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European gas crisis and frequent blackouts in Bangladesh and India and how they are linked

By Kazuya Hiruta, Misa Hama, Konatsu Ochi

In an attempt to mitigate the energy crisis, Europe began to compete for LNG with the East – and added to its problems.

Asia had to turn off electricity without gas and increasingly rely on coal periodically, writes Japanese Nihon Keizai.

“They prefer to leave our market but leave with losses.”

According to the Interfax news agency, in late October, Vladimir Putin sarcastically commented on the actions of Western countries to distance themselves from Moscow in the energy sector.

Read also: Check out our coverage on the new multipolar world order

Although Europe continues to buy Russian gas after the start of the special military operation in Ukraine, it has stated its desire to abandon imports as soon as possible (German Finance Minister Christian Lindner).

Coal has become the only option for many. (Photo internet reproduction)
Coal has become the only option for many. (Photo internet reproduction)

However, the reality is that, like it or not, the Kremlin restricts supplies.

In the summer, it significantly reduced exports to Europe to put pressure on the EU, which persisted at the beginning of the special operation.

According to Refinitiv, in October of this year, Russia sent about 600 thousand tons of gas to the region through the main pipelines, which is 90% less than a year ago.

The real crisis will come next winter.

The lack of gas affected the results of the companies’ activities: the most significant European chemical concern BASF (Germany), reported a decrease in net profit by 27% in the period from July to September 2022.

It was forced to buy gas on the spot market to replace the Russian one, and their prices are higher, so in January-September, BASF spent EUR2.2 billion more than last year.

Martin Brudermüller, Chairman of the company’s Board of Directors, is concerned about the crisis: “We need to change the structure of our costs as soon as possible.”

As a countermeasure, EU states are increasing imports of liquefied natural gas (LNG) from the US and other countries.

From January to October this year, Europe as a whole saw an increase of 60% compared to the same period of the previous year.

As a result, gas reserves at the end of October exceeded 90% of the storage capacity. However, their successful build-up this year is mainly due to the impact of continued supplies from Moscow.

Next year, it will be necessary to ensure sufficient reserves of blue fuel to meet winter demand without considering the bulk of Russian production, making preparing for the season more complex than this year.

LNG imports have already reached a level of ten million tons per month, which is considered close to the maximum.

To further increase supplies, Berlin will build a new receiving terminal; other significant countries will also contribute to expanding capacity.

However, Europe’s overall LNG reception capacity will increase by only 18 million tonnes next year, given the availability factor and actual performance.

Initially, Russian gas supplies amounted to more than 100 million tons, and there is no capacity to cover such a volume.

LNG has become prohibitively expensive for many Asian countries. (Photo internet reproduction)
LNG has become prohibitively expensive for many Asian countries. (Photo internet reproduction)

If Europe fails to provide the gas it needs, it will have no choice but to reduce its energy use.

The EU has set a target to reduce the consumption of blue fuel by 15% from August this year to March 2023, compared with the average level of the previous five years.

Meanwhile, the degree of savings is highly dependent on weather and prices, so the prospects are unclear.

Yutaka Shirakawa, a spokeswoman for japan’s National Petroleum, Gas and Metals Corporation (JOGMEC), said that if gas consumption fell by only 7%, then “gas reserves will drop to almost zero by March 2024.”

Germany, which is mainly dependent on Russian fuel, is in an even more difficult position.

According to some estimates, it will not be able to ensure the occupancy of storage facilities, even if it cuts consumption by 10%.

Since the risks associated with reserves remain, there are no prospects for reducing the cost of blue fuel in Europe.

At the end of October, the base price of Dutch TTF futures for January 2023 was about 130 euros per megawatt-hour.

Futures for July 2023, relating to the summer season of low demand, and for January 2024 are more expensive than contracts for December of this year – about EUR120.

The current TTF is 60-70% higher than a year ago, and prices are unlikely to fall in the spring, continuing to pressure European businesses and consumers.

In October, the EU agreed on emergency measures in response to a sharp rise in energy prices to mitigate the damage to the economy.

In addition to plans to impose restrictions on gas prices for electricity generation introduced in Spain and Portugal, measures are being considered to control the change in the cost of TTF.

But price regulation will lead to a deterioration in the financial situation of the region’s countries.

Germany plans to pour EUR200 billion into this program, and it cannot be ruled out that if the problem persists, additional fiscal stimulus will be required.

As the European Central Bank (ECB) continues to raise interest rates sharply, some note that despite the German budget surplus, “market confidence could falter if fiscal discipline weakens,” said Mana Nakazora of BNP Paribas Securities.

THE HIGH COST OF LNG IN ASIA AND CONCERNS ABOUT COAL

There are growing signs that LNG prices in Asia will remain high for a long time due to competition with Europe.

