Winter begins in energy-insecure Europe
Originally published at Europe in Review on January, 2023
Winter arrived and a new year began in an energy-insecure Europe without incident, with natural gas storage levels sufficient to enable the continent to maintain electricity and heat until spring, provided the weather is not colder than expected. [DWD] [Reuters]
Czech Industry and Trade Minister Jozef Sikela, whose country held the rotating presidency of the EU in the second half of 2022, announced that European governments had agreed on a gas price cap on December 19 to insulate both consumers and European businesses from temporary price spikes due to supply shocks. [WSJ] [European Commission]
EU gas cap regime
Germany had opposed the cap due to concerns that gas would be redirected away from Europe in times of shortage-induced price rises, but finally agreed to a compromise which limits caps to a three-day time span, and enables any cap to be lifted if market disruption occurs. [FT]
The cap will be implemented if a price of EUR 180 per megawatt hour is reached for month-ahead, three months-ahead, and year-ahead derivative contracts on the Dutch Title Transfer Facility (TTF), and remains at this level for three days, provided this level is also more than EUR 35 over average global prices. [ICE] [ICE] [WSJ].
TTF’s owner, Intercontinental Exchange (ICE), has protested. Only Hungary voted against the cap while the Netherlands and Austria, which had previously opposed the measure, abstained, and the majority of EU countries voted in favour.
LNG terminals under construction
German Chancellor Olaf Scholz inaugurated the Hoegh Esperanza floating storage and regasification unit (FSRU) at Wilhelmshaven on December 17. [FT] The FSRU can provide a capacity of 5 billion cubic metres (bcm) per year, replacing approximately 11 percent of Russian imports, equivalent to 6 percent of annual German gas demand. [Marine Link]
Two more FSRUs are scheduled for completion within the coming month, with a fourth to be completed soon afterward, together representing over half of the 50 bcm of gas that Germany imported from Russia in 2021.
Construction of the Wilhelmshaven FSRU began immediately following the Russian invasion of Ukraine in February 2022, and the project, which would normally take years in Europe or the US, was completed in record time for Germany – providing a model of what can be accomplished when critical infrastructure construction becomes a national priority.
Two more terminals, at Brunsbuttel and Lubmin, are scheduled to begin operations in January. Germany is continuing to work on shore terminals scheduled for completion in the coming years as it pursues an effort to replace Russian energy.
Twelve liquefied natural gas (LNG) terminals, including Wilhelmshaven, are currently under construction throughout Europe, including in Germany, Poland, Lithuania, France, Italy and Greece.
French Finance Minister Bruno Le Maire and the executive director for strategy, planning and evaluation of French electricity transmission system operator RTE informed the French Senate on December 17 that the country would be able to avoid electricity cuts and rolling blackouts this winter. [Reuters]
RTE announced that French nuclear power production on December 11 had exceeded 40 gigawatts (GW) for the first time since last March, and was expected to reach 45 GW in January as four nuclear plants completed maintenance work and returned to service. A significant portion of the French nuclear generation fleet had been taken offline for repairs last year, coinciding with Ukraine war-induced power shortages, due to maintenance issues discovered in 2021.
UK Secretary of State for Levelling Up, Housing and Communities Michael Gove on December 7 announced approval of the first new coal mine in the country in 30 years. The move should provide additional coal to UK plants supplying baseload power to the British electricity grid as the country, together with the rest of Europe, prolongs the service of coal plants. [FT]
EU, G7 impose price cap on Russian oil
The G7 and the EU imposed a USD 60 (EUR 56) global price cap on Russian oil on December 2 after lone holdout Poland agreed to the measure after negotiations. [WSJ]
However, Russian oil exports from the Kamchatka port of Kozmino were recorded as selling at close to USD 20 above the cap, near world prices within the week, as Asian importers purchased the crude at market prices without regard to the cap. [European Commission] [Reuters]
The price of Urals crude, which had predominantly been sold in Europe prior to the Russian invasion of Ukraine, was priced below the cap, at USD 56, on December 27 as Russian President Vladimir Putin declared his country would not sell oil to nations participating in the cap mechanism, including the EU, the G7 and Australia. [Reuters]
The cap prohibits Western countries from insuring, financing or shipping Russian oil sold above the cap, and the practical result of the measure has been the elimination of Russian crude in EU and G7 markets without a significant effect on global or Russian crude pricing.
Urals crude had been priced at the same approximate level for months, far below the world price, due to the effect of previous Western sanctions. Russia produced around 10.8 million barrels of oil per day in 2021 and is the third largest oil producer in the world behind Saudi Arabia, at 10.9 million, and the United States, at 19 million. [EIA]
Crude oil reached a three-week high on December 27 as China eased Covid-related travel restrictions and traders anticipated increased demand from an opening Chinese economy. [Reuters]
(rw/pk)