Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'm Stephen Carol and
Speaker 1: this is Here's Why, where we take one news story
Speaker 1: and explain it in just a few minutes with our
Speaker 1: experts here at Bloomberg. In twenty twenty two, an unprecedented
Speaker 1: energy crisis caused by Russia's invasion of Ukraine left Europe
Speaker 1: with a bill worth over a trillion dollars. For in
Speaker 1: the middle of an energy crisis is not just oil markets,
Speaker 1: but gas market, electricity market. The lesson is you've got
Speaker 1: to be energy independent. Don't put yourself in the hands
Speaker 1: of the dictator who's prepared to weaponize your provision of energy.
Speaker 1: Government's picked up much of that cost, and for a
Speaker 1: time at least it felt like the worst had passed.
Speaker 1: This oil price cup will help reduce Russia's revenues on
Speaker 1: one hand, and it will keep the global market for
Speaker 1: energy stable.
Speaker 2: On the other hand, there is a need to as
Speaker 2: as possible cut the link between the price of gas
Speaker 2: and the price of decabonated pinage.
Speaker 1: This year, by mid August, the European Union had filled
Speaker 1: ninety percent of its gas storage capacity preparing for the
Speaker 1: winter season. But for some even that might not be enough.
Speaker 1: So here's why Europe is worrying about the winter again.
Speaker 1: Joining us now is our senior energy reporter, Stephen Stapchinsky. Stephen,
Speaker 1: first of all, can you remind us how important our
Speaker 1: gas supplies to Europe's energy mix?
Speaker 3: I mean, gas plays a key role in Europe's economy.
Speaker 3: It made up about fifteen percent of power generation last
Speaker 3: year and it's expected to play a larger role as
Speaker 3: dirtier coal plants are shut You know, they're not only
Speaker 3: is it needed for power generation, it's needed for industries
Speaker 3: and then during winter it's needed for heating. So gas
Speaker 3: has played a key role in before the war in Ukraine,
Speaker 3: Russia was a major supplier via pipeline of some pretty
Speaker 3: affordable guest in. Their whole economy was kind of built
Speaker 3: around that.
Speaker 1: So we're over two years now on from the start
Speaker 1: of Russia's full scale invasion of Ukraine. How have European
Speaker 1: countries reorganized their supplies in that time?
Speaker 3: So there's the supply side and the demand side, right,
Speaker 3: So supply there has been a rapid rollout of renewables,
Speaker 3: been a big push to add more solar and win
Speaker 3: to the grid. There's a push to also increase offshore
Speaker 3: wind that has had some kurdles, and there's also been
Speaker 3: a push in most places except for Germany to also
Speaker 3: look at, you know, how can they expand nuclear power.
Speaker 3: On the demand side, consumers have really cut back consumption.
Speaker 3: They're they're better at conserving energy, and that includes households
Speaker 3: and businesses, but also industries. There is something called demand
Speaker 3: destruction where gas was just too expensive for industries that
Speaker 3: depended on it, like fertilizer and other kinds of businesses
Speaker 3: that depend on gas as a feedstock. So they've essentially
Speaker 3: just shut down and gone to other places. So when
Speaker 3: you look at European gas demand, actually it has has
Speaker 3: dropped over the last few years compared to when they
Speaker 3: were getting that cheaper Russian pipeline gas. Now they've turned
Speaker 3: significantly more to liquefied natural gas. Gas can be delivered
Speaker 3: either via pipeline from Russia or via liquified natural gas
Speaker 3: via ship. Some of that comes from Russia, but a
Speaker 3: large portion of it actually comes from the United States,
Speaker 3: and Germany built floating LNG import terminals and other countries
Speaker 3: are boosting imports of LNG to replace the Russian pipeline gas.
Speaker 3: The one thing though, is LLERG is just more expensive
Speaker 3: than the pipeline supplies.
Speaker 1: So this year the stockpiles are nearly full already. Why
Speaker 1: the concern.
Speaker 3: So that's the thing. Just because European stockpiles are full,
Speaker 3: it doesn't mean that they won't necessarily run out of gas.
Speaker 3: Let me explain why the stockpiles will help Europe get
Speaker 3: through a mild or normal winter if they're one hundred
Speaker 3: percent full. We've seen that in the last two winters.
