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Slump in gas prices far from fixing EU’s energy crisis without long-term LNG “road map”, Atlantic Council highlights

Whilst the recent drop in natural gas benchmark prices – reaching October 2021 levels – may have presented a sign of relief for policymakers and businesses across Europe, the EU’s energy challenges seem to be far from over. As highlighted by last month’s analysis by the Washington-based think tank, Atlantic Council, subsequent winters “could be even more challenging” as Europe will soon enter spring filling season with low inventory and tightened global liquified natural gas (LNG) market with spikes in demand in Asia.

To respond to the brewing, new phase of Europe’s energy crisis, the think-tank emphasised the need for a “concrete long-term road map for the role of natural gas in fuelling, heating, electricity and industrial needs”. The need for a commitment to a long-term approach was especially underlined in the context of securing and diversifying LNG supplies.

Whilst Qatar has “quickly” grown its European LNG portfolio in the past months – with new interest from countries like Slovakia and Czechia and an increase in imports to Poland – the Middle-Eastern supplier continues to be “overwhelmingly” oriented towards its Indo-Pacific customer base (representing almost 90 per cent of Doha’s LNG exports in 2020). Here, long-term commitments are essential for the EU to strengthen its commercial position and have a chance at competing with the Indo-Pacific region, the report highlighted. As it currently stands, only around 10 to 15 per cent of Qatar’s current natural gas production can be diverted to Europe. As insisted by senior Qatari government officials, increasing imports from new production projects such as the North Field expansion – can only materialise with fixed-destination, long-term contracts. Indeed, long-term commitments to reliance on fossil fuels could lead to a “carbon lock-in” and undermine the EU’s flagship climate commitments.

A similar theme of obstacles and challenges appears in the EU’s LNG imports from the United States. As recommended in the report: “US suppliers and EU importers must ensure that long-term contracts – necessary to incentivise gas investments – can be reconciled with long-term climate ambitions, including through provisions on destination flexibility, escalating emissions standards, and future hydrogen and bio-methane integration.”

In this context, the authors of the report reiterated that “policymakers on both sides of the Atlantic must make clear the role of gas in the green transformation as a critical transition fuel for coal-, oil-, and peat-dependent regions in Europe, North America and the developing world.”

It is clear that the EU’s dilemma over responding to the immediate crisis of energy supply and ensuring the continent’s economic and social stability – whilst tackling the climate crisis – is not going away any time soon. The Atlantic Council’s analysis provides another strong indication that the time to make a decision on the EU’s energy identity is rapidly running out, despite the long-awaited, optimistic sight of plummeting gas prices on the Dutch TFF.

Long-term commitments: the missing piece of an ‘overall’ successful EU energy strategy?

Our analysis last month concluded that the EU’s response to Putin’s energy warfare had “overall” been successful with its focus on policy tools strengthening diversification of supply, competitiveness and solidarity. However, measures such as the wholesale gas price cap, as well as the joint purchasing platform, present many inefficiencies in their ability to protect the’s bloc’s security of supply. For example, as argued by Alex Barnes, Visiting Research Fellow at the Oxford Institute for Energy Studies, the price cap will make it more difficult to balance supply and demand until more LNG supply becomes available.

Interestingly, the authors of the Atlantic Council report broadly share a similar perspective. Whilst the EU’s efforts to “attain alternative supplies, save energy and fill gas storage” are praised, they appear more sceptical towards joint purchasing of gas and the energy price cap.

The report highlighted that measures to maximise leverage in negotiating prices (for example, joint purchasing) ought to preserve market liberalisation fundamentally: “Ultimately, policymakers must understand that Europe’s gas crunch is a matter of supply. Ensuring that producers are incentivised to invest in bringing new supply to the market is a prerequisite for European consumers to be relieved of high prices.”

In terms of the price cap (prior to the final legislation), joining Alex Barnes and other experts, the report voiced further scepticism towards this measure, particularly regarding its insignificant impact on distorting market forces: “Under the proposal, even the skyrocketing prices from August 2022 would have been insufficient for enforcing the pricing mechanism. While this tool will guard the European consumers against catastrophic pricing scenarios, its impact on European energy prices is superficial.”

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