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The most remarkable year in energy

 

The year 2022 will go down as the annus mirabilis (remarkable year) in energy history. It has brought a tsunami of events and changes which fundamentally transformed the oil and gas markets. You would never think that so much can be packed in a year, yet it did. Events that rewired the traditional oil and gas flows, which caused the highest electricity and natural gas prices ever recorded by European statistics, which have shaken governments and economies and sent aftershocks to markets as far away as India and China. Russia lost its most lucrative market: Europe. Nord Stream was blown up in September 2022. Europe finally got its act together and said a hard “NO” to both Russian oil and gas and issued 11 (!) sanctions packages on Russia following its invasion of Ukraine on February 24, 2022, with the 12^th sanctions package currently under preparation.

 

Oil market

Global oil production in 2022 was 93.9 million barrels per day (Mb/d), still below pre-pandemic levels (95 Mb/d in 2019). The ranking of the top 10 producers continues to be dominated by the United States (17,7 Mb/d), Saudi Arabia (12 Mb/d) and Russia (11 Mb/d).

The top 10 global oil producers in 2022 were:

1. USA (17,7 Mb/d)
2. Saudi Arabia (12 Mb/d)
3. Russia (11 Mb/d)
4. Canada (5.6 Mb/d)
5. Iraq (4.5 Mb/d)
6. China (4.1 Mb/d)
7. UAE (4 Mb/d)
8. Iran (3.8 Mb/d)
9. Brazil (3.1 Mb/d)
10. Kuwait (3 Mb/d)

A comparison between regions shows Europe’s extreme weakness. As a region, Europe is the laggard with a meagre production of just 3 Mb/d, compared with 6.4 Mb/d (South America), 7.3 Mb/d (Africa), 7.3 Mb/d (Asia Pacific), 14 Mb/d (CIS or former Soviet area), 25.3 Mb/d (North America) and 30.7 Mb/d (Middle East). So, every day, the Middle East provides 1/3 of the global oil production while Europe provides just 3% of the world oil production.

Within Europe, Norway is the top oil, producer (with 1.9 Mb/d in 2022), followed by UK (778,000 b/d), and at a big distance by Italy (92,000 b/d), Romania and Denmark (each with only 65,000 b/d). These numbers clearly show Europe is a dwarf on the production side which is the root cause of its vulnerability. Total imports of crude oil to the EU amounted to 446.5 Mt in 2021. Most imports came from Russia (112.3 Mt) so 25% of total imports, followed by Norway (43.6 Mt equivalent to 9,7%), USA (37.4 Mt or 8.4%), Kazakhstan (35.7 Mt) and Libya (35.6 Mt) with 8% each.

Oil production in 2022

Source: Visual Capitalist (for graph), BP (for data)

 

Europe is the second largest crude oil importer after China and is the biggest products importer in the world (2021 and 2022 data). In 2022, Europe imported 10 Mb/day of crude and 4 Mb/day of petroleum products. See Table 1 (Oil trade in 2021-2022).

Table 1: Oil trade (2021 vs 2022)

Source: BP

 

Within the EU, there are only 21 countries producing petroleum products. In 2021, the biggest producer of petroleum products in the EU was Germany (94.4 Mtoe), followed by Italy (70.2 Mtoe), Netherlands (60.3 Mtoe) and Spain (59.3 Mtoe). Romania comes 10^th in the EU. Countries such as Estonia, Cyprus, Latvia, Luxembourg, Malta, Slovenia are not producers of petroleum products. See graph below.

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Source: Eurostat

 

 

To put things in context, EU’s consumption of oil and petroleum products in 2021 was 328 Mtoe, up from the pandemic-hit 310 Mtoe in 2020, but down from the peak of 409 Mtoe in 2004.

The most significant development ii the oil market in 2022 was the reshuffling of well-established traditional flows. The combination of tit-for-tat sanctions concerning Russian oil and petroleum products and the price ceiling have resulted into a drastic change of the market structure. Russia which until 2022 was the top crude supplier in Europe (31% in January 2022) is all but gone from the EU market (3% by March 2023). Following the oil embargo on Russian crude imports which went into effect on December 5, 2022, most of the Russian barrels have been replaced with American and Middle Eastern ones. Basically, the European Union is now the largest export market for American oil. In parallel, Russia’s seaborne crude exports all but disappeared from the European market. See graphs below.

