Europe Faces a Natural Gas Supply Challenge This Year

Europe faces a natural gas supply challenge this year as it needs a significant volume of gas to meet storage targets for next winter, potentially driving up prices for liquefied natural gas. Europe must import 10 million tons of LNG, about 10 percent more than in 2024, to cover projected demand. Its inventories are being eroded by cold weather, and supply has been squeezed since Russian pipeline deliveries through Ukraine ceased following the end of a transport agreement on January 1. Germany, for example, was reliant on Russia for more than half of its gas supplies before the invasion of Ukraine in 2022.

There is uncertainty about next year’s gas supply, and the UK’s current gas reserves have reached ‘concerningly low‘ levels. They could be depleted after a cold snap caused temperatures to drop sharply. The frigid weather spiked demand for gas-fired power plants, and further cold spells could lead to an energy crisis. Gas storage is down 26 percent compared to last year, leaving reserves at about ‘half full,’ which could cover less than a week of gas needs. The early arrival of winter had already slightly reduced gas storage levels by December.

Meanwhile, the UK has made significant strides in expanding wind and solar energy. In 2024, these renewable sources collectively produced more electricity than fossil fuels. Wind power alone contributed 84 terawatt hours (26 percent of the energy mix), and solar PV added 14 terawatt hours (4 percent). Together, they accounted for 30 percent of the country’s electricity, slightly surpassing natural gas, which produced 88 terawatt hours (28 percent), making it the most significant power source. However, as reliance on intermittent wind and solar energy grows, the UK had to import 11 percent of its electricity from fossil fuels in 2024, setting a new record. While wind and solar energy are cheaper than gas during favorable weather, their lower costs don’t account for the additional expense of backup power when conditions are unfavorable.

The UK government denied claims that the nation was close to having energy blackouts amid the cold weather and low wind-power generation. The UK Labor government pledged to reach net zero carbon in the UK’s power grid by 2030. However, Prime Minister Keir Starmer recently lowered the target to at least 95 percent ‘clean’ power by the decade’s end. The UK’s residential electricity prices rank among Europe’s highest, and other nations with high electricity prices, such as Germany and Denmark, also have high-solar and high-wind electricity grids and carbon taxes. The cost of power for industrial businesses in the UK has more than doubled, increasing 124 percent in just five years. Industrial electricity prices in the UK are about 50 percent more expensive than in Germany and France and four times as expensive as in the United States, which are crippling domestic manufacturers in the UK.

Starmer’s government recently increased its windfall profit tax on oil and gas to 38 percent, bringing the headline rate for UK producers to 78 percent, and he extended the tax until March 2030. The tax was introduced in May 2022 after Russia invaded Ukraine, when oil and gas prices soared. As a result, oil company Apache plans to exit the North Sea as the levy rendered operations in the country “uneconomic.” During last summer’s election campaign, Starmer’s Party promised to stop issuing North Sea licenses for new oil and gas exploration. President-elect Donald Trump called out the UK’s windfall profit tax on oil and gas producers in a social media post, stating, “The UK is making a very big mistake. Open Up the North Sea. Get rid of Windmills!”

President Trump is no fan of windmills, stating that they only exist due to subsidies, which he wants to eliminate in the United States. The Democrat-passed Inflation Reduction Act extended the production tax credit and the investment tax credit that “clean” technologies receive in the United States. According to the Wall Street Journal, federal tax credits can cover 50 percent of the cost of building an offshore wind facility and more than 80 percent of the cost of an onshore wind facility. Rising interest rates, inflation, and supply chain problems have made offshore wind uneconomic even with the subsidies, so developers are canceling projects. For example, Vineyard Offshore recently canceled Vineyard Wind 2 when Connecticut withdrew its support after developers sought to renegotiate for higher prices.

Europe’s LNG Supply Sources

The United States is the world’s leader in LNG exports, which are expected to increase by about 15 percent this year as Venture Global LNG Inc.’s Plaquemines and Cheniere Energy Inc.’s Corpus Christi expansion increase production. President Biden put a damper on U.S. LNG growth with his ‘pause’ on LNG license permits beginning in January 2024 and his Energy Department’s report that anti-LNG advocates can use in court challenges to Trump’s termination of the Biden LNG moratorium.

Russia is Europe’s second-biggest source of LNG. The Biden administration, however, imposed sanctions on two of its smaller facilities. Western sanctions delayed Russia’s Arctic LNG 2 project by two to three years, affecting key equipment and service supplies.

The supply situation should ease by 2030, when an additional 175 million tons of new LNG supply are expected, primarily from the United States and Qatar. Qatar used Biden’s “pause” on licenses to initiate expansion of LNG facilities there to secure world market share.

Conclusion

LNG is in demand as colder weather has hit the European continent, Russia’s pipeline supply has been further cut, and Ukraine has not renewed its transit pipeline agreement. The higher demand for LNG is likely to cause its price to increase, as well as Europe’s electricity prices. Cold weather has already lowered the UK’s gas storage levels, and with it, the possibility of electricity blackouts has been averted. The UK has gas resources in the North Sea. Still, its government prefers wind and solar power, which are not economical without heavy subsidies and are intermittent, forcing the UK to rely more on electricity imports when the weather is not conducive. While the United States is the world’s largest supplier of LNG, President Biden’s moratorium on permit licenses has caused slow progress in remedying national security and energy security issues for U.S. allies.