“There was only one catch and that was catch 22.”
— Joseph Heller
When it comes to the question of energy security, one cannot afford to get too comfortable or complacent. I guess it’s the same for any important industry, strategic resources, or the provision of essential services. Security of supply and reliability of the whole supply and operations system is an imperative. Something that cannot be sacrificed, compromised, ignored, or otherwise jeopardised. The consequences can be drastic, unexpected and costly.
Things can change quickly and unexpectedly, say from a situation of “a sense of energy security” to one of sudden insecurity and uncertainty. The unexpected disruption of an essential service or supply, such as the massive disruption in logistics and supply chain that occurred as a result of lockdowns during the COVID-19 pandemic, amply demonstrated the point being made.
Another example, and something which happens quite frequently, is the disruption in the power supply, which can occur for many reasons and could happen at any time. In the past, especially in 1992, a major blackout occurred in Malaya, which eventually led to the privatisation of power generation and supply and the loss of the monopoly position of LLN (Lembaga Letrik Negara), the precursor to Tenaga Nasional Berhad (TNB). Thereafter, IPPs (Independent Power Producers) sprouted like mushrooms after the rain, to TNB’s business detriment.
The current energy supply situation in Europe is an unfortunate, painful lesson or pertinent case study in energy security issues as it undergoes an energy supply crisis. Europe is finding out the truth in a hard way, realising that they have to face a tough winter this year on the back of an unavoidable perfect storm that has been brewing, which is set to make landfall this winter season. To be fair, it’s not entirely their fault. They just got the bad luck to be caught in a very tight situation. Something not quite predictable but not at all unforeseeable.
To provide context and to show how the situation came about, it is important to note that Europe has been relying on Russia for a third, some 30 per cent to 40 per cent, of Europe’s total gas supply requirements. In terms of volume, this amounted to a supply of 155 billion cubic metres (Bcm) of gas to Europe in 2021. This pre-existing supply situation before the current crisis was taken for granted — a given scenario that has held for some time. Until the spring of 2022, that is. The status quo was upended after the Russia-Ukraine conflict broke out into the open.
To make matters worse, in the middle of the unfolding crisis, the European Union set an ambitious target to reduce dependency on Russian gas by 66 per cent within this year, while at the same time planning to replenish the EU’s gas storage to some 80 per cent capacity by November 1. And if Russian pipeline gas were to be stopped immediately, the 20 per cent ullage would be used up in no time. The decision taken seems rather contradictory, to wit, reducing dependence while at the same time filling up the gas storage!
In order to replace such substantial portion of the Russian gas supply while replenishing depleted gas storage, both initiatives of replacing and replenishing would need to be done simultaneously within a very limited time frame. So, it is implied in the decisions taken. Something that will be exceedingly difficult, to say the least. This is because the real alternative to pipeline gas comes in the form of liquefied natural gas (LNG), but due to the juxtaposition of factors, LNG prices have shot up to a level that is way too expensive compared to pipeline gas. At the same time, there is not enough LNG terminal capacity in Europe to allow for immediate importation of the additional volume of LNG in the timeframe required. A classic catch-22 situation.
Failure to resolve Europe’s energy supply crisis, whether through pipeline gas or LNG, will have far-reaching consequences for Europe’s population and economy, while also undermining the long-term strategy of using natural gas as the transition fuel in the region’s energy transition journey. At the moment, the situation looks like it will remain unchanged for the medium to long term.
By way of illustration and to demonstrate the point, around 95 per cent of Germany’s natural gas requirements are imported, of which around half is re-exported to other parts of Europe. More than 55 per cent of Germany’s gas imports come from Russia, with 30 per cent from Norway and 13 per cent from the Netherlands.
In the whole of Europe, there is a comprehensive system of pipelines from Russia, Europe, the Middle East, and Central Asia. At the same time, there are 24 LNG import terminals, including six small-scale LNG terminals, in operation in the European Union. This includes seven in Spain, four in France, three each in Italy, the UK, and one each in Belgium, Greece, Portugal, the Netherlands, Poland, Malta, and Lithuania. But as of 2022, Germany does not have a single LNG terminal. In other words, all of Germany’s gas imports come via pipelines.
Isn’t it strange? It seems to imply that Germany has been assuming a scenario of continuous gas supply using pipelines and did not see the imperative to have alternative supply or a back-up plan for pipeline gas supply in the form of LNG. Apparently, there were plans to build an LNG import terminal in the past, but somehow it never took off, possibly because LNG imports would be much more expensive compared to pipeline gas.
But seen from a different perspective, that of gas supply security, it looks like Germany has put all its bets on just one horse, albeit a strong looking one. This supply reliance on pipeline gas alone, however, has an Achilles’ heel to it, as the events now unfolding seem to prove. The policymakers’ reasoning was probably that pipeline gas supplies from different sources — Russia, Norway and the Netherlands — would be sufficient to provide the required security of supply and guarantee reliability. That policy assumption has a fatal flaw in it and was dramatically upended by the Russia-Ukraine war.
