GLOBAL ENERGY CRISIS & STABILISATION

By Alexander Novak, Russian Deputy Prime Minister

GLOBAL ENERGY - February 18, 2022 - The world energy crisis: who is to blame and what should be done?

The large-scale energy crises which erupted last autumn on the markets of a series of large world economies rapidly turned into a world-wide crisis on the basis of the domino effect influencing major sectors of the economy and industry.

The consequences of the “turbulence” on markets extended far beyond those regions where they first occurred. It was only a matter of weeks before the most far-flung and diverse corners of the planet felt the effects of shortages of traditional energy sources and skyrocketing price increases. And balances have still not been achieved in many countries.

The reasons behind the energy crises

The energy crises experienced by different countries have identical roots.

In the first instance, demand exceeds supply against a background of a recovering economy after the pandemic – as well as attempts to limit the financing of projects involving traditional energy sources and, as a consequence, reduced production capacity. As a result, gas and coal prices on world markets in the second half of last year rose several times over.

Europe was the epicentre of the energy crisis.

Output in these countries totalled 94.6 bcm, in 2018, it stood at 88.4 bcm and in 2020 the figure was 78.4 bcm. Regardless, the policy of closing down gas fields remains in force.

In recent years, Europe has thrown its weight behind alternative energy sources. But last year, light winds persisted in the North Sea and that substantially reduced output from wind farms. For instance, in 2021 in Denmark, the energy output from wind farms amounted to about 75 % of normal levels –in September that figure was reduced to 50 %. And the advent of autumn also, as expected, reduced generating volumes from solar power stations.

Experts have noted that wind speeds over the North Atlantic have been in decline for 40 years and, more Importantly, that trend is continuing. By 2100, wind speeds will fall by 10 %. That casts into uncertainty prospects for expanding wind generation. And given the current outlook, it is clear that previous output levels in Europe will not be achieved in the foreseeable future.

What gave a jolt to the circumstances leading to the European energy crisis was the recovery of industrial production, and last year’s cold winter and hot summer requiring additional energy supplies. The result was a shortage of energy resources. A considerable role here was played specifically by the determined abandonment of hundreds of coal and gas-fired power stations and also nuclear power generation – without replacing them with alternative generating sources.

Just before the record jump in gas prices, stocks in European storage areas totalled 76 % of capacity – 14 percentage points lower than the average level over the previous five years. And at that moment, several countries moved from storing gas to extracting it. Gas levels in storage areas therefore began to fall. In October, the average level stood at 77 %, in November it was 73 % and in December, 61 % — figures ranging from 14 to 17 percentage points lower than the five-year average levels.

in 2022, gas storage areas in Europe remain at record low levels. At the beginning of February, the volume of active gas in European storage sites remained at record low levels. As of the beginning of February (02.02.22), the volume of active gas in European storage sites was 27.2 % (or 14.7 bcm) lower than last year’s levels and 2.87 bcm lower than the minimum indicator for that date – the level of occupancy fell by 37 %.

It is worth noting that also weighing on the situation was a cold December 2021. For instance, in Swedish Lapland, temperatures dipped below – 40 C. The lowest temperatures recorded in Europe for 128 years at the outset of winter led to rapid consumption of gas in storage areas.

Another factor was Europe’s policy of planning shipments of energy sources. Europe’s transition from long-term contracts to gas supplies, often with the proviso “pay for what you take”, towards liberalisation of markets and exchanges began with the adoption in 2009 of the “third energy package”. That law included a requirement to reserve a part of capacity of the gas transport system for independent suppliers — and that created an impediment for Gazprom in fulfilling and boosting its contractual volumes.

Taking into account the strengthened role of gas trade exchanges, the speculation factor also had a considerable influence on price rises. After the trend of rising prices was established as a result of natural factors, investor en masse opened “long” positions to claim their speculative advantage from price rises. Anticipating a reversal in the market, other investors bean opening “short” positions, but as the trend continued, they were obliged to close their positions, leading to a rapid rise of nearly 30 % in a single day (at its peak, the price hit $2,000 per 1,000 cubic metres). And that speculative demand outstripped demand on the exchange, extending the “overheated” market.

By rejecting long-term contracts, Europe was counting on gradually carrying out its energy transition and lowering its needs for fossil fuels. Great stock was placed on American LNG as a means of diversifying imports. But as gas prices climbed in China, U.S. producers of LNG redirected their supplies to that more lucrative market.