India took the place of Europe in Russia’s crude exports, albeit at significant discounts in 2022 (up to 25-30 $/bbl from the prices the European market was fetching). These generous discounts are now gone, having plummeted to 4$/bbl. This happened to the extent the Russian crude started finding new markets in Asia, such as Pakistan which saw its first Urals-cargo arrive in the country in June 2023.^[1]

The Russian crude rejected by Europe went mainly to India, China and Turkey, but also to countries such as Morocco or even Saudi Arabia which imports Russian diesel for its domestic power generation (to the tune of 193,000 bbl/d in June 2023) to free up Saudi crude barrels for the much more lucrative European market.^[2]

Source: Kpler

Europe’s natural gas – a market transformed

Much more than in the oil market, the transformations in the natural gas market are quite astonishing. In parallel with the retreat of the once-dominant Russian gas from the EU market, a series of event and projects reached maturity and helped bring more non-Russian gas to the EU. The Interconnector Greece- Bulgaria (IGB) with an initial capacity of 3 Bcm/year (and extendable to 5 Bcm/year) is operational since October 2022. A new gas pipeline (Baltic Pipe) between Poland and Norway, with a capacity of 10 Bcm/year went in full operation in November 2022. In Germany, there are 3 new working Floating Storage and Regasification Units (FSRUs) and another onshore terminal for import of LNG under construction. For the first time, Estonia and Finland jointly leased and now operate an FSRU. There are mandatory gas storage obligations ahead of winter in place at EU level. In October, Europe’s underground gas storages (UGSs) reached an all-time high and are now 98% full, far exceeding the 90% target and achieving this ahead of the November 1 deadline. The EU platform for joint purchases of natural gas (AggregateEU) was operationalized in May 2023 and is now conducting its 3^rd tender. Going forward, at least 15% of the European gas storage filling obligation will have to be fulfilled through natural gas demand aggregation. The United States has become the number 1 supplier of LNG to Europe, with 2/3 of the US LNG now landing in Europe. Norway replaced Russia as the number one supplier on the European market. Netherlands stopped its natural gas production at Groningen – the longest producing gas field in Europe. Last, but not least, amidst all these changes is the EU’s surreal and overly ambitious plan to half its natural gas consumption by 2027. Next, we’ll zoom in on several of these events.

 

Germany’s LNG terminals

After it downplayed for decades the risks to energy security from relying too much on Russian gas, after completing the construction of Nord Stream I and II (two underwater gas pipelines, each carrying 55 Bcm/ year), after having paid €10 Billion for the construction of Nord Stream II alone, after explaining to everyone how this project is not at all geopolitical (but commercial only), Germany was left picking the pieces of its flawed energy policy once it literally blew up (both gas pipes were the object of sabotage in September 2022, with zero gas flowing through them now).

In record time, Germany mobilized to build a vital LNG importing infrastructure, from scratch. Three FSRUs are in operation at Wilhelmshaven, Brunsbuettel and Lubmin ports. See map below.

Germany’s new LNG importing infrastructure

 

Because the construction of land-based terminal is a lengthy project (3-4 years), Germany is beefing up its floating storage and regasification terminals as a short-term solution.

Wilhelmshaven, owned by Uniper and launched in December 2022, is Germany’s first FSRU.

Lubmin has an FSRU chartered by Deutsche ReGas which started receiving LNG in early 2023.

Brunsbuettel hosts an FSRU operated by RWE, which became operational in April 2023. However, the plan is to build a land-based terminal here at a cost of €1.3 billion. The European Commission already gave €40 million euro as a support measure for this project which will receive also state aid. The land-based LNG import terminal project could become operational in 2026.

For winter 2023/2024, additional FSRUs are planned at Lubin, Mukran and Stade, as follows^[3]:

• At Lubmin, Deutsche ReGas wants to add a second FSRU with a capacity of 7.5 Bcm.
• At Mukran, on Ruegen Island in the Baltic Sea, Deutsche ReGas wants to add two FSRUs with a 4 Bcm /year capacity for 10 years, for delivery to the mainland.
• At Stade, an inland port on the river Elbe, work is underway for a landing pier for a FSRU for this winter. There are plans to build a land-based terminal here as well by 2027.
• At Wilhelmshaven, another company – Tree Energy Solutions (TES) – will operate a second FSRU (Wilhelmshaven 2) for 5 years starting in late 2023.

