Europe faces ‘unprecedented risk’ to gas supplies, IEA says

Europe faces “unprecedented risks” to its natural gas supplies this winter, with the market tightness expected to continue well into 2023, the International Energy Agency (IEA) has said. 

The Paris-based body's quarterly Gas Market Report for Europe said most of the cutbacks would have to come from consumer behaviour, such as turning down thermostats by one degree and adjusting boiler temperatures, as well as industrial and utility conservation.

In preparation for this critical situation, the European Union has already agreed on a mandate for a reduction in the bloc's energy consumption by at least 5 per cent during peak price hours. Some business in the area have already taken measures to cut back on natural gas use, sometimes simply by abandoning energy-intensive activities such as making steel and fertiliser.

The EU has already filled storage to 88 per cent, but the IEA assumed 90 per cent would be needed in its Russian cutoff scenario.

Since 2021, natural gas markets worldwide have been tightening and global gas consumption is expected to decline by 0.8 per cent in 2022 as a result of Russia's invasion of Ukraine and an unchanged demand in the Asia Pacific region. Predictions of a harsher winter could also pose a challenge to the global gas market. 

Currently, some Russian gas is arriving through Ukraine to Slovakia and across the Black Sea through Turkey to Bulgaria. However, Russia has recently halted flows through the Nord Stream 1 pipeline running under the Baltic Sea to Germany, and the parallel Nord Stream 2, stating these were damaged in underwater explosions which European governments suspect as sabotage.

“Russia’s invasion of Ukraine and sharp reductions in natural gas supplies to Europe are causing significant harm to consumers, businesses and entire economies – not just in Europe, but also in emerging and developing economies,” said Keisuke Sadamori, the IEA’s director of energy markets and security.

“The outlook for gas markets remains clouded, not least because of Russia’s reckless and unpredictable conduct, which has shattered its reputation as a reliable supplier. All the signs point to markets remaining very tight well into 2023.”

As a result of the rising costs of natural gas, the IEA has predicted a rapid increase in the demand for liquified natural gas (LNG), which Europe is using to offset the falls in Russian supplies. However, this 65 per cent rise in Europe’s demand for LNG has drawn supply away from traditional buyers in the Asia-Pacific region, such as Bangladesh and Pakistan, which have been facing widespread blackouts.

“Inter-regional competition in LNG procurement may create further tension, as additional European needs would put more pressure on other buyers, especially in Asia, and conversely cold spells in north-east Asia could limit Europe’s access to LNG,” the agency said.

However, the global energy market is also facing an increase in costs of carbon dioxide, which could add £1.7bn to the cost of British groceries, according to a new analysis by the UK Energy and Climate Intelligence Unit (ECIU). 

CO2 is used in a range of sectors but particularly in food and drink, to add fizz to beer and soft drinks, and in packaging foods safely. At present, the price of a tonne of liquid CO2 is up to 3,000 per cent higher than it was a year ago, with the price as high as £3,000 per tonne, compared to just £100 per tonne one year ago, the ECIU said.

Soaring prices resulted in CF Fertilisers proposing to halt production at its ammonia site, where CO2 is created as a by-product, in August.

“The price of gas is adding thousands of pounds to families’ energy bills," said Fay Jones, MP for Brecon and Radnorshire and chair of the Farming APPG. “Now, like last autumn, it could affect supplies of CO2 and of fertilisers and drive up the price of everything from beer to bacon.”

Matt Williams, climate and land programme lead at the Energy and Climate Intelligence Unit (ECIU), said: “The UK’s reliance on fossil fuels affects more than just families’ energy bills. It could bring the food and drink system to its knees.

“Rising energy costs are creating an extra cost of hundreds of millions of pounds in the food and drink industry that customers may struggle to avoid. If high gas prices, or even blackouts, force factories to close, it could create real problems for farmers and the food and drink industry.”

The IEA concluded that, without demand reductions in place and if Russian pipeline supply is completely cut, EU gas storage would be less than 20 per cent full in February, assuming a high level of LNG supply – and close to 5 per cent full, assuming low LNG supply. The body stated that gas storage must remain above 33 per cent to ensure a secure winter. 

As a result, gas-saving measures will be "crucial to minimise storage withdrawals and keep inventories at adequate levels" until the end of winter, according to IEA. 

Before Russia’s invasion of Ukraine, the former had supplied 27 per cent of the EU’s imported oil and 40 per cent of its gas, with the bloc paying around €400bn (£341bn) a year in return. That is equivalent to around 2.4 million barrels per day, according to data from the International Energy Agency. 

Earlier this month, the European Commission outlined its five-point plan to address the energy price crisis for EU member states, which includes windfall taxes on the gargantuan profits of fossil fuel companies, mandatory electricity savings and a cap on the price of Russian gas.

In the UK, new Prime Minister Liz Truss has presented a package that includes freezing energy bills at £2,500 a year average. The measure will replace the existing energy price cap set by regulator Ofgem, which had been set to increase its cap to £3,549 this month.