Richard North, 18/09/2021  

With recent events in Afghanistan, and the amount of reading I've been doing on the subject recently, it occurred to me that I probably know more about the secretive ISIS-K terrorist group than I do of the internal workings of the European (and global) gas market.

Yet, as I look morosely upon the eye-watering increases my utilities provider is proposing for this winter, there can be no doubt that, at the moment, my gas supplier is a greater threat to my wellbeing than these homicidal terrorists.

I was thinking perhaps that we should ask ISIS-K to become a gas provider. With that, all our major threats would be in one basket. But then I discovered that the main price reporting agency for energy supplies is a firm called Icis, so truth might be closer to fiction than we imagined.

Anyhow, Mr Ed Cox of said Icis has been setting the scene for the train-wreck that is the UK's energy policy, telling us in the indefatigable jargon of his trade that gas prices in Britain have been "caught in a bullish cycle this year that has covered Europe and Asia".

Cox adds: "The outlook for the winter in both regions is a concern. In Europe, gas storage levels are just 68 percent full, the lowest for the time of year on record. Storage plays a major role in security of gas supply in Europe over the peak winter demand period".

The UK is particularly vulnerable to storage issues as it has less capacity than many of its European neighbours. In addition gas production in the North Sea has fallen this year because of maintenance shutdowns and delays to projects because of the pandemic.

However, according to the Russian newspaper Tass, which has a particular interest in energy matters, European gas storage levels, before the start of the heating season, are not only in deficit, the backlog is so enormous that it cannot be made up in time to cover the winter demand. 

 By way of example, gas storage facilities in the Netherlands have only reached 50 percent of capacity. As of 1 October, they are usually above 80 percent. The Germans and Austrians, other important gas users and countries with large storage, also lag behind with 60 and 48 percent respectively. Only the French are in a near comfortable state, with reserves approaching 85 percent.

This year, because of the cold winter and spring, pumping into storage began three weeks later than usual. But there are also complaints that Russia has been sending less gas to Europe.

One possible reason it that it too needs to refill its storage, but there are suspicions that it is engineering a shortage to force rapid regulatory approval of its recently completed Nord Stream 2 gas pipeline. This undersea pipeline, which by-passes Ukraine, is now ready to deliver gas to Germany and needs only the approval of the German authorities and the EU, although this could take as long as six months.

Meanwhile, as wholesale prices soared above $800 per 1,000 cubic metres of gas (peaking close to $970 on Wednesday) – driving electricity prices to 11 times the baseload level - the Telegraph carried news of 40 MEPs signing a letter accusing Gazprom of "deliberate market manipulation", while retailing claims that Russia is seeking to undermine Britain and the EU's economic recovery from the Covid-19 pandemic.

Tass, on the other hand, cites Brussels-based political analyst and energy market expert, Simonas Vileikis. He puts the prices increases down to a number of "objective factors".

Firstly, gas production throughout Europe is static, with few possibilities of increasing output, especially in Norway, the Netherlands and Britain. Secondly, most supplies of liquified natural gas are moving to Asia where the economic recovery is triggering substantial additional demand for energy.

That problem is only going to get worse. According to Gazprom CEO Alexey Miller, China shows "stunning" potential for gas demand growth, with the Asia-Pacific region is expected to grow by 1.5 trillion cubic metres by 2040.

Vileikis also confirms that the deficit of gas on the EU market is so serious that even increased supplies via existing routes from Russia and Algeria cannot satisfy the demand and also fill Europe's storage facilities. Any extra supplies via Nord Stream 2 will be welcome, especially in an election year in Germany, but they won't be enough to address the structural shortages.

Dermot Nolan, former chief executive of Ofgem, adds another factor. The higher gas prices, he says, have been exacerbated by "relatively low wind output". Wind speeds have been unusually low across Europe for the past few months, which means that wind farms are producing less power than usual.

Then the UK has its own special problems. Although Britain's current peak electricity demand stands at a relatively modest of around 35GW, some 17GW of non-intermittent generation - gas, coal, nuclear and underwater power cables - are offline. Some 3GW of this is nuclear and 2GW have been lost after last week's fire in the French interconnector. Gas plants are having to fill the gap.

This situation does not entirely invoke confidence in the government, which claims that the gas price surge vindicates its focus on moving to greener sources of energy.

A spokeswoman thus tells us: "Our exposure to volatile global gas prices underscores the importance of our plan to build a strong, homegrown renewable energy sector to further reduce our reliance on fossil fuels". Somehow, one gets the impression that they haven't quite got a grip of the situation.

Illustrating how separate strands of the economy are closely interlinked, we see reports that the gas price hike has raised the spot price of electricity to such levels that fertiliser manufacturer CF Industries have halted operations at its plants at Ince in Cheshire and Billingham in Teesside this week, with no indication of when it intends to reopen them.

CF is understood to produce more than 40 percent of the UK’s fertiliser supply. But crucially, the plants produce carbon dioxide as a by-product of the ammonia used in the fertiliser production. This accounts for as much as 60 percent of the UK’s industrial CO2.

With the plants offline, poultry processors are concerned that that supplies for euthanising birds on the slaughter lines will run short, further disrupting food production, exacerbating the ongoing labour crisis and ultimately leading to food shortages.

CO2 gas is also used for modified atmosphere packaging used to extend the shelf life of perishable foods, and especially red meats and products such as cheese. Thus production of these foods could also be affected.

While food producers are struggling, energy suppliers are doubtless hoping that there is no more bad news waiting in the wings. "We're not yet even into autumn proper, so there’s plenty of time for other things - good and bad - to happen ahead of the winter", one industry source told The Times.

If wind speeds pick up and the winter is mild, fears of power shortages may prove overblown, says Tom Edwards, of Cornwall Insight, the energy market consultants. Then adding a statement of the bleedin' obvious, he says he would be concerned about security of supply if we had a "cold, windless day and something else breaks down".

The big danger, or course, is a major, unexpected plant shutdown, triggering a large-scale cascade failure which could leave large parts of the grid without power for days, if not weeks.

Should this happen – on top of all the other crises building up over the winter – as Pete observes, the results won't be pretty. This all the more so as successive governments have had more then two decades to prepare and, more than ten years ago we were forecasting massive price hikes.

Now, it is almost too late to do anything but watch and wait, hoping that the weather is kind and the winter is not too severe. Bizarrely, Johnson's survival may rest on how much snow we get. He will not, we suspect, be wishing for a white Christmas.

Also published on Turbulent Times.

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