Cyril Widdershoven, Owner, VEROCY,
Global Head Strategy & Risk, Berry Commodities Fund
Europe’s energy crunch is continuing, as gas storage volumes are still hitting record low levels. A possible harsh winter could lead to severe energy shortages and possible shutdowns of large part of the economy. As the main discussion is focusing at present on a potential role of Russia in the current shortage, a new narrative could be soon hitting the news. In a surprise move the Dutch government has indicated that in a severe supply crunch situation the Groningen gas field, Europe’s largest onshore gas reserves, could be partially and temporarily be reopened. It seems that the term Dutch Disease could get a new meaning, from being the threat scenario of a rentier state situation to a show of Europe’s and Dutch lack of realism in energy transition risks and market powers.
Uncertainty ahead
Dutch Minister Stef Blok has indicated that he is considering the potential use of the Groningen field, in particular five (5) wells, especially the one at Slochteren, to be re-opened as indicated by Johan Attema, director of the Nederlandse Aardolie Maatschappij (NAM), the operator of Groningen, these ideas have already been discussed since August. To reopen the field, even in case of emergency or an energy crisis, is however very political. Until now the plans are that Groningen will be closed totally by 2022, ending the large gas production and export position of the Netherlands with a bang, however, minister Blok will be asking for a possible new role of Groningen if a real supply issue exists. If this will be put in place, the whole Groningen debacle, as some see it, will be prolonged. It is clear that the Peak Gas Shaving position that Groningen has been having for decades is still needed, looking at the current deplorable situation of the European energy sector. The ongoing energy crunch, as mentioned in the media, hitting the EU soon, changing possible narratives in Brussels and the respective European capitals.
The lack of supply of natural gas by Russia, or political will, the low possibility of sourcing Norwegian or other gas volumes quickly, is putting Europe’s energy situation under pressure. At the same time, a possible shutdown of several manufacturing and production sectors in Europe, such as fertilizers, chemicals and steel or aluminium is being considered or already done.
Political leaders, maybe not yet in Brussels, are also looking at the direct implications of higher energy bills or possible energy deficit for consumers and industry. Both could lead to severe protests or political landslides during upcoming elections. Threats of an energy poverty crisis are being discussed widely, but no real solutions except lower taxes are available. Due to higher energy costs, showing a possible record price level of $100 MBTU or $250 per crude oil barrel equivalent is putting fear in the eyes of politicians, especially in the Netherlands, Germany, France, and the UK.
Man-made disaster
The current situation however still does not make clear to politicians that the current crisis is a home-made issue, as the fundamentals have been changed by politics and EU, while market fundamentals are still not able to cope or counter threats. Even if Groningen is again pushing volumes into market, relieving maybe some of the pain in NL, UK or G-Fr-Belgium, the overall issue is still forgotten.
By opening up the gas market for liberalization, without presenting the real tools to parties, and pushing for a spot-market, instability has been introduced. Geopolitical powers are still at play, while utilities and European suppliers have been thrown into the seas full of sharks without some defense options. At the same time, when oil price-indexed long-term contracts with Russia were thrown out of the window, parties did not understand that this could mean handing over full market powers to national parties, such as Gazprom. Putin has been opening up his Russian champagne bottles, knowing that he was handed the key to European markets, with the option of manipulating fundamentals and prices at the same time. Europe also has blocked to find a strong strategy for EU parties to bring in new diversified other volumes.
At the same time, European leaders are in dire need to reconsider their diffuse position towards Russian gas supplies and the future role of NordStream 2, the new Russian-German gas pipeline addition, which is still being discussed and threatened by US sanctions and Eastern European opposition. It seems that Russia’s leader Vladimir Putin however is holding the best deck of cards, as without additional and substantially more natural gas supplies to Europe, consumers and industry should be preparing for a possible cold winter. Europe’s gas supply diversification has been a major disaster, not only due to inherent EU tactics and regulations, but also because of the ongoing one-sided emphasis on energy transition, hydrocarbon divestment and full-scale investments in renewables, without realizing that the backbone of the European economic system is still hydrocarbon linked.
Hydrocarbon is the answer
The current situation shows one main fact of life, the success of the energy transition is not based on a one-sided approach, putting all eggs in one basket, while killing the other goose with the golden eggs. By introducing new renewable options, the market got destabilized, but politicians and others didn’t want to admit the latter. Destabilization could and should be prevented, by acknowledging the fact that for the foreseeable future hydrocarbons, including coal, will be playing a major or even overwhelming role in the energy sector of the continent. At the same time, European politicians also should acknowledge that without hydrocarbons not only energy supply is being threatened, as renewables need to be backed up, but also the hydrocarbon economy is being hit substantially. Not yet fully understood by most, but without hydrocarbons, especially natural gas and oil, food and other primary sectors are being hit. The first shutdowns of fertilizer and steel companies have already been reported.
Brussels, London, Berlin and even The Hague, should start to change their approach to energy and the economy of the future. Politicians should start to listen to market analysts and geopolitical thinkers, that have been warning for the tectonic shifts being put in place, without realizing that this could lead to a major earthquake or tsunami. By opening up the energy markets the last decades, removing and believing in the power of the global energy market without realizing that hydrocarbon/energy and geopolitics are sleeping in the same bed, risks have been taken that are now hitting us in the face.
At the same time, a clear strategy should have been shown indicating that while setting up a Green Deal and forcing energy transition, a hydrocarbon backbone should be in place, including investments in storage and new supply deals. Without the latter, supply giants such as Putin’s Russia is holding all the cards.
This winter could be wake-up call for most, especially voters. Energy transition is a long-term process, not a revolutionary approach. By throwing away the baby you have, while expecting the other come soon, miscalculations are now shown.
