The European Union (EU) target for an energy transition and energy independence is 2027. EU just-in-time fossil fuel substitutes from countries other than Russia has got liquefied natural gas (LNG) and oil exporters and importers euphoric. These latter stakeholders are in for a big surprise. The EU REPowerEU strategy resulted in gas-fired power demand peaking in 2023, with an overall gas consumption drop by 29% to 52% by 2030 or, at the very least, no LNG import growth. Somber news for oil exporters to the old Continent too, the EU electric vehicle sales growth appears to be heading for 50% of the total vehicle market by 2025, meaning EU peak oil is not far off.
All of this is happening against a global historic backdrop of 2023 marking the first time ever that clean tech investments are greater than those of the fossil fuel sector.
European Union energy consumption and imports
The EU accounts for 12.5% of global energy consumption. Buildings, transport and industry make up 75% of EU energy uses.
Continental Europe and the U.K have not been “blessed” with ample oil and gas resources. Domestic EU oil and gas production accommodates 42% of EU energy demand. Germany has been relying on energy imports to the tune of 63.7%.
One third of the pre-war imports came from Russia.
Of total EU energy use, the petroleum portion was up until the war 34.5%; electricity 23.2%; natural gas 21.9%; renewables 14%; and nuclear 10%. Oil consumption has been declining, largely displaced by natural gas. Renewables are on the uptake, while coal is declining.
Russian dependency on oil and gas exports
For Russia, 30% of Russia’s GDP and 40% of its budget had been dependent on fossil fuel exports.
Prior to the Russian invasion of Ukraine, in 2021, EU Russian gas and oil represented 48% and 21% respectively of EU imports of these fuels.
Since the Russian invasion of Ukraine, EU imports from Russia declined to 12.9% for gas and 9.9% for oil.
Pre-war glut of oil and gas supplies and U.S. shale bankruptcies
Up until the war, there was an oversupply of oil resulting in U.S. oil stored in ships due to a lack of onshore storage capacity.
Ditto for LNG being stored in ships before the war. LNG supply exceeded demand, gas prices were low and U.S. LNG land gas storage sites were full, complete with LNG stored from the previous year. Goldman Sachs had predicted that storage capacity would reach its limit in October 2020.
For 2020, the cumulative North American oil and gas industry debt was around US$100B. The U.S. shale industry, on average, had more debts than revenues.
Together, the oversupply of gas and oil led to a proliferation of U.S. shale industry bankruptcies.
The price of U.S. Permian natural gas reached negative values in mid-2019, while orders for LNG were cancelled. Reserve-based lending, which entails a bank lending money to reflect the value of a given firm’s oil or gas in the ground, amounted to $1B in write-offs by banks for the shale industry at-large. Contributing to the borrowing problem, shale companies had a dreadful record on overestimating reserves to ease access to lending.
On May 31, 2020, the U.S. energy sector had 225 cases pending in federal bankruptcy courts. The shale industry had accumulated US$300 billion in losses.
Exxon invested US$41 billion investment in the shale gas company XTO a decade ago. The company was dropped from the Dow Industrial Average in August 2020.
Chesapeake Energy, once the second largest U.S. shale gas stakeholder after Exxon, filed for bankruptcy in 2020.
Halliburtan, one of the largest shale gas firms, laid off 3000 employees.
Indeed, with U.S. shale bankruptcies in the oil and gas sectors spiraling, it had become common practice for such firms to abandon wells and pay their executives generous retention bonuses to take over the new companies that had cropped up from the bankruptcies.
This is the backdrop to the European search for LNG substitutes for Russian gas coming to the rescue of a moribund U.S. LNG industry.
Expanding LNG export and import capacity
This rapid shrinking of Russian imports was compensated by a steep hike in EU imports of U.S. LNG, climbing from the pre-war level of 24%, to 54% in 2022.
This catapulted the U.S. to become the world’s largest LNG exporter. Plans are now underway to double U.S. LNG export capacity. At this moment, around 20 new LNG terminals are planned.
To feed the new U.S. LNG terminals, fossil fuel firms are seeking approvals for over 4,600 kilometres of pipelines to transfer shale gas to the terminals. These potential pipeline projects would deliver 490 billion cubic metres of gas per year, about half of the amount of gas consumed in the U.S. in 2022.
Ironically, though the EU has banned fracking, the just-in-time EU gas demand has been a lifesaver for the previously bankruptcy plagued U.S. fracking sector.
A stumbling block had been that the EU reached 95% of their gas storage capacity by November 2022, meaning the EU was unprepared for importing gas from elsewhere.
