The 19th century Scottish novelist Robert Louis Stevenson, author of such classics as Kidnapped , Treasure Island and The Strange Case of Dr Jekyll and Mr Hyde was an astute observer of the human condition.
The 19th century Scottish novelist Robert Louis Stevenson, author of such classics as Kidnapped, Treasure Island and The Strange Case of Dr Jekyll and Mr Hyde was an astute observer of the human condition. For example, he offered his own spin on the biblical admonition you reap what you sow observing that ‘sooner or later everyone sits down to a banquet of consequences’.
How those words resonate as we consider Covid-19 scenarios. There is no point blaming anyone for the pandemic itself. It happened and has had to be managed with no useful precedent for such a global outbreak. More interesting now as we enter the post-Covid era are the consequences of the strategies adopted by government and industry to avoid an economic crisis, plus the malaise in which the energy resource industry once again finds itself.
Most obviously no one seriously warned about the inevitable post-Covid tsunami of cash in the hands of consumers seeking spending outlets after two years of enforced constraint. This is seen to be threatening the course of economic recovery. The decision by governments to print money to get through the crisis laid the foundations for this post-Covid boom. The retail sector in developed economies is now facing frustrated consumer demand as manufacturers and service providers struggle to get back to normal. Labour and materials are both in short supply. Getting people back to work is one of the issues as a result of government financial support for the unintentionally unemployed during the worst of the pandemic. Even China, the producer on which so much of the world depends, has proved susceptible.
We should not get too diverted by the extreme case of the mayhem in the Britain of Boris Johnson although there is a lesson here. Motorists have been queuing to fill their petrol tanks, shortages of goods and services are more severe than elsewhere, and even the sacrosanct Christmas turkey-fest is under threat. This is an incontrovertible case of paying the price of a past decision, namely the 2016 referendum decision to leave the European Union. It was fuelled by a groundswell of whipped up anti-immigration emotion. Brits have found to their cost the wheels of their economy are heavily dependent upon foreign labour, notably lorry drivers from the Continent, now absent in large numbers, but also upon immigrant workers in other sectors such as poultry-producing establishments.
Most of these setbacks are likely temporary. Governments cannot be castigated too harshly for over-stimulating their economies in a good cause, if that has been the case. However, on the energy front, post-Covid is turning out to be a more culpable story. It has apparently been a big shock for people in numerous European countries to discover that there may not be enough natural gas to go around to meet likely demand this winter, and the price of fuel for heating, power, transport and factories is rising alarmingly.
It is tempting to pass off this disruption as an extreme example of the cyclical nature that has long blighted the resource industry. However, this time it is arguably a lot more complicated and likely to be so for a long time to come. The difference is the energy transition.
As has been extensively reported, the rocketing price of natural gas and threat of shortages in the main markets of Europe is due to a confluence of factors. The starting point would be that 2020 saw global gas demand decrease for the first time after 10 years of growth (-1.5% vs 2019), mainly driven by North America (-4.1%), Russia (-3.2%) and Europe (-2.6%), according to the recently published world energy review by Eni.
The short explanation since is that a surge in demand has put an impossible burden on the supply side. An unusually long and cold winter in North America and Eurasia is apparently partly to blame. According to a Reuters report, compared with five-year averages, energy inventories moved from large surpluses in 2020 through to neutral in the winter of 2020/21 to deficits by late 2021. In Europe, the volume of gas in storage started the winter of 2020/21 at a near-record level of 1069 Terawatt-hours (TWh) but ended at just 323 TWh. The winter drawdown of 2020/21 was the second-largest on record and left inventories at their lowest for three years. The US suffered a similar but less drastic depletion.
