The cost of energy is currently increasing sharply. A consumer portal has calculated that the price of natural gas for end customers in Germany has increased by 15 percent compared to the previous year. But that is nothing compared to the cost of heating oil (plus 53 percent) or diesel and petrol (plus 26 percent). The situation is similar in other European countries, although the picture in Great Britain is even more dramatic. Factors related to Brexit also have an effect there.
Even if the price of natural gas has risen moderately compared to other energy sources, it has sparked a political discussion. For some media, but also for some in the political arena, the culprit for the price rise is quickly found: Russian President Vladimir Putin. He turned off the gas tap, so we Europeans would have to fear a cold winter. That this has nothing to do with reality doesn’t seem to matter.
Anyone who does serious research will find: The reasons for the price increase can be found on the international gas market – increased demand, global market developments and the weather situation. Compared to the same period in the previous year, demand for gas in the six largest European markets – Germany, France, the Netherlands, Italy, Spain, and the United Kingdom – rose by twelve percent in the first half of 2021.
The decisive factor was the economy, which picked up again after the Covid-19-related business interruptions in the industry in spring and summer 2020. At the same time, the gas storage facilities were used for longer than usual last winter due to the colder temperatures that lasted into spring. As a result, the feed back into the gas storage facility did not begin until the end of April, almost a month later than the average for previous years. These factors lead to higher prices and greater demand in the summer months.
Where should affordable gas for Europe come from?
The question is: where should affordable gas for Europe come from in this situation? The European Union and Germany obtain a large part of the gas via a differentiated pipeline network, especially from Russia and Norway. There is also the option of importing liquefied natural gas (LNG). But what about the so-called “freedom gas” that the US has always touted as an inexpensive and abundant alternative?
The answer is simple: it’s not coming. The LNG tankers are going to Asia. China in particular continues to buy pipeline gas and LNG at high prices for both consumption and storage. Between January and August 2021, China imported over 22 percent more than the previous year, while LNG imports from the EU and the UK fell by 17 percent.
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It is interesting that the US has quadrupled its LNG shipments to China during this period. On the one hand, the US is calling for Europe to restrict its trade with China, but on the other hand, they are using the opportunity to sell natural gas lucratively to China, not to Europe. The economic recovery in Asia and the associated increased demand are therefore the key factors behind the high gas prices on the world market.
Even if the headlines about an alleged gas crisis are currently sounding dramatic, nobody needs to worry because the needs of consumers are still being served. Despite the delay in filling the gas storage facilities in Europe, this has been proceeding at a similarly high speed since the beginning of May as in previous years. With 23 billion cubic meters in 47 underground storage facilities, Germany has the largest storage capacities in the European Union. The storage tanks in Germany are currently 68 percent full, and in most EU countries the storage levels are even around 80 percent.
Russia is a reliable supplier
How is the situation now at our largest natural gas supplier, Russia? Gas production there increased in the first eight months of the year. However, Russia also had to fill up its domestic storage facilities first, as a large part of the stored gas was used up there last winter. Nevertheless, Russian gas exports are approaching all-time highs. Exports to Germany alone have so far increased by around 40 percent in 2021 compared to the previous year.
The Federal Ministry of Economics recently confirmed that there are no bottlenecks and that all contracts are being served. For more than 50 years, Russia or the former Soviet Union has been a reliable supplier – this also applied to the time of the real existing Cold War. So Russia turns out to be the enemy for a cold gas war.
What situation will we have to reckon with in the next few months? I assume that the situation on the gas market will gradually recover. The continued high gas imports from Russia and the end of the summer maintenance period for Norwegian North Sea gas production will stabilize gas flows to Europe. The current situation makes it clear, however, that gas trading is becoming more and more global.
Europe is in sharp competition here with other regions of the world, whose hunger for energy is unsatisfied. Even if we want to achieve our ambitious climate protection goals, we need natural gas for the transition period – which is expected to last three decades – as the fossil fuel that is best on the climate.
Gas as a partner for renewable energies
And what does this situation mean for the completed but not yet operational Nord Stream 2 pipeline, which is supposed to deliver Russian natural gas to Europe? I am known to be the chairman of the board of directors of this pipeline company. LNG is often portrayed as a flexible and reliable source of supply. But at times like these we see once again that the LNG ships go to where the highest prices are paid.
From the exporters’ point of view, this is understandable, but it does not guarantee reliable security of supply on the basis of LNG. The pipelines are and will remain the backbone of European security of supply.
We will continue to need gas in the future. As a partner for renewable energies – for example in electricity production – gas-fired power plants can compensate for fluctuations. Around 65 percent fewer emissions are produced if the electricity is produced in gas instead of coal-fired power plants. Therefore, any additional pipeline is good for the European market – this applies not only to Nord Stream 2, but also to other projects that are currently being planned or built.
The more sources and delivery routes we have, the better it is for the European Union, but above all for the end customer. Because the better the offer, the lower the prices.
The author: Gerhard Schröder, the seventh Chancellor of the Federal Republic of Germany from 1998 to 2005, is Chairman of the Board of Directors of the European-Russian gas pipeline companies Nord Stream and Nord Stream 2 and of the Russian mineral oil company Rosneft.
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