This did not pose a problem for very long.
You can always count on exporters and importers alike to come up with solutions for fast-tracking fossil fuel consumption.
The LNG industry, like the fossil fuel sector at-large, placed their bets on new demand and ascending prices. There are no models for a short-term spike in demand, followed by a rapid descent, as per EU plan for a green transition and energy independence by 2027. (See article segments on the EU transition, one on gas, the other on transport.)
There are extraordinary economic and environmental disadvantages of there being absolutely no such models.
To accommodate the LNG imports, the EU is building infrastructure to double gas import capacity. Eight new LNG terminals have been approved and 38 are pending.
The German “short term” LNG import solution consists of plans for 6 floating terminals, one of which is already operating. Three onshore terminals may be in the works too.
This poses a conundrum as LNG import contracts typically require contracts for up to 40 years. The short-term “solutions” could lock in the EU for LNG imports for decades to come.
Neither the fossil fuel suppliers, nor users, have demonstrated they are capable of conceiving short-term, interim, plans.
The LNG supply chain having bloated their LNG export capacity, the EU having bloated its import capacity, the LNG exporters and importers are headed towards colossal, stranded gas assets and contract failures.
EU LNG imports will increase emissions
Huge amounts of energy are required to compress, chill and convert natural gas to a liquid and then ship it. The gas must be chilled to -160°C to shrink it to 600 times less volume. This problem is compounded with the “boiling-off” evaporation of 0.07% to 0.15% from LNG tankers, on average, per day. Together these factors translate into piped gas having 70 times lower CO2 than LNG.
Upstream, LNG production and transportation generates 10 times more carbon than pipeline gas.
At both the LNG export and import ends of intertwined networks, from shale gas extraction to consumption, colossal methane emissions are the norm, 70% underestimated according to the International Energy Agency.
Should all Russian pre-war gas imports be substituted with LNG imports, there would be an additional 35 million tonnes of CO2 compared to 2021 levels.
Middle East states, Africa and Norway have also benefitted from the “new” LNG opportunities to accommodate EU demand.
Cumulatively, LNG transport increased 65% for the first nine months of 2022, compared to 2021.
Norway’s state-owned Equinor, to respond to newfound LNG export opportunities to Europe, succeeded in acquiring government approval for both extending the life of the Hammerfest LNG facility to 2040 to produce an additional 60 billion cubic metres of natural gas. This would increase Hammerfest LNG energy consumption by 350 MW by 2030.
Hammerfest LNG is Europe’s largest LNG plant and Norway’s largest emitter of CO2.
Despite this fact, Hammerfest LNG expanded production and lifespan has been billed as a good news story by the Norwegian government, highlighting the avoidance of 350,000 tonnes of CO2 per year, supposedly equivalent to 90% of Hammerfest LNG current emissions.
The bottom line is that new LNG imports could result in 950 million tonnes of CO2 or 32% of the EU total of CO2 tonnes in 2019.
EU green transition by 2027: Gas
In 2021, the 27 EU countries gas consumption portrait consisted of 31.4% for power and heating generation; 24% for households; services 10.6%; industry 22.6%; and other uses 11.4%.
The 2021 European Green Deal Investment Plan, aka Fit for 55, calls for a tripling of solar and wind energy capacity and a decrease gas consumption by 30% by 2030. In March 2022, the target year was modified to 2027.
Should the REPowerEU target of 45% renewables by 2030 be reached, there would decrease in Russian imports by two-thirds. In September 2023, the EU Parliament approved a 42% renewables target by 2030, while encouraging member states to aim for 45%.
Much due to the war in Ukraine and related preoccupations over energy security, the International Energy Agency (IEA) has increased its forecast for new renewables capacity in Europe by 40%. The IEA latest estimate entails a steep hike in annual solar and wind capacity in Germany, Spain and Ireland, reaching 40% in 2024.
Solar Power Europe has predicted that 23 European countries will achieve their 2030 renewables goal 3 years early, in 2027.
These developments set the stage for European gas-fired power demand to peak in 2023, dropping 20% compared to 2022. The Institute for Energy Economics and Financial Analysis had predicted EU overall gas consumption would fall 29-52% by 2030.
In the interim, in May 2023, the European Council set a 15% voluntary target for reducing gas demand for the period of April 1, 2023 to March 31, 2024. Amazingly, this is aligns with a trend already established, the EU having slashed gas demand in winter 2022 by 18%.
The black hole in REPowerEU ambitions are a lack of details on how the EU will drastically reduce fossil fuel requirements within a matter of a few years.