Speaker 3: Actually they've been relatively mild, with just small short spates
Speaker 3: of cold periods. Certain now falls as to what if
Speaker 3: we have a really cold winter. Not only will that
Speaker 3: drain stockpiles in some places, but if it's also cold
Speaker 3: in other Northern Hemisphere places like North Asia, home to
Speaker 3: the world's biggest LNG importers, Suddenly you're draining your inventories
Speaker 3: very quickly. And then on top of that, you're not
Speaker 3: able to get those LNG shipments because LNG shipments go
Speaker 3: to where folks are paying the highest and if China, Japan,
Speaker 3: Korea want that LENG, they can pay more than Europe
Speaker 3: to get it. So that causes a problem for Europe,
Speaker 3: essentially leading to a sort of a price competition between
Speaker 3: the Pacific at the Atlantic, increasing prices and risking potentially
Speaker 3: worst case scenario curtailment for some customers.
Speaker 1: Today, though prices are still way way below where they
Speaker 1: were in twenty twenty two, what could trigger a spike?
Speaker 3: Yes, Okay, first that first bit, prices are way below
Speaker 3: where we were at the record levels in twenty twenty two,
Speaker 3: But I have to also show that prices are higher
Speaker 3: than the ten years before twenty twenty two. So prices
Speaker 3: on average are higher than before the war in Ukraine,
Speaker 3: even though they're not as high as record high levels
Speaker 3: from twenty twenty two. Now, the global gas market is
Speaker 3: still in a bit of a careful balance. So things
Speaker 3: that could trigger a spike. If there is a hurricane
Speaker 3: Atlantic and it disrupts LNG exports from a US facility
Speaker 3: from the US golf, that could cause a spike. Any
Speaker 3: sort of disruption to supply. If it's cold, as I
Speaker 3: mentioned before, that could also cause a spike. If there
Speaker 3: are any more issues with key choke points. You know
Speaker 3: you have the Sewis Canal is not being used for
Speaker 3: LNG trade. If that leads to more disruption to other
Speaker 3: parts of global trade, routes that could also lead to
Speaker 3: price spikes. Likewise, if there's any disruption to supply in
Speaker 3: the European region, especially Norway which is essentially the largest
Speaker 3: supplier of gas to Europe, if there is a extended
Speaker 3: maintenance during their maintenance period, if they're unable to deliver
Speaker 3: the gas that they promise, that could also lead to
Speaker 3: a spike. That is to say, the two big things,
Speaker 3: disruptions and weather are going to be the things that
Speaker 3: could affect prices going forward.
Speaker 1: Here that makes supplies alsound quite vulnerable. Is Europe any
Speaker 1: closer to long term solutions to try and address thus.
Speaker 3: Now, the good thing is that wind and solar generation,
Speaker 3: as mentioned before, has been rising really rapidly. It hit
Speaker 3: a record twenty seven percent for the EU power mix
Speaker 3: in twenty twenty three, and it's continuing to rise. But
Speaker 3: the other goals, which is, you know, implement hydrogen supply
Speaker 3: chain green hydrogen. Also, dependence on coal means that gas
Speaker 3: is going to be needed more and it's just not
Speaker 3: there at the moment. At the same time, different efforts
Speaker 3: to increase nuclear power generation is going to take years.
Speaker 3: It's not easy to put on a nuclear power plant
Speaker 3: and offshore wind has had a few hurdles, so that
Speaker 3: is to say European policy is in the right direction
Speaker 3: and wind and solar has definitely been deployed at a
Speaker 3: faster rate, but there's still more to be done before
Speaker 3: Europe can really reduce their dependence on gas and reduce
Speaker 3: this vulnerability.
Speaker 1: Steven Stoptinski, our senior energy reporter, Thank you for more
Speaker 1: Xnations like this from our team of twenty seven hundred
Speaker 1: journalists and analysts around the world. Search for Quick Take
Speaker 1: on the Bloomberg website or Bloomberg Business App. I'm Stephen Caroll.
Speaker 1: This is Here's why. I'll be back next week with more.
Speaker 1: Thanks for listening.