Russia’s invasion of Ukraine in the spring of 2022 has not only turned decades of German energy policy upside down but the whole of Europe’s as well. Germany, which has been relying the most on Russian pipeline gas supply, is therefore the most hard-pressed and vulnerable. Following the war, Europe has announced economic sanctions and an embargo on Russian gas and oil. In a tit for tat situation, Russia has reduced gas supply to Europe, with Germany being badly hit and unprepared because it had no LNG import terminal.
By the way, picture a tit for tat as giving back as much as you got, especially in retaliation for something harmful. Like when you were young, if you conked your sister in the head and she conked you right back, that’s tit for tat. Adults play the same game too, or so it seems in the game of geopolitics.
It should be noted that Germany is the largest economy in Europe, followed by the United Kingdom, France, Italy, and Russia. These five countries are said to control half of the European economy. By bringing natural gas into the realm of EU sanctions or playing a ‘tit for tat’ game, the Euro zone economy could see a sharp slowdown, with Germany’s growth rate possibly turning negative. Not to mention the far-reaching consequences on the population and ordinary people. As the African proverb says, “When elephants fight, it’s the grass that suffers.” There is a similar saying in Portugal: “When the sea clashes with the rocks, it is the clams that suffer.” In Malaysia, we have a localised version of the clashes of elephants, with the mousedeer being the victim instead of the grass.
Indeed, the International Monetary Fund expressed concerns in mid-July 2022 that the Russian natural gas embargo would cause deep recessions in Hungary, Slovakia, the Czech Republic and Italy, unless countries cooperated more to share alternative supplies. In an interconnected world, we all know that a recession or trouble in one part will inevitably affect the other parts of the world.
In a desperate effort to reduce overreliance on Russian pipeline gas, the race to build LNG terminals in Europe is now on. What was previously negatively looked at as a prolongation of reliance on fossil fuel has now become an unavoidable solution, and indeed a necessity. It is reported that Germany alone has plans for five floating LNG terminals to be built by the end of 2022. That is a very ambitious plan, and the timeline looks very tight indeed. Maybe the Germans can do it, but in most places, it will take a miracle to achieve that.
Granted, floating LNG terminals can be the way forward for a faster effect if time is a concern and this is one of the solutions being pursued. However, there are practical issues and challenges to overcome. Floating LNG terminals are either new, purpose-built FSRUs (Floating Storage and Regasification Units) or used LNG tankers that have been converted into LNG storage and re-gasification terminals, or SFRUs. Converting an existing LNG vessel into an FSRU takes at least a year, compared to the three years required to build a new FSRU. The construction and commissioning of conventional LNG import terminals with onshore LNG storage would take even much longer. In other words, the technical and execution challenges of the relatively faster solution are enormous as well as capital-intensive.
The predicament facing countries like Germany and others that rely mainly on Russian pipeline gas supplies and have no plans to replace such reliance is indeed a tough one to unravel. Looking at the limited sources of supply of LNG (US, Qatar, Africa, Australia, Malaysia, etc.) the competition amongst buyers of LNG would become intense. Underlining the challenge for Germany or Europe in sourcing adequate LNG supplies to meet their needs, Russia itself is also an important supplier of LNG.
The foregoing scenarios can only mean one thing: the price of gas and LNG will skyrocket, reaching new heights unseen before, as demand rises in Europe. During the first half of 2022, the Title Transfer Facility (TTF) pricing [note: TTF is a pricing location within the Netherlands] averaged $30.94 per million Btu and reached a record high of $62.10 in July. At the same time, LNG spot prices in Asia have also been high, averaging $29.50 per million Btu during the same period.
The need to build more LNG terminals in Europe to accommodate the required volume of LNG to reduce reliance on Russian pipeline gas will take time. As a result, Europe’s announced timetable for replacing Russian gas appears ambitious, even “wildly optimistic”, in the opinion of some. The answer will be apparent in the winter of 2022. And a prolonged period of high LNG prices will not be a surprise.
It is foreseeable that demand will far outstrip supply by the end of this year, and this soaring demand has spurred the greatest rush for new LNG projects around the world in more than a decade. But construction timelines would mean substantial early relief is unlikely. The LNG facilities need time to come on stream, so the ride will be rough for a while. It could be only after 2024 that we see some form of material relief emerge.
On the positive side, with new plantings and investments in gas infrastructure and supply and distribution systems, natural gas will indeed materialise as the real, viable, and practical solution for a seamless energy transition into the future of a totally renewable energy world. A point I made in a previous post about natural gas’s logical role as a practical bridging and transition fuel.
But for the time being, Europe will have a tough lesson to waddle through. In having overlooked having LNG terminals constructed and in operation, it appears their policymakers have been rather amiss or complacent. In the case of the Germans, it’s a surprising thing coming from them, who are well known for their precision, industriousness and comprehensiveness. There was nothing wrong with their culture of industriousness, but it showed that an unforeseen force majeure situation like an outbreak of war or hostilities would upend all the carefully laid out plans and strategies.
For all others, what is happening is a noteworthy lesson not to be forgotten. Be they policymakers and planners — whether in governments, city halls, corporations, associations, statutory bodies, or any other organisation or anyone in a position to influence policies and strategies — it helps to always be alert and comprehensive in all that you do. That way, you can avoid painful surprises and a big dent in your wallet.
**The views and opinions expressed in this posting are the writer’s own and do not represent that of this paper.**