To meet this seasonal shortfall Russia as Europe’s chief supplier of natural gas might reasonably have been expected to come to the rescue. There are various explanations as to why Gazprom has been unable to provide extra on top of its contracted amount. The conspiratorially minded immediately pointed the finger at President Putin. It was thought that Russia’s reticence was a ploy to put pressure on Western European consumers to agree to the controversial Nord Stream 2 gas pipeline route. It may also have been seen as an opportunity to increase the price of gas with a view to quick profit. In this regard, Russia certainly has form. It teamed up with Saudi Arabia in early 2020 to increase their respective oil production. At the time the theory was that the two oil superpowers were engaged in a commercial war trying to sabotage the US shale business. A more innocent explanation may be that Russia was and is worried about serving its own domestic market following the last harsh winter. A strategy based on alienating the country’s principal customer that provides crucial revenue to the Russian economy does not make sense.
At one time the US might also have stepped in to help via LNG produced from its plentiful shale gas fields. The go ahead to allow export of US production was given some time ago. But historic low prices have left investors disenchanted so the increase in natural gas exports in response to the demand has been relatively modest. However you can be sure that the current massive price hike will renew interest in shale gas although issues remain with gas supply to LNG facilities for transport overseas.
The other problem that the current shortages has exposed is inadequate natural gas storage in Europe. Veteran analysts of the natural gas market like Jonathan Stern of the Oxford Institute for Energy Studies argues that this stems effectively from complacency. He was quoted recently as saying ‘All governments rejected the chance to do something about this during the 2000s, early 2010s, when there were lots of storage projects that needed funding. They decided to ‘leave it to the market’. Last year that was a great decision with huge supply, low demand and record-low prices; this year, not so good.’
The UK has been hit particularly hard because of the decision by Centrica in 2017 to close the big Rough gas storage facility without building any replacement. Rough accounted for 70% of the UK capacity. At the time the facility was ageing, gas was cheap and abundant, so it made no economic sense to reinvest. Talk about actions having consequences. The country can rely on domestic and Norwegian gas production for about 80% of its needs, but for the rest it now has to vie with countries around the world, including China, the biggest importer, with panic-buying sending prices through the roof.
What this natural gas turmoil underlines is the imperfection of the energy resources market. The geoscience and engineering service sector is all too familiar with the cyclical nature of oil and gas business. Over the years it has nearly bankrupt itself trying to come to terms with the roller coaster of E&P spending.
Time was when oil companies used to be predictable enough to invest when the price was right. By extension this should lead to a correction in the gas supply market. Yet the pattern has been disrupted by calls for decarbonization and the rush to renewables. i.e., the energy transition. This is something in which the big oil companies under pressure from stakeholders and the community at large are now actively participating with substantial investment dollars. This simply reinforces oil industry reluctance, evident for some years now, to commit money as freely to new E&P projects.
This underinvestment in hydrocarbons will of course have consequences if we make the safe assumption that the energy transition is a long-term process and that oil and gas products will be needed for decades to come before alternatives can fully if ever replace them. In this context the current natural gas crisis may be a precursor of things to come. Scarcity must surely mean substantially higher prices for these commodities in the future.
That prospect presents a huge challenge to popular thinking on climate change mitigation and the balm of government promises of a magically changed environment by 2050. The latter will doubtless be at full throttle at this month’s COP26 international meeting in Glasgow, UK.
There is little sign yet of disillusionment with measures to address global warming, but that’s because there haven’t been any of note. However looking ahead, will people in the developed world enjoying a comfortable lifestyle tolerate a steep rise in their cost of living in the name of climate change mitigation? That surely is a potential issue in the years to come. Governments could end up having to seriously subsidize fossil fuels in order to avoid the wrath of their electorates. There is nothing new about that if a new International Monetary Fund study is to be believed. It claims that global fossil fuel subsidies amounted to $5.6 trillion in 2020, 70% of which is accounted for in ‘under-charging’ for the associated environmental costs’
As for humanity as a whole, there are many voices already – and they will be heard in Glasgow – arguing that the energy transition will simply worsen the plight of less well-off nations already suffering from shameful energy poverty.
‘The difference is the energy transition’
‘There is little sign yet of disillusionment with measures to address global warming’