The spot price of LNG in the East is now hovering around US$30 per million BTU (British Thermal Units), well below the August peak, but it is still more than three times the average cost over the past five years.

There is no downward trend.

Frequent blackouts in Bangladesh. (Photo internet reproduction)
Frequent blackouts in Bangladesh. (Photo internet reproduction)

In the futures market, the price for the year ahead (as of November 2023) is about US$37, which is higher than the current level.

While rising costs could lead to higher prices for electricity generation in Japan and South Korea, which consume it extensively, emerging economies will be hit harder.

According to research firm Kepler, Pakistan’s LNG imports in the first nine months of 2022 decreased by 20% compared to last year and amounted to 5.1 million tonnes.

India’s purchases decreased by 16% and Bangladesh’s by 8%.

“Given the foreign currency available to buy fuel, our country cannot afford to import LNG.”

Pakistani Prime Minister Shahbaz Sharif announced this during an energy conference in early July.

As of September, Bangladesh’s foreign exchange reserves stood at US$36.4 billion, down 24% from the peak recorded in August 2021.

As LNG traders say, suppliers are hesitant to sell because of concerns about future solvency.

According to the International Energy Agency (IEA), in 2019, gas accounted for 46% of electricity generation in Pakistan and 81% in Bangladesh.

Except for India, where the share of coal is large, the reduction in imports of blue fuel directly affects the electric power industry.

People’s lives are enormously impacted. In Bangladesh, problems with the power grid worsened in October: on some days, outages were observed in more than 80% of the country.

“We were forced to stop selling our products because our refrigeration units were not working due to a lack of electricity,” a Sri Lankan food company spokesman said, upset.

In this country, a sharp drop in foreign exchange reserves due to a tourism slump caused by the novel coronavirus pandemic has been exacerbated by skyrocketing prices for fuel and other market commodities, leading to power cuts and record inflation.

The consumer price index of Colombo in September increased by 69.8% compared with the previous year.

In July, long gasoline and diesel fuel queues formed at gas stations. Some residents said they spent five days in line.

In August, the Sri Lankan government introduced a rationing system with a weekly limit of refueling. Still, it is difficult to solve the problem of supply shortages, and civilian lives continue to deteriorate.

Gas shortages and rising prices have led to an increase in demand for relatively cheap coal.

According to the IEA, gas consumption to produce electricity in India, which initially relied on coal, fell by almost 30% between January and August.

Coal-fired power plants seem to have filled much of the gap. In Pakistan, electricity production from this type of fuel increased fivefold in 2022.

Coal, on which dependence is growing, is also alarming.

Gazprom. More powerful than expected. (Photo internet reproduction)
Gazprom. More powerful than expected. (Photo internet reproduction)

In September 2021, at several power plants in India, the resource reserves were only enough for a few days since energy companies did not have time to make purchases.

This May, the country has repeatedly observed a shortage of coal. In some areas, electricity was cut off due to increased demand caused by the abnormal heat.

In China, the restriction of coal production due to environmental measures in the fall of 2021 caused an energy crisis.

This year, the government began to increase coal and gas production, focusing on stable supplies.

If demand in China recovers, it will be more difficult for developing Asian countries with low purchasing power to import fuel.

IN THE US, EXPENSIVE GASOLINE REDUCES CONSUMPTION

There is a growing concern in the US that high gasoline prices could hurt consumption.

According to the American Automobile Association (AAA), the price of regular gasoline at the end of October was US$ 3.76 per gallon.

Due to the Ukrainian crisis in June, the cost reached an all-time high of just over five dollars.

And while there’s a lull now, prices are still about 10% higher than they were a year ago.
Americans began to buy cheaper canned food rather than fresh food.

This is noted in the US Federal Reserve economic report published in October. Sellers complain that rising food and gasoline prices are forcing people to save.

The University of Michigan Consumer Sentiment Index for October was 59.9. This is lower than in the same month last year (71.7).

It is inversely dependent on oil prices, which are directly related to the cost of gasoline.
At the same time, oil production in the United States is growing slowly.

This is partly due to pressure from Wall Street investors, as shale companies tend to favor dividends and equities over investments in higher production.

Shale giant Pioneer Natural Resources, which released its results for the period from July to September 2022, showed that during the same time, it spent about US$1.9 billion to return funds to shareholders.

The company’s free funds amounted to US41.7 billion. In addition, in July-September, the company made a share repurchase for US$500 million.

CEO Scott Sheffield said at a briefing for analysts: “The dividend yield will reach 10%. For the whole year, we will pay shareholders US$7.5 billion.”

According to forecasts of the US Energy Information Administration, oil production in 2022 will be 11.7 million barrels per day, and the record high of 2019 (12.2 million barrels per day) will be beaten in 2023 (12.4 million barrels).

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