Heading into last winter, Europe was in a panic that a potential energy shortage because of the Russian war could leave millions without heat or electricity. But thanks to a mild winter, EU policies reducing energy consumption, continued gas shipments from Russia, and new sources of imported LNG, gas-storage facilities were replenished and the forecasted energy crisis was averted.
Europe might not get so lucky again this winter. In November 2022, the International Energy Agency (IEA) issued a chilling report warning of the high risk of a European energy crisis for the winter of 2023-2024. They said that if Russian gas shipments to Europe further decreased and China’s demand for gas increased, Europe might not be able to fill gas storage sites adequately before winter.
An Increasingly Volatile Context
By the end of 2022, the EU had managed to reduce Russian gas to 9% of its imports, gas from other suppliers had increased to 50% (compared to 40% in 2021) and LNG imported by sea doubled from the previous year. The situation appeared promising at the beginning of autumn as Europe’s gas storage facilities were 97% full on October 9th. But the following day, the IEA issued another warning to European nations not to get complacent. It said: “While gas prices decreased in the first three quarters of 2023, uncertainty and risks remain for the coming winter in the Northern Hemisphere. Steep demand reductions in Europe and some Asian markets helped reduce strains, but supplies remain tight. The increase in LNG supply was not enough to offset the sharp declines in deliveries of pipeline gas from Russia to Europe. As such, the risk of price volatility, particularly in the event of a cold winter, is cause for concern. “
Indeed, the energy market has shown its volatility as prices went up following strikes at Chevron’s gas facilities in Australia and again when a leak suspected of being caused by sabotage shut down a pipeline between Finland and Estonia. But the event that will most likely have the largest impact on Europe’s (and the world’s) energy supplies and prices this winter is the attack on Israel by Hamas on October 7th.
Israel itself has offshore gas resources and recently asked Chevron to stop production at the Tamar field because of the conflict. While this will result in gas tankers being diverted to Israel, the bigger question is what will happen across the region as the conflict appears to be escalating – particularly as Israel and Palestine point fingers as to who was responsible for the rocket that killed hundreds at a hospital in Gaza City.
Richard Bronze, co-founder of Energy Aspects, says, “The market is watching very closely, much more because of the potential for spillover and the risks of what either a wider conflict or a shift in regional diplomacy could have for energy supplies.” As a result of this burgeoning conflict, Europe might have to scramble once again to find alternative LNG supplies, particularly if relations with Algeria, one of Europe’s main suppliers, sours. Luckily, there are some other promising projects in Africa coming online that could provide some solutions.
Algeria’s Leading Role
With the continent’s largest reserves, the African Energy Chamber says that 80% of African gas will come from Algeria, Egypt, and Nigeria. Algeria has the continent’s highest export capacity of 29.3 million tpy and supplies Europe through the Medgaz pipeline to Spain and the TransMed pipeline to Italy via Tunisia. Last year, Algeria became Italy’s biggest gas supplier. Toufik Hakkar, Sonatrach’s CEO, explains that “Europe is the traditional market for Algeria” and that Algeria delivered over 4bcm of natural gas to Europe on a spot basis in 2022. But geopolitical changes and pipeline issues could threaten this supply.
Sonatrach’s CEO also says that because of increased European demand, it has fast-tracked the development of gas discoveries and expanded the Medgaz pipeline. But in November 2022, Algeria shut down the Maghreb-Europe pipeline (GME), the country’s largest pipeline with Spain via Morocco, apparently because of a diplomatic fallout and rivalry with Morocco.
Regardless, Algeria remains an important EU supplier, but this could be threatened if the escalating conflict between Hamas and Israel continues to draw in other countries as Algeria has long been a supporter of the Palestinian cause. In this scenario, the EU may have to look further south for new suppliers.
Promising African Projects
Discoveries of proven natural gas reserves in 2010 of approximately 180 trillion cubic feet (tcf) in Mozambique place it third in Africa after Nigeria and Algeria and 14th in the world. These discoveries have attracted major investments from the world’s largest energy companies and the attention of leaders from Europe and across the globe.
The Coral South FLNG project, operated by Italian Eni, was the first to begin production. It sent its first shipment to Europe in November 2022 and has generated $34 million in revenues for Mozambique as of May 2023. The offshore platform is the smaller of the planned projects sitting on an estimated 16 tcf and a production capacity of 3.37 MTPA (million tonnes per year).
Mozambique’s largest onshore project, the Mozambique LNG Project operated by a consortium of Asian (India, Thailand, Japan) and European (France) energy companies, together with Mozambique’s national company ENH, has been on standby since April 2021 when the project leaders declared force majeure due to a violent conflict in the region. With the security situation progressively improving and discussions between major stakeholders gaining momentum, it appears that the project may soon resume operations. Considering that the Mozambique LNG project sits on about 75 tcf of recoverable gas with an initial expected production rate of 13,12 MTPA, this could become a large supply source for Europe.
Two other smaller, but promising, projects (one in Congo, the other in the waters between Senegal and Mauritania) have not quite yet reached production, but should soon begin exporting. Eni’s floating LNG project, the Marine XII FLNG in Congo, sits above 6.99 tcf and hopes to begin shipments by the end of the year and reach exports of 3 MTPA by 2025.
In a rare example of cooperation between two countries, The Grand Tortue Ahmeyim (GTA) gas field development project sits offshore in the waters between Mauritania and Senegal with each country agreeing to a 50/50 share of revenues. Operated by BP, the offshore project faced significant delays because of the pandemic but is expected to begin production at the beginning of 2024. The project has an estimated reserve of 15 tcf and an initial capacity of 2.5 MTPA that will be used domestically and exported internationally by tankers.
Getting Through This Winter
Energy markets are inherently volatile and Russia’s invasion of Ukraine has demonstrated how gas can be weaponized and used to sanction countries’ geopolitical positions. It is yet to be seen what impact the Israeli/Hamas conflict will have on energy markets this winter and if commodities will again be used as a “soft coercion” instrument, but it has already highlighted the fragility of international gas supplies. And while the impending, promising gas projects in sub-Saharan Africa might not be able to help Europe out of a tight energy situation this coming winter, they might be the key to avoiding such a precarious position in the next few years.