 

US LNG exports to Europe

It is difficult to believe that the first shipment of US LNG arrived in Europe only in 2016. Yet, by 2022, Europe became the recipient of the lion’s share of US LNG exports. The volumes headed for Europe increased steadily: from 14.2 Bcm in 2019, 18.7 Bcm in 2020, 22.2 Bcm in 2021 and more than double the previous year (49 Bcm) in 2022.

American LNG exports by destination (2020-2022)

in billion cubic feet /day

Source: EIA

Netherlands’s closure of Groningen

As baffling as it may sound, in the middle of still high demand for gas, Netherlands stopped operations at the longest producing gas field in Europe starting October 1. Groningen is the biggest natural gas field in Europe. Put into production in the 1960s by Shell and Exxon, and largely considered the pillar of the North-West European gas market, it reached peak production at 88 Bcm in 1976. It was still producing 54 Bcm in 2013, but production plummeted to 4.6 Bcm in 2022. Due to low-magnitude earthquakes in the area, a political decision was taken by the Dutch government in 2012 to close down gas production. So, the closure is not for lack of the resource. There is still natural gas in the ground (some 450 Bcm).^[4] The Dutch government kept the site operational due to Russia’s invasion of Ukraine, but it plans to pass a law for the permanent demolishment of installations so that gas production cannot be resumed. While the policy of zero extraction is maintained, gas might be extracted temporarily over the coming winter in case of extreme cold, defined as a period when daytime temperatures are around -6.5 degrees Celsius for several consecutive days. The definitive closure of the Groningen gas field is scheduled for October 1, 2024, so it was not shut down for good yet.^[5]

 

Source: https://www.europeangashub.com

In any case, the situation is indicative of the challenges of moving away from hydrocarbons when the renewables are not yet capable of fully supplying societal and economical energy needs. It shows a failure of politicians to explain our society’s still significant dependence on fossil fuels. Shutting down a natural gas field that still has resource in it, at a time when Europe is struggling to bring more natural gas from elsewhere to Europe’s shores, shows that pursing the green agenda at the same time with giving up Russian gas on geopolitical grounds (which Europe definitely should) will be neither easy, nor devoid of problems and setbacks.

In conclusion, the world became more complicated in 2022. Geopolitics is back adding extra difficulties to a process that is already difficult enough – energy transition. Europe was reminded that security of supply is not a thing of the past. Consumers and governments experienced an unprecedented energy price spike: the price of natural gas on TTF reached a historic 340 €/ MWh. See graph below.

 

Natural gas prices in Europe (last 5 years, TTF)

Source: Tradingeconomics

 

The three separate developments on the natural gas markets we examined show that political will is key in energy policy. In Germany’s case, the lack of it made Germany sleepwalk into an economic trap, of which it is now making efforts to get out. In the case of the United States, it is the political will that allowed crude and LNG exports from the US to reach Europe which proved instrumental in Europe’s successful diversification away from Russian oil and gas in 2022-2023. In Netherlands’ case, the jury is still out. The country may very well succeed in securing natural gas imports from elsewhere, but it is nevertheless mindboggling to see one of the few countries in Europe that still possess natural gas reserves to be shutting down production in the middle of the “mother of all crisis”. How wise such a decision is will be shown by subsequent events. However, in the Eastern part of the continent, in a country such as Romania, this can only raise eyebrows and shrug shoulders. Netherlands’ decision comes at a time when the EU is trying to became less dependent on Russia, to boost European industry, to make it more competitive, to increase domestic production, including mining for critical raw materials. It shows that, even if the direction is for a net-zero future by 2050, the path to reach it will be different across the continent. As the sun sets on natural gas production in Netherlands, it is about to rise in Romania, where the FID was finally taken this year on developing Romania’s Black Sea gas reserves.

 

 

FOOTNOTES

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1. Syed Fazl-e-Haider, India Losing Its Steep Discount on Russian Crude Oil, in Eurasia Daily Monitor Volume: 20 Issue: 132, available at: https://jamestown.org/program/india-losing-its-steep-discount-on-russian-crude-oil/ ↑
2. Jack Dutton, Saudi Arabia imports record volumes of discounted Russian fuel oil in June , AI Monitor, 13 July 2023, available here.  ↑
3. Reuters, Germany builds up LNG import terminals, 18 October 2023, available at: https://www.reuters.com/business/energy/germany-builds-up-lng-import-terminals-2023-10-18/ ↑
4. S&P Global, “Netherlands rules out change to Groningen gas field policy despite high prices”, 16 September 2021, available here. ↑
5. DW, Netherlands closes Groningen gas field over quake fears, 22 September 2023, available here. ↑