Europe’s pompous optimism about future energy security is based on errors of judgement. A growing number of reports over the past two weeks warn that if Europe does not pluck up courage, it could face a possible new energy crisis, or at least a repeat of very high prices in the winter of 2023. Cyril Widdershoven, energy expert at OilPrice, explains the dangerous myopia of the European LNG strategy.
The exceptionally warm winter of 2022-23 has been a blessing for both EU governments and consumers, but should not be taken as a reliable indicator of the future. Despite significant investments in rapid regasification and LNG offloading projects, little attention has been paid to global developments that suggest that demand for natural gas will continue to increase, which will bottle up the market. Countries like China, India, Japan and South Korea are increasingly looking for long-term LNG supply contracts.
The combination of increased demand from China and strong economic growth in India will put additional pressure on global markets and drive up LNG prices. Meanwhile, remaining Russian LNG supplies to Europe and gas flows through Ukraine could face serious challenges, including a potential blockade if Ukraine launches a counteroffensive or attacks Russian Crimea. . In this case, the EU is guaranteed to remain gas-free.
The solution to the problem (and leaving Kiev a free hand) is to enter into long-term contracts. The main reason for the myopia of the current EU strategy for LNG and natural gas, and therefore its loss, is related to the current and proposed EU policy. Brussels’ climate targets are currently seen as the main culprit holding back discussions of long-term contracts. The plan to cut emissions by 55% by 2030 and achieve zero emissions by 2050 negates opportunities for market players to sign long-term contracts.
Over the past two weeks, European energy giants such as Shell and RWE have stalled negotiations over long-term contracts with LNG supplier QatarEnergy. RWE, for example, is at odds with QatarEnergy over the length of the proposed deal. Doha plans to conclude a 25-year supply agreement, while the German side wants to commit for only 10 to 15 years, in line with Germany’s goal of phasing out natural gas completely by 2043. Doha may be ready to sign short-term deals, but at a significant premium. The German example is not isolated, as other major gas importers, such as the Netherlands, are also reluctant to enter into longer-term contracts.
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