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More gas supply disruption sends prices rocketing

Photo: Qatar Petroleum Qatar Petroleum LNG carrier.png
Energy rationing in Germany moved one step closer this morning, as Germany embarked on the second phase of its three-stage gas emergency programme.

 Energy Minister Robert Habeck told reporters at a Berlin press conference that “gas is from now on in short supply in Germany”.

The crisis is the result of a move by Russia to slash gas exports to Germany via the Nord Stream pipeline by 60% since the beginning of June. According to analysis by Rystad Energy, an Oslo-based consultancy, volumes have dropped from 167m cubic metres per day at the end of May to just 67m cubic metres. Although the decline in throughput was initially reported as a technical issue in the pipeline’s systems, it later became clear that it was a politically motivated tit-for-tat.    

Prices have risen in line, Rystad said, with Germany’s baseload day ahead price climbing from €177 per MWh over the first ten days of June, to €300 per MWh when the report was written.

European countries had already agreed a strategy to reduce dependency on Russian gas over the next decade but this sudden supply squeeze is putting European energy markets under pressure at what is usually the easiest time of year, in an energy context.

For Germany, Europe’s largest economy, the implications are serious. Rystad noted that the German Government is now trying to extend the life of 10 GW of mothballed coal capacity until March 2024. These facilities would have the potential to provide the equivalent of 9% of the country’s total electricity generation.

However, the coal plants that are likely to be recommissioned traditionally use hard coal imported from Russia. “With the international seaborne thermal coal market already incredibly tight, the prospect of additional demand from German coal-power re-starts will definitely push imported coal prices higher than their current super-high levels,” Rystad said. To put this in context, the thermal coal benchmark delivered into ARA ports is currently trading at around $377 per tonne, up almost $250 since the beginning of the year.

The recommissioning of coal facilities has various implications for both for decarbonisation and shipping. On the former, coal is the dirtiest form of hydrocarbon energy and Rystad estimates that reopening the power stations will create ten million tonnes of carbon-equivalent emissions. For shipping, Germany will now be hell-bent on seeking other sources of coal to replace the Russian shortfall. Analysts believe South Africa is likely to prove an early source of replacement supplies.

Rystad also noted that a further 4 GW of wind and solar power is due to be commissioned in Germany before the end of the year, taking the potential total to 14 GW. But this will only compensate for about a quarter of the gas consumed by the power sector.

Elsewhere in Europe, gas supplies are facing further disruption across the Atlantic. A fire that broke out at the Freeport natural gas terminal in Quintana, Texas, on June 8 has slashed US LNG export capacity by about 20%. Exports are unlikely to begin again for at least three months. Meanwhile, a heatwave in the south has pushed electricity consumption to new records.