On the other hand, proportionately, clean tech is more prominent in the EU than China, though China is light years ahead in absolute scales. The EU has the capability of being model for an expeditious energy transition.
Apart from the industrial sectors for which energy conversion is loaded with complexities, an accelerated EU green transition to drastically reduce gas use is not only possible, but also probable with the right policies and programs to back it up.
EU green transition: Electric vehicles 50% EU sales by 2025
In the transportation sector, recent vehicle sales trends are such that 2023 European electric vehicle (EV) sales attained 23% of market share up to May 2023, and fully electric vehicles sales climbed 67% year over year.
Accordingly, European EV sales as a percentage of total vehicle sales may reach 50% as early as 2025. In June 2022, the EU Parliament stiffened vehicle emission (WLTP) standards to cut average fleet emissions by 15% by 2025, relative to 2021 levels.
This is bad news for all oil exporting countries since 50% of European oil imports, up until recently, served road transportation. As a matter of fact, 50% of oil consumption linked to road transport is a general rule of thumb among all developed countries.
Private sector enhanced support
Implementing the green economy transition requires that the private sector play ball.
The principal tool for reducing private sector emissions, is the the cap and trade system regulating the total emissions that could be emitted by businesses, the European Trading Scheme (ETS). The ETS permits companies to buy and trade emission allowances. Since the ETS gets incrementally more stringent over time, the ETS tool can be used as a reset for more demanding caps.
Complementing the ETS, the EU has established green standards for evaluating listed firms, banks, insurance companies and other large companies by way of the Corporate Sustainability Reporting Directive (CSRD) which will provide clear measurements of environmental and social performance of corporations, thus making them more accountable. The standards will reflect EU policies, an important consideration in light of the EU accelerated green economy transition. The CSRD will integrate international models too.
The intention is for the CSRD to be a catalyst for improved green goals and less greenwashing.
Since the CSRD applies to both to domestic and non-EU based companies operating in the EU, the world will finally have an alternative to the fuzzy ESG. The new rules will become effective in the 2024 financial year.
Backdrop: Global clean tech uptake spikes
According to the IEA report Energy Investment in 2023, for the first time ever, investments in clean tech, US$1.7 trillion, will surpass those of the fossil fuel sector, US$1 trillion.
The IEA anticipates 2023 global renewables capacity additions will escalate to 440 gigawatts (GW). By 2024 total renewables capacity will rise to 4,500 GW, equal to total power generation of U.S. and China combined.
This translates into renewables capacity augmentations to climb by a third in 2023, taking 90% of the power market.
Solar will equal two-thirds of the surge with spectacular average daily investments of US$1 billion, with average new capacity climbing 1 GW per day.
Reflecting extraordinary ascending solar market demand, solar manufacturing capacity will double by 2024 to 1000 GW, China will experience the greatest expansion followed by the U.S. and India.
Installations of wind power in 2023 will jump by 70%, year over year.
On transportation, EV demand will increase by one-third in 2023 relative to 2022, doubling since 2021 for a total of US$130 billion.
Even when taking into account that growth in energy investments is partially due to higher costs, the increases in clean tech investments, since 2021, have been outpacing those of fossil fuel investments by three-to-one.
All factors considered, the IEA predicts demand for all fossil fuels will peak by 2030.
The takeaway
Short- and long-term EU fossil fuel import substitutes from Russian sources plans are out of sync.
The EU renewables, EV and other clean tech developments in addition to the EU determination to become energy independent by 2027, will contribute more nails in the coffin for peak gas and oil to occur before 2030.
No doubt, the global momentum favouring clean tech over fossil fuel investments will strengthen EU chances for a successful energy transition.
Consequently, the LNG export to EU boom will be short lived, renewables, heat pumps and energy efficiency playing major roles in making this happen.
The EU LNG terminals and distribution infrastructure are being built for long term solutions, though this is not necessary.
The EU oil imports have nowhere to go but to go down.
As well, the ETS and CSRD duo together constitute a gamechanger for private sector participation in the EU green transition.
To sum up, the flurry of activity to fill the war-related EU fossil fuel gap with alternative fuel sources are based on an EU energy transition never happening.
Nevertheless, the fossil fuel industry continues to believe it can control the narrative.
With their trillions in profits, largely attributable to the war in Ukraine, the oil and gas industry has massive carbon bombs in the planning stages. The sector is unprepared for the new era of changing markets, public opinion and government actions.
The fossil fuel sector is headed towards gargantuan stranded assets.
In this regard, the EU is playing a major global leadership role.
