Long and Short-term solutions to the gas crunch
Slava Kiryushin, Global Head of Energy at DWF, shares his views on the Gas crunch that threatens industry in UK, Europe and other parts of the world. It highlights the issues and the short-term and long-terms answers. He said:
“Years of weak upstream investment in the oil (and more so in the gas) sector are building up to a global supply crunch. While the latest OPEC decision to up oil production by 400kbbl p/d (and OPEC holding back more than 7m bbls p/d from production) will alleviate some fears of an oil supply crunch, the gas situation is different. When it comes to gas, new supply is only expected towards the middle of this decade.
“The EIA estimates that there has been around a 33% decrease in investment in oil and gas due to the COVID-19 pandemic and this led to a lack of supply. A vivid example is the Permian basin and the US Shale industry. This has been in decline due to lack of investment. The good news is that with the developments of more efficient technology and a focus on short-cycle project, the output of gas can be increased relatively quickly. If this was to happen, there would need to be a sharp increase in production to allow sufficient surplus to be exported outside of the US. As one can appreciate, this scenario has too many ‘ifs’ to be comfortable in the current state of the European gas markets.
“As things stand at the moment, the European gas inventory is not looking prepared for a cold winter. The inventory is at the lowest it has been in a decade, which is why the prices are rallying. On the other hand, the world’s top importers (China, Japan, South Korea, Taiwan) have been buying gas well in advance. It seems that the Asian importers do not want to make the mistakes of last winter. Perhaps this may lead to a silver lining if the Asian importers satisfy their demand earlier in the year and leave sufficient supply to be re-directed to Europe. With the 13 year high in gas prices in Europe, this seems unlikely.
“If the European utilities are to compete for the limited amount of available supply (predominantly LNG), the prices will continue to soar. This will, almost inevitably, be passed down to consumers. Another nuance that needs to be addressed is whether the Asian demand for gas, and relative willingness / ability to pay a premium, would even allow European utilities to compete. There is only so much of the cost that could be passed down to consumers, who have already experienced a surge in energy prices.
“So what does this all mean? Well the long and short if it is that, unless there is a mild winter or an ease in demand, the EU utilities will have to look to alternative energy sources to meet the demand. While most may read ‘alternative energy sources’ as “renewables”, the energy market may have an alternative definition: coal. In the current market conditions, coal is a far more economic source of fuel and its relative market availability is much ‘better’ than that of natural gas. It remains to be seen how the European utilities will balance the rise in carbon emissions and consumer sentiment against the unavailability (or unaffordability) of power from less carbon intensive sources.
“As far as renewables go, unfortunately, there is just not enough generation at the moment to meet the peak demand that a cold winter could create. It would also be near impossible to create sufficient additional generation in the limited time that is available to meet this demand. The next 3-4 months may lead to unexpected consequences for all industries with a particular ‘hit’ being taken by those that are energy intensive.”
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Submitted By: Nahidur Rahman, Senior PR Manager, DWF | Email: email@example.com
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