McKinsey: Europe must reduce gas demand to make up for supply shortfall – Economic Post

McKinsey: Europe must reduce gas demand to make up for supply shortfall – Economic Post

Europe has succeeded in reducing its gas consumption more than the targets set last summer. This, combined with the mild winter and the faster filling of storage, has considerably reduced the impact of the energy crisis and avoided the worst… However, it seems that this is not enough: Europe could having to reduce its demand much more this year and in the future. coming years to compensate for the lack of natural gas supply through Russian gas pipelines in order to avoid shortages and balance the natural gas market.

Natural gas: First for the new EU energy platform

According to a report by McKinsey & Company, the European energy market faces many challenges. The report recognizes that the EU was able to compensate for the reduction in flows from Russia, reducing consumption by 57 billion m3.

With further reductions in demand and new sources of natural gas supply, Europe may be able to maintain the balance over the next few years, McKinsey analysts say. They estimate that it will have to reduce its consumption from 2022 levels by an additional 55 billion cubic meters in 2023.

Factors that could lead to a drop in supply in Europe include a recovery in Asian LNG demand after an unfavorable 2022, a complete shutdown of natural gas through pipelines and a normal winter compared to a milder than normal winter. habit of 2022/2023.

“In the coming years, Europe may need to maintain and intensify its efforts to reduce demand for natural gas in order to manage the supply shock of the ongoing war in Ukraine, which may require a set of difficult but achievable actions,” the McKinsey analysts wrote.

“However, while energy supply and demand in Europe are expected to balance out, uncertainty remains as price volatility and supply disruptions put all sectors of the economy at risk – and the Europe may have to prepare for these dangers”.

Reduction targets

According to data published a few days ago by Eurostat, between August 2022 and March 2023, the EU has achieved its natural gas consumption reduction target.

In particular, gas consumption in the EU decreased by 17.7% in the period from August 2022 to March 2023, compared to the average gas consumption for the same months between 2017 and 2022. The savings exceeded the 15% target set last summer.

This year alone, consumption was consistently below the 2017-2022 average for the respective months, with demand down 19% in January, 14.7% in February and 17.1% in March.

Conscious efforts to reduce demand, a milder winter and a slump in industrial demand helped Europe avoid a severe gas shortage that governments feared ahead of winter.

Going forward, Europe must continue its gas-saving measures, as demand in Asia may increase and the winter of 2023/2024 may not be as mild as the one just ended.

EU gas storage was 58% full on April 24 and has increased in recent weeks, according to data from Gas Infrastructure Europe.

European energy markets in crisis

As the report points out, before the invasion of Ukraine, Russia supplied almost a third of Europe’s natural gas. After the invasion, gas flows from Russia were more than halved, from 140 billion cubic meters (bcm) in 2021 to 65 bcm in 2022.

As Europe lost this volume of natural gas supply from Russia, liquefied natural gas (LNG) was purchased as a substitute, increasing LNG imports into Europe by 64 bcm from 2021 levels. .

This upheaval in the European energy market has driven energy prices up in 2022: natural gas prices peaked at $100 per million British thermal units (MMBtu), Brent reached $130 a barrel and that of coal peaked at $441 a ton.

As a result, Europe spent over €1 trillion more on oil, gas and coal in 2022 than in 2021, more than double the share of GDP spent on energy.

Although energy prices started to decline in the last quarter of 2022, the tight balance could continue, leading to higher prices, which in turn could force Europe’s energy spending to stay higher. above pre-war levels until at least 2025, which would put further pressure on Europe. energy market.

The common platform

The EU has just launched a first-of-its-kind process for European companies to register their gas purchase needs through the AggregateEU ​​mechanism to prepare for joint EU-wide gas markets, the first purchase agreements are expected before the summer.
“This is a key step for the EU to prepare for next winter by replenishing its gas storage in a coordinated and timely manner, using its collective market power to negotiate better prices with international suppliers,” the European Commission said on Tuesday.

The next moves

After the first call for tenders, the EU plans to organize more common markets, forcing governments to pool demand for the 15% of natural gas reserves stored for the winter. This target equates to around 13 billion cubic meters this year, or around 3% of total EU demand.

“The more participants we have, the more chances we have of finding attractive gas deals,” European Commission Vice-President Maros Sefcovic said last week. “Now is the time to take full advantage” of the new tool.

The first contracts

After the tender, he expects the first contracts with suppliers – from the United States to the Middle East and Africa – to be signed around June. A number of non-EU countries have also been invited to participate, including Ukraine.

However, there is considerable skepticism about how the new tool will work.

“If large buyers can negotiate a better price directly with sellers, why use the AggregateEU ​​mechanism?” Kim Talus, director of the Tulane Center for Energy Law, asks Bloomberg.

The aggregate demand obligation applies to EU member states, but is not binding on businesses. All contracts will be negotiated outside of Prisma European Capacity Platform GmbH, which manages the process.

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