipeline in Europe is Nord Stream, whose majority shareholder is Gazprom, Russia's state-owned natural gas company. Nord Stream transports 55 bcm of natural gas a year across the Baltic Sea from Russia to northeastern Germany, and in the second quarter of 2021 transported 15 bcm to the EU. (See its ceremony in Fig. 1) [4]
Other countries have upended the European Natural Gas market, and Chinas transition from a heavy reliance on coal to natural gas has increased demand for LNG. Chinese energy companies have been negotiating long term deals for US LNG, creating further demand. [5] Other countries such as India have also been increasing demand for LNG, which has contributed to the large price increases in 2021.
Another contributor to natural gas prices is the current constricted supply of stored natural gas in Europe. Natural Gas demand, unlike oil, fluctuates throughout the year. That demand is highest during winter months, as it is used in heating. In the UK, nearly 40 percent of natural gas consumption is directed towards heating homes. [1] An unusually warm summer and potentially colder than normal winter have constricted this supply, which have resulted in even larger demand. Moreover, the capacity for storage has dwindled in recent years. The largest European gas field, Groningen in the Netherlands, is no longer reliable to produce gas to make up for current shortages. The storage filling rate in the EU was at an average of 47.5%, the lowest in the last decade. [4]
Russia plays a crucial role in the European natural gas landscape, and the EUs reliance on pipeline imports has led to many political conversations. Currently, talks are centered around the recently completed Nord Stream 2 pipeline, also owned by Gazprom. Nord Stream 2 runs alongside Nord Stream 1, and provides another 55 bcm of natural gas to Europe per year, bringing the total of both pipelines to 110 bcm. [6] Although completed, the pipeline requires regulatory approval before it can start delivering the gas. The pipeline is partially funded by EU Companies, and includes financing from Engie (France), OMV (Austria), Shell (Netherlands/UK), Uniper and Wintershall (Germany). [6] Ukraine and Poland are contesting the approval of the pipeline: in the second quarter of 2021,10 bcm of Russian natural gas flowed through the Brotherhood Pipeline, which gives revenue to Ukraine through taxes. [6] Ukraine is concerned by the fact that Nord Stream 2 could result in a diversion of gas towards Nord Stream 2, and increase its vulnerability to Russia. Critics of Nord Stream 2 also question Russia's reliability concerning the supply of natural gas, and whether Russia is purposely constricting the supply to increase prices, claims that the government contests. [1]
It remains to be seen if Nord Stream 2 will be approved by Germany and the EU. The regulatory timeline can last another few months, and may not be approved until January at the earliest. [7] The debate is ongoing, and Nord Stream 2 may not be enough to alleviate the demand for natural gas. The EU consumed 84.5 bcm in the second quarter of 2021, an increase of 13.5 bcm in comparison to the second quarter of 2020. As countries increasingly move away from traditional fossil fuels, natural gas role as a transition fuel has increased. France, who traditionally depended on nuclear energy, have increased their consumption of natural gas by 31% year-on-year. [4]
As many countries in Europe push for carbon neutrality, natural gas will play an increasingly important role in the years to come. For now, however, a potentially colder winter will likely increase the record demand for natural gas and push prices even higher. What remains to be seen, however, is how EU regulators will respond to the shortage and concerns over Russian dependency in the coming months.
© Alexander Lerner. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] D. Shepard, "Gas Shortages: What Is Driving Europe's Energy Crisis?" Financial Times, 10 Oct 21.
[2] "BP Statistical Review of World Energy 2021," British Petroleum, June 2021.
[3] R. Dezember, "Natural-Gas Supply Is Back in Balance, but Prices Are Still Swinging," Wall Street Journal, 12 Nov 21.
[4] "Quarterly Report on European Gas Markets," European Commission, 2021.
[5] A. Chen, J. Jaganathan, and S. Disavino, "China Looks to Lock in U.S. Liquefied Natural Gas in Energy Crunch," Reuters, 16 Oct 21.
[6] "Russia's Nord Stream 2 Natural Gas Pipeline to Germany," Congressional Research Service, IF11138, August 2021.
[7] P. Donahue and D. Khrennikova, "Nord Stream 2 Is Still Months From Easing Europes Gas Woes," Bloomberg, 3 Nov 21.