As a result of a combination of factors, prices over the course of last year soared tenfold in Europe.

In turn, the energy crisis in China, which had a considerable effect on European markets, was initially sparked by coal shortages.

Until recently, more than two-thirds of electricity in China was provided by coal-fired power stations. In December 2020, China halted all coal imports from Australia, which had accounted for about 68 % of Chinese imports. What is more, lower production of Chinese coal by companies acting on restrictive measures within the “green” policy agenda and safety checks at pits created additional shortages.

Prices for thermal coal in September 2021 beat records dating from 1999. And world prices of thermal coal, on average, tripled throughout the course of the year.

These factors led to increased demand for LNG, provided by U.S. producers. In the first nine months of last year, China’s LNG imports compared to the same period a year earlier. As of the end of 2021, the annual increase in the imports, stood at 9 %. In 2020, imports stood at 92 bcm, while in 2021, that figure was 100 bcm.

In addition, at the end of last year, the United States was considering a bar on exports of LNG, which amounted to a negative signal for both Europe and Asia. The United States is the world’s third largest exporter of LNG, supplying gas to more than 35 countries throughout the world in recent years.

It is clear that such declarations firstly damage the reputation of a reliable energy supplier and do not act in the interests of decarbonisation. In conditions of shortages, countries in the Asia-Pacific region, first and foremost China, will have to put off decisions to abandon coal power generation.

After the “Asian prize” was diminished, LNG was redirected back to Europe. The incoming supply of natural gas to LPG terminals in January 2022 set high levels never seen previously since records were kept. Experts cautioned Europeans about placing too much emphasis on LNG as it cannot simply replace shipments of Russian gas.

And even a partial rejection of Russian gas in favour of LNG could be a good reason for starting a new wave of a gas crises in Asia.

In addition to Europe and China, the gas crisis affected several other regions. A serious drought was the reason for an energy crisis in Latin America. Hydropower occupies a considerable share in the 2020 energy balance – about 53 % of all energy needs.

In many countries, the level achieved for hydropower is considerably higher. In Brazil, the share of hydropower in generation stands about 63 %. And in September last year, water levels in the majority of reservoirs of hydropower stations were at their bottom limit – 10-15 % from the norm.

The southeastern region was worst affected by the drought. Energy production at the hydropower stations in the region totalled about 12 GW, a little more than half the volume achieved in October 2018 and 2019.

Climate factors and the recovery of the economy after the pandemic have also sparked increased demand for power in India, resulting in an acute shortage of fuel at coal-fired power stations. Indian authorities permitted producers of power to boost their coal imports to meet rising demand, a move which can also affect world coal prices.

In January of this year an energy crisis worsened in Iraq – a power shortage erupted because of that country’s shortage of gas imported from Iran. The Iraqi government is now intending to sign several major contracts for investments, including projects for gas extraction and deposits.

Against the background of gas and coal markets, oil markets have displayed relative stability. Oil prices over the course of last year occasionally exceeded $85 a barrel – linked to reductions in production in the United States, Norway and Kazakhstan as well as a shift in some countries to fuel oil when gas was in short supply. In the course of the year, sharp fluctuations in prize were avoided as were supply shortages. This is linked to a great extent to the work conducted within the framework of the OPEC+ agreement which aims to minimise the consequences of the pandemic s of the pandemic and level out as much as possible disbalances related to demand for energy resources.

The energy crises and the consequences for the world economy

The world-wide rise in gas prices in the autumn of 2021 prompted a steep rise in the price of mineral fertilisers for agriculture, In their cost prices, the share of energy (natural gas) accounts for up to 80 %, according to Fertilizers Europe.

As a result, about a dozen major plants either reduced production or suspended altogether production of fertiliser or of components to make fertiliser. This began when prices were about $800 for 1,000 cu.m. Prizes for nitrogen fertilisers in the world have shot up to their highest level since 2008. And demand for Russian production outside the country rose and that affects the cost of fertiliser on the Russia domestic market and on the final cost of production.

In China, industrial consumers, including ceramics and cement manufacturers, can raise prices for their own production against a background of high gas prices, In Brazil, all conditions are right to tackle the high cost of electricity and the economies of such countries as Bangladesh and Pakistan cannot afford to buy gas at high prices could find themselves under unprecedented pressure.

On the other hand, Beijing has also introduced limits on the use of electricity produced on the basis of coal generation. Those restrictions concerned 20 regions, whose total contribution to the Chinese economy amounts to around 66 % of GDP.

