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Prioritizing Natural Gas Proving Problematic For Europe

by YAR

Emily Pickrell, UH Energy Scholar

As the world discusses its plans for an energy transition, one of the trickiest topics is the role natural gas will play.

It is both a fossil fuel and a much-needed bridge fuel for an energy transition, as the needed technology – think large-scale batteries, electrified industrial furnaces, and offshore wind, for example – matures.  

At the same time, some states in the US have been vocal about criticizing hydraulic fracturing that has yielded a prolific amount of natural gas  – New York, for example, permanently banned this technology approach in 2020.  

Yet prolific amounts of natural gas being produced in the Texas Eagle Ford Basin and the Appalachian Haynesville Basin make such political posturing largely irrelevant – the East Coast still gets a steady flow for its heating and power needs.

How the EU plans to meet its natural gas demand in an energy transition is trickier. The center of its energy news now is the escalating prices for natural gas, a reflection of an insufficient supply to meet its growing needs. Natural gas’ price has skyrocketed, reaching more than $130 per megawatt-hour on Dec. 13. That’s more than five times its European price this time last year.

The high prices partially reflect a worldwide tight market for natural gas, exacerbated by problems in production and a growing demand in a post-Covid lockdown recovery boom.

Relief from the gas shortage in Europe has been held up by contention over the Nord Stream 2 pipeline, which would bring gas from Russia to Germany via an underwater pipeline in the Baltic Sea.

The new German government, however, has made approval contingent on support from the European Commission, which is requiring Gazprom to follow its gas directive rules. Under these rules, gas suppliers must allow third party access to pipelines and provide price transparency. They are also required to decouple production from delivery.  

Forcing Gazprom to comply with these requirements means it would not be able to act as a producer and supplier of gas, essentially gutting its competitiveness.

 “From my point of view, these conditions are unacceptable for Gazprom,” said Paul Gregory, an economics professor emeritus from the University of Houston, explaining that Gazprom’s role as the ministry of gas for the Kremlin means it is conducting foreign energy policy for Russia.

In Gregory’s view, its end game is to achieve dominance of European energy by controlling gas traffic.

This pipeline would have doubled the total capacity of the Nord Stream pipeline system.

The politics are the main challenge for the Germans and for the European Union. In 2019, construction was stopped after the U.S. established new sanctions against Russia for its aggressive posturing in the Ukraine. And while the construction has continued and the pipeline is said to be complete, it still needs blessings from Berlin and Brussels to become operational.

“I don’t think that the governments have woken up to how bad it is right now – how bad the energy prices, and where they reach could reach by the end of winter, and how that carries through into next year,” said Murray Douglas, research director of the European gas team at Wood Mackenzie, an international energy consulting firm.

EU politicians have expressed interest in reducing their natural gas footprint, but currently depend on Russia for about half of the needed imports. Climate change commitments and effort to reach there will not reduce this demand in the short term. Regardless of how aggressively the EU plans to reach its climate change goals, natural gas will first replace the oil and coal fuel now being used. New decarbonization technologies expected, such as carbon capture and sequestration, will also require some natural gas.

“This decade, no matter what path we take, Europe still needs a lot of gas,” Douglas said. “That is not going to suddenly fall of the cliff, because we need to get coal and oil out of the mix wherever we can.”

Meanwhile, politics has entered as yet another complication: Russia’s Gazprom has been slow to export sufficient natural gas through alternative routes, arguably to put pressure on the EU to approve its pipeline.

The shortfall has meant that Europe has been firing up its lignite coal plants as a back-up and that natural gas prices have gone through the roof as a means of attracting more LNG shipments.

“We’re using coal and oil and all the polluting fuels simply because gas is so expensive,” said Bernadett Papp, a Hungarian carbon trader, in an interview with the Wall Street Journal.

An unseasonably cold spell could speed approval of the pipeline, even under Russia’s terms.

“I have always thought if that if things started to get ugly in December, there would be a pragmatic decision to just get Nordstream 2 online, because Europe is sort of out of options,” Douglas said. “As unpalatable as it would be, to protect European consumers and European industries, it would be the pragmatic solution.”

It illustrates how closely politics and energy are intertwined, and not just at the COP negotiating table. The pipeline brings up questions of energy security, and pits them against concerns about European geopolitical interests and protection of the Ukraine’s sovereignty and NATO Expansion.

It also shows that until an energy transition is fully ramped up, with sufficient alternatives, old, dirty fuels will still be a stand-by option.

It’s a challenge that the negotiating table will need to factor in.

For if even countries like Germany and France are scrambling to figure out how to balance economic and national interest against environmental commitments, consider how much greater the pressure and constraints will be for poorer countries.

“I don’t think it changes European’s commitment to decarbonizing – it makes the next years a little more complicated,” Douglas said. “This is an early signal of how difficult decarbonizing of energy market is. You have nuclear outages, a global gas market, which is difficult to predict, and variable renewables – which isn’t just a daily thing, it is a multi-year thing to figure out as well.”

Emily Pickrell is a veteran energy reporter, with more than 12 years of experience covering everything from oil fields to industrial water policy to the latest on Mexican climate change laws. Emily has reported on energy issues from around the U.S., Mexico and the United Kingdom. Prior to journalism, Emily worked as a policy analyst for the U.S. Government Accountability Office and as an auditor for the international aid organization, CARE. 

UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.

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