Nice outside, isn’t it? Europe’s unusually mild winter has been the stroke of luck needed to preserve gas supplies, with consumption about 30 percent below the seasonal average and storage full in Germany and France.
The charts below and throughout are via Barclays analysts Mark Cus Babic and Abbas Kahn:
It is a combination of industrial demand shrinking and domestic consumption suddenly falling well below average in October. The trends for Germany are typical for Europe as a whole:
Warm weather is buying time for Germany, which is building two new liquefied natural gas terminals. The liquid storage will come online in the next few months in preparation for the total shutdown of Russian supply.
But there is no mileage on an empty tank. Europe may be temporarily awash in LNG, but the market remains tight, prices are well above historical norms and a supply shortage remains likely next year. How can Germany get what it needs?
To answer that question and a few others, we met with Rui Soares, of the independent investment firm FAM Frankfurt Asset Management, whose work on Russian gas dependence we published in May.
Most LNG contracts are long. Where do new supplies come from?
“Germany needs to tap about 3 percent of the world’s annual LNG production to fill its new terminals. One way is through wild capitalism. Most LNG contracts are long-term but suppliers may not comply with the terms, pay a penalty for breach of contract and sell LNG to highest bidder German industry can bid high.
“Trafigura and Glencore, which deal in around 6 percent of all LNG in the world, are very opportunistic. And Germany only needs half of the LNG they trade.”
Does it mean a European bidding war to hijack each other’s supplies?
“Some EU countries have contracted more LNG than they consume. They can resell the excess. For example, Spain has an LNG storage capacity of 70 billion cubic meters [BCM]. But it only consumes 36 bcm annually. Enagás [of Spain] has more than 36 bcm contracted annually through long-term LNG contracts but sells the excess on the spot market. No one knows exactly how much, but 10 billion cubic meters alone would already account for two-thirds of Germany’s needs. Shipments can be easily redirected.
“This also explains why the EU adopted legislation in June making it mandatory for all member states to fill their gas storage facilities to at least 80 percent of capacity by November 1. Tanks are full, trade in excess nat gas is effectively halted. , and the E.U. -members are ready to redistribute supplies as needed.”
But isn’t the problem also limited supply?
“Although conventional wisdom says there is no additional LNG production capacity worldwide, this is actually not the case. Some nat gas producers, particularly those in the Gulf, may not be fully transparent. The suspicion is that they have additional production capacity but not report it.
“For example, after the Fukushima accident in March 2011, Japan increased its gas consumption by 20-25 bcm in 12-18 months. The prevailing view at the time was that there would be no additional short-term LNG production capacity available worldwide, and that Japan would have to divert LNG from other countries. Yet production met rising demand and the extra supply came largely from Qatar.”
How about shipping?
“At the end of 2019 there were 584 LNG vessels worldwide. At the end of 2021 there were 700, an increase of 20 percent. It is possible that the new vessels are smaller but LNG production and exports between 2019 and 2021 only increased with 6.5 percent.
“In addition to this, the global order book for new LNG vessels stands at 140-150 units, with Russia to account for 20-30 of these. Between a fifth and a quarter of the order book is delivered each year. A capacity crisis looks unlikely.”
What happens if the new terminals are not ready in time?
“Things are much better now than they were in May. The EU’s natural gas storage targets have been met early.
“In terms of math, Germany’s consumption of nat gas before the Ukraine war was about 100 billion cubic meters per year, compared to storage capacity of about 23 billion cubic meters.
– Industry accounts for around 35-40 percent of consumption and is cyclical. Less than 15 percent is for electricity production. The rest is demand from households and the service sector, where four-fifths of their consumption takes place during the winter months. It is therefore reasonable to estimate that Germany’s gas consumption during the winter months is around 50 bcm.
“Germany imports 55 billion cubic meters of non-Russian gas per year through its pipeline system. Deliveries are reasonably constant at about 18 bcm during the winter months. Add this to existing storage and Germany will have about 40 bcm of natural gas available, suggesting that without the new tanks, it would have to reduce consumption by about 20 percent for the numbers to add up.”
It sounds like a lot.
“German industry has already reduced consumption by more than 20 percent through efficiency measures, production stops and fuel changes. Households could make the same savings by lowering their thermostats by about 3 degrees Celsius, or perhaps less when you factor in oil stoves, electric heaters and even fireplaces. This would mean that German households live with a room temperature of between 17 and 19 degrees Celsius. Hardly an unbearable sacrifice.
“And if the terminals are up and running, even this sacrifice can be avoided. To make a long story short: it will be a less pleasant winter than usual in Germany, but households will not freeze or industry will collapse. Reality is better than perception .”
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