The volume of industrial production in China was sharply reduced as a result of the shortage of electricity in sectors with high-energy content. Analysts say that this factor will affect the rate of economic growth in the country inasmuch as the Chinese economy depends to considerable extent on coal.

Experts expect that the restrictions on electricity use in the most energy-reliant industries, including steelmaking and aluminum and cement, will remain in place for some months. And that means that China will continue to actively buy natural gas and that will support price levels.

And if Chinese plants come up against electricity shortages, world prices for steel and aluminium will rise substantially.

Restrictions on the use of electricity produced from goal could have a negative affect in general on the entire supply chain leading to the emergence of shortfalls in supply on markets and a subsequent price rise on final good.

The prospects for stabilising energy markets

Energy markets continue to operate In volatile conditions. WE see a paradoxical picture.

Despite the declarations of leaders of different countries abandoning traditional energy sources, gas and coal prices remain high. That shows that demand for them is considerably higher than supply. The fact that hydrocarbons remain very much in demand on markets confirms market mechanisms that are more objective than any political declaration.

At the same time, all market participants, producers and consumers have an interest in the fastest possible stabilisation of the situation.

In our opinion, guaranteeing stability of markets in the future can only be ensured by achieving a balance of energy resources. That means that an artificial abandonment of traditional energy resources that some countries are trying to impose will inevitably lead to greater energy, economic and possible political crisis than exist today.

In the context of decarbonisation, considerable attention should be paid to nuclear energy and the gas industry as upholding for the world community the hope for accessible and environmental forms of energy.

Our country views nuclear power, the peaceful atom, as one of the key links in meeting the growing needs for electricity while carrying out the green agenda. It is a clean, reliable, safe, available and, essentially inexhaustible energy source. Let me just say that many developed countries are actively using nuclear power, including the United States, France and Japan.

In 2021, research was completed from the United Technologies Research Centre of the European Commission setting down detailed criteria and calculations, on the parameters, the material capacities, emissions, polluting substances in the atmosphere, effect on people’s health and life expectancy. The key conclusion is that nuclear power, in terms of its effect on the environment,t is compatible with other “green” types of electricity.

As for the accessibility of nuclear power, the commercial effective technologies of the closed nuclear cycle which Rosatom is now working on, allows for spent nuclear fuel to be used an infinite number of times in reactors.

We believe that in future, small modular reactors will be In particular demand – from 5 to 100 MW. These nuclear plans will significantly raise the accessibility of nuclear power for supplying energy to remote settlements. And we believe that by 2030, in Russia’s share of world markets of nuclear power stations, small capacity reactors will account for 24 % and int terms of fuel it will provide 24 %.

Natural gas in the near future will also remain not only In demand and a reliable energy resource but also an effective base in the fight against climate change The volume of CO2 emissions in gas-fired power stations is 50 % less than in coal-fired stations, that is the cleanest hydrocarbon source of energy.

I am certain that it is vital for gas and nuclear power to be viewed as clean energy sources. And it is gas that, in the process of the energy transition, will play the role of guarantee of energy security.

It is important that at the beginning of the year the European Commission confirmed gas and nuclear power among those classified as clean energy sources. We believe that in the next six months these new norms will come into effect.,

Special attention should be paid in the sphere of energy security to predictability and planning of markets I order that we can meet growing needs in sources of energy.

We believe that in this connection, it is appropriate for consumers in Europe to think about the return to practices of long-range contracts for delivering pipeline gas. This is economically beneficial, reliable and environmentally sound. Such a system will allow for risks to be significantly reduced against gas shortages.

And already today, stabilisation of gas markets in Europe can be promptly ensured by the timely launch of “Nord Stream 2”. Let me say that the use of, for instance, 55 billion cubic metres of gas from Nord Stream 2 for producing electricity instead of goal will allow the EU to lower overall volumes of CO2 emissions by 14 % — and that means in annual volumes of emissions approximately 30 million statistically average vehicles.

In the situation that has obtained in recent months on energy markets, it has become clear that one of the foundations of stability of the modern global world is, in the first instance, reliable energy supply, which cannot be provided without observing a reasonable balance of energy sources and an absence of discrimination against traditional sectors of the fuel and energy complex. Using last year as an example, we are convinced that rash and illogical decisions in the fundamental sector of the world economy will lead to negative consequences for the entire global market for industry, science, transport and, most importantly , will damage people’s prosperity.

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