Domino effect of Europe’s natural gas crisis will resonate in changing global energy map

Written by on September 22, 2022

Germany is expected to sign contracts for liquefied natural gas (LNG) with the United Arab Emirates this coming weekend in an attempt to avert a pending energy crisis.

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As a result of the war in Ukraine, Germany together with the rest of Europe is struggling to maintain an adequate energy supply.

Natural gas is used for electricity, industry and domestic heating.

Since Russia has cut the amount of gas it is sending to Europe via the Nord Stream 1 pipeline, the continent has had difficulties obtaining enough energy. But even though Russia has cited technical difficulties and maintenance needs, it is more likely that political arm-wrestling is the cause of Russian restrictions.

Even with maintenance work supposedly completed, the gas supply from Russia has been completely halted. Russian President Vladimir Putin appears to be punishing European countries for siding with Ukraine in the current conflict.

Russian President Vladimir Putin attends a session of the St. Petersburg International Economic Forum (SPIEF) in Saint Petersburg, Russia (credit: MAXIM SHEMETOV/REUTERS)

“There is a crisis-mode mentality that is dominating the agenda, that is leading to short-term commitments to lock in fossil fuels, particularly LNG supplies, almost at any price,” said Toby D. Couture, director of E3 Analytics, a consulting company focusing on renewable energy policy, markets and finance. “This is driven by urgency of the situation and the fact that energy security has risen again to the top of the agenda.”

A new lights-out policy that has national monuments darkened by 10 p.m. is a strikingly visible reflection of Germany’s situation. As the days grow shorter, there is a realistic fear that it will be the harshest winter the country has faced in decades.

“Europe is in for a very cold and expensive winter,” said Dr. Amit Mor, CEO of Eco Energy Financial & Strategic Consulting and a senior lecturer at Reichman University. “The continent will survive the winter, but at hysterical and historical prices that are pushing Europe to an energy crisis.”

On Wednesday, the German government nationalized gas giant Uniper in an attempt to prevent an energy supply crisis in the country. Once Europe’s strongest economy, the outlook for Germany is grim.

“We will need plenty of stamina … we need to prepare not just for this winter, but also the next one. We are making great strides forward on reducing our dependence on Russian gas, but we can already predict that 2023 will still be a challenging year,” German Economic Affairs and Climate Action Minister Robert Habeck said over the summer.

The challenge is one faced by all of Europe, some countries more than others. In August, European Union (EU) countries pledged to reduce their gas consumption by 15% compared to the previous year.

According to Eurostat, the statistical office of the European Union, Russia is the largest source of natural gas entering the EU. Together with gas imports from Ukraine and Belarus, which originates in Russia, the EU is highly dependent on Russia for energy resources. Hence, the heightened concern since the beginning of the war is understandable.

It is not only about shivering in the winter or putting on an extra layer of clothing, it is about further plunging Europe into an economic crisis that will take years to recuperate from. Germany’s central bank, the Bundesbank, forecasts a possible recession with gross domestic product expected to decline well into 2023.

Factories have been shut down or drastically scaled back operations. Some of Germany’s leading industries are struggling to stay afloat.

The warning signs existed already in 2006, when Putin shut down gas supply to Europe in protest of a dispute with Ukraine. Coupled with a harsh winter on the continent, natural gas resources to Europe should already have been diversified.

The search for alternatives has therefore been intense.

German Chancellor Olaf Scholz is scheduled to visit the UAE, Saudi Arabia and Qatar this weekend to discuss Germany’s energy needs.

“Germany will try to keep agreements as short as possible and maximize their flexibility,” according to Couture. “Long-term agreements will likely prove unsustainable, partly because of climate commitments Germany has made.”

Germany also is beginning to build industrial ports throughout the country in order to enable the flow of LNG to the country. The ports will not be ready for the coming winter, however.

According to media reports, gas from the UAE will not be available to Germany before 2026 at the earliest. Germany reportedly is also negotiating gas deals with Canadian and Qatari firms.

Germany’s challenge is not only to secure gas supply for years to come but also to create the infrastructure to receive the LNG.

“German need for gas will not change overnight,” said Couture.

Floating gas terminals, which also have been suggested as part of the solution to the crisis, will be ready in the coming months. According to the German Federal Ministry for Economic Affairs and Climate Action, five such terminals should be ready by the winter of 2023/2024.

“As soon as Germany diverts to LNG, it will be able to import gas from different sources as needed. There is now an understanding that supply needs to be decentralized,” said Amir Foster, executive director of the Natural Gas Trade Association in Israel.

The Middle East and the Gulf region will become increasingly important for Germany and Europe as a whole.

“This will be a region important for future supply of energy,” said Foster. “This can have political influence beyond just the energy market. Europe has been severely burnt from its centralized import policy and will now be looking to guarantee LNG from diverse sources.”

Before the crisis, natural gas was viewed by many experts and environmentalists as an energy source that the developed world needs to wean itself from. Natural gas is considered a major contributor to carbon dioxide emissions which have an adverse effect on climate change.

As European countries scramble to avert an energy crisis, environmental considerations have been put aside. In an attempt to replace Russian supply, coal production has been drastically increased in Germany. The effect of this is considered far more hazardous than that of natural gas.

“Natural gas should not be viewed as a transition fuel, it will be with us as a major energy source deep into the 22nd century,” said Mor. “There are tens of new technologies in development and utilization that are aimed to capture, store and utilize carbon dioxide, which will counter the need to cease the utilization of fossil fuels.”

“The most important product in the world today and for years to come is natural gas,” Foster asserted.

Shifting to renewable energy sources was a major goal for Germany, one on which critics say it was too slow to deliver. While it still remains, the crisis has changed priorities.

This can have some unwanted effects.

View of the Israeli Leviathan gas field gas processing rig near the Israeli city of Caesarea, on January 31, 2019. (credit: MARC ISRAEL SELLEM/POOL)

“There is a major risk of locking in more fossil fuels infrastructure than is sustainable. Germany is aware of that risk, but the current crisis mode is overpowering that argument,” said Couture. “That risks jeopardizing long-term climate commitments and this is a very serious risk at this point.”

Germany has also made a U-turn on a previous decision to stop using nuclear energy. The use of such energy will not be quickly shut down once the crisis is over. Therefore, the effects of this energy jam will be measured in years, if not decades.

“Europe still has a lot to do to increase its strategic resilience, not just squirreling away more fossil fuels, but also by diversifying its energy mix away from such fuels,” Couture summarized.

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