The International Energy Agency (IEA) said Tuesday market fundamentals rather than the energy transition are to blame for record natural gas prices in Europe, but it stressed that Russia could be doing more to help ease the crisis.
European natural gas prices increased by nearly 16% Monday, with the front-month UK benchmark finishing close to $27/MMBtu. Prices for October in northwestern Europe were at nearly $26. Some manufacturers have curbed production because of high gas prices, while the UK government and others across the continent have indicated they will assist energy suppliers and consumers during the crisis.
Russia has faced backlash over its inability to send additional natural gas to the continent via pipeline. It has not elected to take surplus pipeline capacity at auction as prices have shot upward. Gazprom PJSC recently completed the controversial Nord Stream 2 (NS2) pipeline and is working to bring it online by the end of the year.
The IEA said while Russia is fulfilling its long-term contracts with European customers, its export levels have lagged those of previous years.
“The IEA believes that Russia could do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter heating season,” the global energy watchdog said Tuesday. “This is also an opportunity for Russia to underscore its credentials as a reliable supplier to the European market.”
Russia’s actions have suggested that it could be keeping the pressure on European governments as it works toward the start-up of NS2. However, some have argued that domestic supply pressures have made it difficult for Russia to serve demand outside the country.
Senior research fellow Vitaly Yermakov of the Oxford Institute for Energy Studies said in a research paper released Tuesday that Russia’s supplies to Europe, including Turkey, have increased this year and production is near capacity.
“With declining indigenous production in Europe and limited availability of liquefied natural gas (LNG) owing to the strong pull from premium markets in Asia, the European gas market is a case in point,” Yermakov said. “Europe now demands greater flexibility from suppliers, in both price and the ability to swing gas deliveries.”
Spot LNG supplies from the United States and across the world have been pulled away from Europe toward Asia, where prices are still higher than those in Europe. Yermakov added that “Russia cannot single-handedly balance sudden spikes in European gas demand,” arguing that such a supply push would take “time, money and contractual assurances of offtake.”
The IEA also addressed claims that Europe’s focus on renewable energy in recent years at the expense of baseload power sources such as coal and natural gas have exacerbated the energy crisis.
“Recent increases in global natural gas prices are the result of multiple factors, and it is inaccurate and misleading to lay the responsibility at the door of the clean energy transition,” said IEA Executive Director Faith Birol.
A cold winter in 2020-2021, followed by a hot summer in places such as Asia and drought in Latin America, have left storage inventories short, IEA said. Recovering gas demand following the outbreak of Covid-19 and a decline in LNG production across the world due to planned and unplanned outages have also tightened the global natural gas market, IEA said.
The spike in gas prices has prompted electricity providers to switch to coal in some markets, but the switch has been limited due to higher carbon prices in Europe. The commodities rally has pushed electricity prices in Europe to their highest level in more than a decade, rising above $117/megawatt-hour in many markets across the continent.
“Today’s situation is a reminder to governments, especially as we seek to accelerate clean energy transitions, of the importance of secure and affordable energy supplies — particularly for the most vulnerable people in our societies,” Birol said. “Well-managed clean energy transitions are a solution to the issues that we are seeing in gas and electricity markets today — not the cause of them.”
European natural gas prices declined on Tuesday as pipeline imports ramped up and Monday’s sharp spike proved hard to beat.
“The trend remains bullish for European gas prices and additional increases are likely,” Engie EnergyScan analysts said Tuesday. “However, after yesterday’s strong rise, profit taking by financial participants and technical resistance could contribute to limit gains today.”
IEA said the European market is likely to continue facing stress this winter. Storage inventories are at 72% of capacity compared to 87% at this time last year. IEA said a further cut in supplies due to unplanned outages at production fields and LNG export terminals, along with sharp cold spells, could test the market further.
Still, the agency stressed that gas would remain an important tool for balancing electricity markets in many regions across the world.
“As clean energy transitions advance on a path towards net zero emissions, global gas demand will start to decline, but it will remain an important component of electricity security,” IEA said. “This is especially the case in countries with large seasonal variations in electricity demand.”
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