The town of Kassel, in Germany, is home to a number of famous companies, including Volkswagen, Mercedes Benz, Rheinmetall and Bombardier. Lying on the banks of the Fulda River, this vale offers its corporate residents the luxury of picturesque, arcadian views, melding in aesthetic harmony with the last word on human technological progress. It is a lovely place from which a CEO might sculpt the destiny of his empire.
But there is gloom in Kassel these days, after one of its residents, the German oil and gas company Wintershall Dea, was forced to write off its billion-dollar investment in the Russo-German Nord Stream 2 pipeline project.
A similar mood prevailed in Dusseldorf, where another German company named Uniper was also forced to write off the billion dollars it had sunk into that project.
Both were victims of a major geopolitical rupture, triggered after Russia was forced to invade Ukraine in February 2022. In a bid to end Europe’s traditional dependency on Russian energy, and allegedly by common political consent, Europe has now chosen to source its oil and gas supplies from America.
It is doubtful if this world-altering gambit will work (see here for details), but until either success is achieved, or failure is clear, Europe, and Germany in particular, is in for a very rough time.
Western Europe is already in the grip of deepening despondency, after energy prices soared over the past year. As a chart below shows, the import price of Russian gas has hovered in the $4-8 range (per MMBtu) since 2015.
But in 2021, the price went up from around $7 in January, to a whopping $38 by year-end. That is a rise of over 500 per cent.
And Europe’s misery didn’t end there. Once the Ukrainian conflict began, the price rose to over $42 in March 2022. See how the black curve soars.
American Liquified Natural Gas (LNG) prices are still only a fraction of this withering cost, as are the prices of other sources of gas supply to Europe, but the problem is that those volumes are simply not enough to meet the need.
This means that until America manages to establish itself as Europe’s energy supplier, this region will have to continue paying for now-prohibitively expensive Russian gas – in Rubles.
The numbers are truly staggering.
As a table below shows, Western Europe is by far the largest gas market in the world. Seven European nations alone account for a third of the gas sold worldwide.
To put these figures in perspective, India imports less than a tenth of what Europe does, and China less than a third.
Now, America has been pushing hard to make Europe’s energy-sourcing transition away from Russia, but as a second table below shows, it has a long way to go.
This is an important table because it shows Russia’s continued, overweening centrality to European energy requirements, as well as the yawning demand gap which America will need to cover.
In 2020, Europe’s top seven gas consumers imported 353 billion cubic meters of gas (bcm). Twenty-seven per cent of this came via pipelines from Russia, and only 5 per cent on LNG tankers from America.
LNG from all sources, including America, actually meets only a fifth of Europe’s gas demand; the balance arrives through a vast regional grid of pipelines. This demand is still growing.
The latest figures from 2020 show that Russia supplies 107 bcm gas to Europe’s big seven, while America supplies only 16 bcm. That is a gap of 91 bcm. Thus, factoring in demand growth, America would need to increase LNG exports to Europe by ten times, if it is to ever fully replace Russia as an energy provider.
Can that happen, and if yes, then how soon?
America produced 948 bcm in 2020 and exported 150 bcm. But a lot of these exports are North American swaps, so it makes more sense to look at American LNG export figures. These are given in a table below:
In 2020, America exported 68 bcm of LNG, of which 16 bcm went to Europe. That number has gone up by 33 bcm in 2021 to 101 bcm, but LNG exports to Europe in the same year went up only to 22.5 bcm. That 100 bcm gap is still wide open.
Part of the reason for slow export growth to Europe is commitments elsewhere, and also because Europe is still not structured to receive exponentially larger volumes of American LNG.
Germany, for example, is Europe’s biggest gas consumer, but imports no LNG. It has only now started thinking of setting up two mega LNG terminals to accommodate the American plan. The lead time for such projects is, conservatively, three to five years; meaning, that for all practical purposes, Germany is stuck with Russian gas, and true fears of energy cost-driven high inflation.
Now, it is possible that they may take advantage of the European gas network to buy LNG from America, have it offloaded somewhere in Europe, and then get it piped to them. But this is cumbersome, expensive, and dependent upon capacity restrictions of these pipelines. The very optimisation Europeans prided themselves upon is now a constraining factor, when a crisis is already upon them.
The situation is broadly the same for Europe’s big consumers. Italy, the second largest importer of gas, got only 3 per cent of its requirements via American LNG in 2020, and that figure actually fell by 50 per cent in 2021.
Spain has managed to increase its offtake of American LNG, but Russian gas still accounts for a tenth of its import market. That is the same figure for France in 2021, even after having roughly doubled LNG imports from America last year.
It's a hard place to be in, but Europeans are sadly having to learn, through shrinking wallets and growing energy bills, that you sleep in the bed you make. There’s no point whining after having concocted a narrative to set the Ukraine-Russia conflict in motion, and then watching helplessly as the Russians ratchet up the gas price in response. Gas causes heartburn.
These are some of the severe costs Europe is now being forced to pay, after it decided to toe the American line. The destiny of Europe over the coming decades will show whether it was worth it, or not.
Venu Gopal Narayanan is an independent upstream petroleum consultant who focuses on energy, geopolitics, current affairs and electoral arithmetic. He tweets at @ideorogue.
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