Oil & Energy
From Coal To Gas: How Europe Is Easing Its Energy Crisis
Last year, in November, the UK, together with key partner, Italy, hosted the COP26 climate summit, an event many believed to be the world’s best last chance to get runaway climate change under control.
A key outcome of the summit was that dozens of nations pledged to end deforestation, curb CO2 and methane emissions and also stop public investment in coal power.
Specifically regarding coal, a total of 46 countries signed the Global Coal to Clean Power Transitionstatement, promising to “accelerate a transition away from unabated coal power generation” and “cease issuance of new permits for new unabated coal-fired power generation projects.”
But less than a year later, all those promises have gone to the dogs, with developed countries now scrambling to resume coal-based energy generation after the Ukraine crisis triggered a global energy meltdown.
According to a report by the Observer Research Foundation, energy supply disruptions triggered by Russia’s war on Ukraine took LNG prices even higher, leaving coal as the only option for dispatchable and affordable power in much of Europe, including the tough markets of Western Europe and North America that have explicit policies to phase out coal.
According to the Washington Post, coal mines and power plants that closed 10 years ago have begun to be repaired in Germany. In what industry observers have dubbed a “spring” for Germany’s coal-fired power plants, the country is expected to burn at least 100,000 tons of coal per month by winter.
That’s a big U-turn considering that Germany’s goal had been to phase out all coal-generated electricity by 2038.
Other European countries such as Austria, Poland, the Netherlands and Greece have also started restarting coal plants.
Meanwhile, China’s coal imports have been surging, increasing 24percent month-to-month in July as power generators increased purchases to provide for peak summer electricity demand. China has the largest number of operational coal power plants with 3,037 while Germany, the largest economy in the EU has 63.
The situation has led to soaring global coal consumption that could reach levels we have not seen in a decade, though there will be a limit to growth considering that investment in any new coal-powered plants has stalled. But that only makes the coal market tighter, pushing the energy source into an outperforming category.
Thermal coal, which is the variety used to generate power, has seen a 170 percent rise in price ince the end of 2021–most of those gains made following Russia’s invasion of Ukraine.
The German Dilemma
Germany is among the hardest hit by the growing energy crisis after effectively boxing itself into a corner with its energy policies. For decades, successive governments in Berlin have pursued a policy of maximising the country’s dependence on Russian oil and gas, and almost completely ditched nuclear energy with the final two functional reactors set to be turned off in 2022.
As a result, Germany has become heavily reliant on natural gas, with the fuel accounting for 25percent of the country’s total primary energy consumption.
Although Germany has substantial supplies of natural gas of its own that could be accessed by fracking, Berlin has banned the technology, meaning it has to import 97percent of its gas mainly from Russia, Netherlands and Norway.
In a worst-case scenario in which Russia stops all pipeline exports, Goldman Sachs’ Chief European Economist, Sven Jari Stehn and his team say, Euro area GDP growth is likely to fall by 2.2pp in 2022, with sizable impacts in Germany (-3.4pp) and Italy (-2.6pp).
Germany’s woes are partly excusable. The dramatic nuclear phase-out is as much part of the country’s Energiewende (energy transition) as the move towards a low-carbon economy.
Natural gas is cheap and reliable, produces only half as much emissions as coal, and is a critical input in many sectors. In Germany, 44percent of gas was used for heating buildings in 2020, while industrial processes consumed 28percent.
Gas is the best and cheapest feedstock for the manufacture of synthetic nitrogen fertilizer, of which Germany is a critical supplier. Gas is also used in refining, the production of chemicals, and many other types of manufacturing. All these are difficult, if not impossible, to completely replace with green energy anytime soon.
With a calamitous energy crisis unfolding, Germany will join the bandwagon of nations rolling back their climate goals by increasing its use of coal, which overtook wind to become the biggest input for electricity production globally in 2021.
Indeed, Germany is left with little choice than to burn lignite in its power plants—widely regarded as one of the dirtiest fossil fuels and extracted in vast open-pit mines that litter the German countryside.
The European Commission has already given its absolution to countries replacing Russian gas with coal and producing higher emissions as a result.
But coal is merely a stop-gap solution, and Germany must also be clear-eyed about its long-term energy future, a future without Russia’s gas.
Nuclear energy is out of the question considering that few, if any, European nations are as opposed to nuclear energy as Germany is. Back in February, German politicians vehemently denounced the EU’s attempt to label nuclear energy as sustainable.
By: Alex Kimani
Kimani reports for Oilprice.com
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.
