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Abu Dhabi, UAEMonday 17 December 2018

Small issues add to up to a big lesson for European gas supplies

The decline of the Netherlands and Algeria have thrown more concern on Europe’s reliance on Russian gas

Recent troubles with supply have highlighted Europe's reliance on gas. Krill Kudryavtsev / AFP
Recent troubles with supply have highlighted Europe's reliance on gas. Krill Kudryavtsev / AFP

A crack in a pipeline, a loose cap seal and a power cut, unrelated faults in three tiny components in Europe’s energy web, struck near-simultaneously last week.

A cold snap had already brought snow to London and Birmingham. As gas supplies were cut sharply, European countries are reminded of their energy vulnerability in a changing market.

The points of failure struck at three of Europe’s most critical pieces of gas infrastructure. The Forties pipeline, now 42 years old, suffered a crack last week which will take weeks to repair. This cost the United Kingdom about 10 per cent of its usual winter gas and sent prices up 55 per cent at one point.

The Baumgarten hub in Austria receives gas from Russia for transport to Germany, Italy and central Europe, equivalent to a tenth of European demand. Last week, an explosion that killed one person stopped operations and Italian gas prices briefly tripled to record levels. However, the oil company OMV, part-owned by Abu Dhabi’s Mubadala, which controls the hub, managed to reroute flows around it.

Finally, the same day, a power failure and leak halted production at Norway’s Troll gasfield, its largest, although it was up and running again shortly. These are not huge issues in themselves, but they are symptomatic of Europe’s exposure to problems with ageing energy facilities.

The shortfall in British supplies has been compounded by closure of the Rough gas storage facility, which could meet the UK’s winter gas needs for three months, but the owner Centrica decided in August it had reached the end of its operational life. UK’s North Sea production has dropped sharply since 2000. Ineos itself has been moving ahead with drilling for shale gas in the UK, though facing public and political opposition.

Shortages can be met by rerouting liquefied natural gas (LNG) tankers. Europe has been busily building new LNG import terminals in recent years, including in Poland, France, Malta and Turkey, with others planned in the UK, Spain, Germany, the Mediterranean and the Baltic.

Utilisation of these LNG terminals last year was only 27 per cent of total capacity, giving plenty of room for increased imports. The start up of new United States and Australian export plants mean there is plenty of LNG on the market, even though Europe will have to compete with strong winter demand from northern China.

New pipelines have greatly improved connectivity within Europe, allowing LNG or Russian gas to be moved to inland locations, and the UK has sucked in more gas from the Netherlands to meet the current upset.

But a tanker could take up to a month to arrive in an emergency, requiring other storage to bridge the gap. The closure of Rough has left the UK with just five to six days of winter storage capacity. Two other longer-term problems have eroded the safety margin. Algerian exports have been in decline since 2006, as insufficient investment has not replaced ageing fields.

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And Groningen in the north of the Netherlands, Europe’s largest gasfield, has had to reduce production because of earthquakes induced by gas withdrawals. The field used to provide up to 6 billion cubic metres (cm) a month in winter, equivalent to more than half the UK’s demand; now that is down to barely 2 billion cm.

The decline of the Netherlands and Algeria have caused more concern about Europe’s reliance on Russian gas. The EU is locked in a dispute with Moscow over the regulation of the Nord Stream 2 pipeline, being built to bypass Ukraine and bring gas directly from near St Petersburg to Germany.

Similarly Russia is constructing the Turkish Stream pipeline to outflank Ukraine on the south. The current outages were not suspicious, but the shadow of sabotage, a cyberattack or a politically-motivated shutdown still hovers.

Improved efficiency and the growth of wind power reduced the UK’s overall gas demand since 2011. Wind was fairly strong over the past week, helping to make up for the lost gas. But apart from a little solar, wood and electric heating, gas is overwhelmingly the dominant fuel for warming homes and water. Some 40 per cent of UK demand goes to these uses. Winter high-pressure zones can bring extended periods of cold, still weather to north-west Europe, while the short days curtail solar. Renewables will not be able to replace the winter surge in gas demand for a long time to come.

The UK government has tended to be laissez-faire in its attitude to gas supply security. This may work in the longer term but is vulnerable to short-term disruptions. At the same time, environmentalists cannot blithely point to the success of wind and solar electricity while forgetting about heat. Strategists should not obsess over the Russian supply threat, but they should not ignore it either.

Last week’s upset is a valuable reminder to the UK and the rest of Europe not to forget gas, still an irreplaceable fuel.

Robin Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis