In this way we will once again turn into the traditional ancient East.
"It is Ukraine that Russia is invading but, depending on the Kremlin's whims, the rest of Europe could be subject to warlike rationing of energy. Natural-gas prices in Europe -- already painfully high -- are headed higher still. How much can the rest of the world pitch in?
Natural-gas futures in Europe soared almost 40% to $40.39 per million British thermal units on Thursday morning, about eight times where prices are in the U.S. Europe depends heavily on Russian natural gas; gas exports from the country met roughly 38% of European Union demand in 2020. With spring some months away, natural-gas inventory is running about a quarter below the five-year average in the region, according to data from S&P Global Platts.
The most likely scenario, one where only natural-gas flows through Ukraine are disrupted, seems more manageable. Ukraine isn't nearly as important to European energy as it was back in the early 2000s when the country was the main conduit through which Russia exported its natural gas to Europe. In 2006, 80% of Russian gas supplies to Europe went through Ukraine.
In recent years, Ukraine played a smaller role and as of Feb. 20, roughly 18% of the natural gas that Russia's Gazprom sent through pipelines to the EU went through the country, according to its own disclosure.
One fine point to remember here is that Russia has been severely limiting natural-gas flow through Belarus and Ukraine since last year while keeping flows that go directly from itself to Europe mostly intact. Gazprom has been sending roughly 1.7 billion cubic feet per day of natural gas through Ukraine, just 40% of the volume it used to send in January 2021.
This has meant Europe has started relying more heavily on seaborne liquefied-natural-gas imports, many from the U.S. Europe was on the receiving end of nearly 77% of U.S. LNG cargoes exported in January, according to the Center for Liquefied Natural Gas.
The U.S. has a peak liquefaction capacity of 11.6 billion cubic feet per day. Assuming high utilization, it could imply the U.S. is sending 8 billion to 9 billion cubic feet a day. That leaves about 3 billion cubic feet a day worth of U.S. LNG that can be exported on the generous end of the estimate.
Given that U.S. LNG cargoes have Asian customers, where supply is also tight, there isn't infinite wiggle room. Still, some more LNG from the U.S. plus those from others -- such as Qatar -- and from storage could help patch the hole from Ukraine. There is about 1.3 trillion cubic feet in storage tanks in Europe, per S&P Global Platts data.
But the worst-case scenario -- one in which Russia opts to turn the taps off on other pipelines -- would be catastrophic. Russian President Vladimir Putin said at an energy conference on Tuesday that the country wouldn't do that, according to a report from The Wall Street Journal.
The scenario can't be completely ruled out, though. Nikos Tsafos, chair of energy and geopolitics at the Center for Strategic and International Studies, said at a press briefing earlier this month that in such a scenario, the continent will be looking at "rationing of gas to industrial customers" and that countries will have to start burning what they can, "oil, coal, wood," adding that prices would become "essentially meaningless."
While there are other countries that could still provide some natural gas, the top suppliers are essentially tapped out. Norway's prime minister said the country is delivering natural gas at maximum capacity, according to a report from Reuters. Qatar, a top LNG exporter, has somewhat limited capacity to send supplies given that much of its volumes are contracted with Asia.
This could end up being a turning point for Europe, which will surely look at diversifying its natural-gas sources. LNG imports are the most obvious solution, but Europe will likely need to build LNG terminals in more places. Today, a third of Europe's LNG import capacity is located in Spain and Portugal, with 24% in the U.K. Both import terminals and export terminals take years to plan and build.
A mild winter and strong LNG flows had so far shielded the continent from even worse price increases, notes Christopher Louney, commodity strategist at RBC Capital Markets.
With the Kremlin and the weather being equally hard to predict, it is unclear exactly which one will ride to Europe's rescue." [1]
It seems that Germany's Olaf Scholz decision to stop Nord Stream 2 will cost Europe a lot of money, that could be used to transfer our economy to green energy sources. We miss Mutti Merkel already.
1. Europe's Energy Options Look Limited --- If Russia starts cutting off natural gas altogether, though, there isn't a whole lot the world can do to help
Lee, Jinjoo. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 25 Feb 2022: B.12.
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