Europe’s energy crisis may not end until 2024


Spring and summer’s worst energy security fears regarding the coming European Union-EU winter have been allayed somewhat. Earlier this year, when war broke out in Ukraine and it became clear that the conflict would drag on for months or even years, the EU appeared dangerously threatened by a “Polar-Geddon” winter, so cold air was gripping the continent. Largely forgotten and retired gas storage caverns, which had not been filled in expectation of a steady supply from Russia via the Nordstream I and II pipelines, were suddenly thrust into the foreground in the public eye. Problems often come in twos. The next shoe to fall was the deflation of expectations that much of the base load on the EU power grid would be met by wind and solar farms, when the elements refused to cooperate. From the middle of last year, it was found that the wind was not blowing and the production of solar farms was lower than expected. These two events seemed poised to converge on the EU and present it with a stark and cold future for the winter of 2022-23.

As is often the case, the fullness of the weather eased the worst fears as energy leaders in the countries that make up the EU sprang into action. They turned to norway 90 billion cubic meters of additional gas to start filling the storage caverns. The infrastructure was in place, it was just a question of price. The United States also responded with a massive shipping of billions cubic feet of LNG, mainly from Gulf Coast Cryo plants, and little by little the most acute fears of early spring have dissipated.

Now WSJ reports that the EU’s gas caverns are largely filled, thanks to US LNG exports. Europe’s population is now in the hands of nature as winter approaches.

“Gas storage facilities for heating and power generation are nearly full, consumption is falling and liquefied natural gas tankers are flooding in. Europe is in a stronger position than feared in recent months, after Moscow cuts gas deliveries in retaliation for Western sanctions against the invasion of Ukraine.

Related: China’s LNG Imports Set for Record Slump

However, many things could go wrong. A long cold spell or a broken pipeline could disrupt the region’s preparations, threatening emergency rationing, power outages and a deeper economic recession. Officials and analysts say consumers’ willingness to reduce their gas consumption will be key to getting through the winter. »

The rest of this article will focus on what could actually go wrong and put EU citizens at risk.

Asian demand, energy reduction compliance and US weather could make a difference

Although seemingly off the hook for the start of this season, with storage caverns full, several challenges await this energy beleaguered continent.

The first is that Asian demand, and in particular Chinese demand should resurface In the coming months. The focus on the Eastern Hemisphere is understandable because its growing economies are the product of this region’s rise as manufacturing and distribution centers for almost everything. This unrelenting demand, should it occur, will challenge EU import hubs, as they start unloading stored gas this winter and start looking for new supplies to face the winter of 2023. -24.

Bloomberg recently noted in an article that China, which resold US LNG shipments to the EU for profit, no longer did so.

“China has told its state-owned gas importers to stop reselling LNG to power-starved buyers in Europe and Asia to secure its own supply for the winter heating season.”

If this action signals a shift in China’s outlook, then EU buyers will face increased competition for US supplies, of which they have received the lion’s share over the summer. Loaded LNG cargoes are highly fungible and it is common for an LNG carrier’s final destination to change after leaving port.

The second is to get through this winter without the drastic cuts discussed in the WSJ article. Compliance with urgent conservation directives will determine whether the EU’s energy security is at the mercy of weather conditions this winter.

“Europe is probably as well prepared as it could be. The infrastructure is about maxed out,” says Michael Bradshaw, professor of global energy at Warwick Business School. “We are faced with the stark reality that there are physical limits to the ability to replace Russian gas in the short term. This means doubling down on the demand reduction side of the equation is vital.

“A lot of things could go wrong. If freezing weather increases demand, stocks could run out and prices could soar to levels that are hammering businesses and public finances. Low temperatures could also trigger a competition between North America and Europe for LNG supplies.

And that brings us to our third point in this macro thesis. It is only by pure chance that things are not much worse in the United States than they are. Skyrocketing coal prices have prompted US utilities to burn gas this summer for power generation. This should have kept prices higher than they were. What happened?

You may remember that fire in the Freeport LNG Plant near Galveston in June? This had the effect of putting 2-BCFD back on the market and making it available for injection rather than export. As a result, we are only about 4% below the 5-year averages in our storage. This week.

It will be interesting to see what kind of drawdowns are seen in next week’s report as much of the nation feels the first breath of winter. Nor am I optimistic that, absent a surge in gas drilling, we will be able to do anything to materially impact this tight supply scenario.

The trend is not encouraging for new supplies in the medium to long term, as shown in the chart above. This is compiled from data published by the EIA and measures only a moving average between the production noted in various reports and the number of right-turning rigs. A simplistic measure as I have noted in previous reports, but the trends are instructive on their own. And the trend suggests, for some reason, well productivity is down.

Your takeaway meals

The challenges for the EU will remain until the heating season of 2023-24, depending, as we have noted in this article, on the weather on the European and North American continents. This will lead to gas prices which have fallen sharply during the third quarter.

One of the ways I seek to arbitrage this price action is to select producers who stand to benefit from it. I’m looking in particular at a Canadian player, ARC Resources, (TSX-ARX). It is the third-largest gas driller in Canada, with high margins and access to LNG hubs in the southern United States and east of the major population centers of Toronto and Montreal. ARX ​​is generating free cash at a rate of C$2.0 billion and has growth plans covered by the Free Funds Flow. ARX ​​pays a modest dividend, currently yielding 2.7%, and is currently trading at 6X EPS. There are others to consider as well. Tourmaline Oil Corp, (TSX: TOU) is one of the largest gas drillers in the country with 80% of its daily production made up of 2.2 BCFD. It trades at 9X EPS, which is why my interest was more in ARC Resources.

I like the Canadian gas drillers as opposed to the big US gas drillers because of market access. EQT, (NYSE:EQT) and CNX Resources, (NYSE:CNX), among others, tap into the Marcellus superbasin for their reserves. The Marcellus is locked behind Appalachia with no pipeline access to major consumer markets in New York and Boston. Despite years of work by pipeline builders to obtain permits to build the Mountain Valley Pipelineand Atlantic Coast Pipelineboth are still incomplete with no clear path to completion.

Whichever direction you take, I think gas drillers are a safe bet if a cold winter here and in the EU challenges supply, as we discussed.

By David Messler for


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