December 2021
For months, Europe has been gripped by rising energy prices, specifically rising natural gas prices, due to constrained natural gas supply, and it is now facing a full-on crisis.

The average wholesale price in Germany this October was US$158.05/MWh, four times higher than the price recorded in October 2020 US$38.49/MWh. The trend of rising wholesale prices seen in recent months continued in France, where prices were even higher. In the UK, September wholesale prices reached almost US$266.28/MWh, up four-fold from a year before. Italian wholesale prices exceeded US$169.96/MWh in October, and in early October, Spanish wholesale prices reached an astonishing US$244.74/MWh.

How are such sky-high prices even possible, and what’s causing the relentless rise of European electricity prices?

Low Gas Stockpiles

To understand the European supply crisis, it’s worth looking first at the global energy mix landscape. As nations around the world pledge to reduce emissions, coal has (in most places) begun to fade from the picture, with natural gas stepping in to fill the gap. During the initial pandemic lockdowns, global energy demand fell significantly, and as a consequence, natural gas prices decreased. However, since lockdowns began to ease in the first half of 2021, energy demand has risen significantly, and supply has struggled to keep pace.

Natural gas prices are normally higher in Asia, which means most gas importers prioritise Asian markets over European ones. This typically isn’t an issue; Europe is working to decarbonise, and has been trying to reduce its use of natural gas. European nations tend to opportunistically stockpile gas reserves when prices are low for use in peaker plants (which are turned on at times when grid demand is high).

However, as Asian demand has skyrocketed over the past several months, global natural gas supply has become extremely constrained, and Europe has been unable to replenish its natural gas stockpiles. As winter with its peak electricity demand looms, many European countries are rightfully concerned over their low natural gas supply.

Gas Imports Uncertainty 

To compound these issues, pandemic-related lockdowns reduced production from Indonesian, Australian, and Indian coal mines, with India’s monsoon season making matters even worse. This has caused Asia (particularly China) to rely even more on natural gas to fuel its economic recovery, further reducing available supply for Europe.

In addition, while several Russian gas pipelines do flow into Europe, much of this capacity, particularly through Poland and Ukraine, has been largely inactive. Russia is pushing for German approval of its Nord Stream 2 pipeline and is hesitant to sell its gas on the spot market, and while more Russian gas could alleviate some of Europe’s supply troubles, the approval of the pipeline and the signing of long-term contracts with Russian gas companies represent politically fraught decisions for European leaders.

There is also speculation as to whether Russia can actually produce the volume of gas needed to materially ease fuel costs in Europe. Consumers in the EU and UK face further gas price spikes this winter, as flows of Russian gas via major transit routes are proving too little, too late.

Major Projects Boosting Supply 

In Norway, Equinor and its partners have received permission to increase natural gas exports from two fields on the Norwegian Continental Shelf (NCS) to supply the tight European market. Production permits for the Oseberg and Troll fields have been increased. In June, Equinor took steps to evaluate and develop concepts for enhancing its production and its exports to a desperate European market. This work resulted in enhanced production permits from the Ministry of Petroleum and Energy for the two gas fields.

Specifically, Equinor and its partners have received production permits for the 2021 gas year (starting 1st October) which are both 1Bcm higher than the permits for the current year, meaning an increase from 5Bcm to 6Bcm for Oseberg and from 36Bcm to 37Bcm for Troll.

The production permits will allow Equinor to produce more gas from these two important fields this autumn and through the coming winter. Norway is the biggest supplier of natural gas to the EU behind Russia.

Oseberg Transitions to Gas Producer 

Oseberg is the third-largest oil producer ever on the NCS. When Oseberg came on stream, it was expected to produce around 1Bbbl of oil. Today, Equinor expects the field to produce a total of around 3.2Bbbl of oil. Oil production is in the tail phase, but 60% of the site’s natural gas resources are still in the ground. Oseberg will transition from primarily being an oil field to becoming a substantial gas producer with large remaining gas resources. Two new compressors will be installed to boost recoverable gas volumes, and the Oseberg Field Centre and Oseberg South platform will be partially electrified.

When it comes to natural gas, Oseberg is also one of the major fields. Only Troll and Snøhvit have more remaining gas resources on the NCS. Equinor’s US$1.1bn investment opens a new chapter in the Oseberg story, with the site about to become one of the main Norwegian gas producers. Oseberg is expected to produce more than 100Bcm of natural gas by 2040. Plans call for start-up of the new facility in 2026.

Ramping up Troll

After 25 years of significant gas exports from Troll, around 50% of the site’s gas is left in the ground. To further develop the Troll area and reinforce its ability to secure gas deliveries to Europe in the coming decades, Equinor has recently completed the Troll Phase 3 expansion project.

Recoverable volumes from Troll Phase 3, which will produce the Troll West gas cap with industry-leading low CO2 emissions, are estimated at as much as 347Bcm of gas. The total recoverable gas volume remaining in Troll is estimated to be 715Bcm. Production is ramping up at Troll following the completion of the Phase 3 project, with plateau production achieved in October. Troll Phase 3 will extend the life of Troll A and the Kollsnes processing plant beyond 2050 and the plateau production period by 5-7 years. 

Equinor expects investment for the project to amount to about US$921m. Troll is one of the largest gas fields in Norway and caters to almost 8% of the EU’s gas consumption. As economies look for emissions reduction strategies, the demand for natural gas is expected to rise over the coming years.

These projects will deliver long-term, reliable natural gas supply into the tight European market.

Major Supply Closure  

Despite record-high gas prices in the Netherlands and across Europe, triggered by a tight market and winter supply concerns, the Dutch government is not considering any change to its policy on gas output from the giant Groningen gas field. Once Europe's biggest producing gas field, Groningen’s output has been gradually reduced in recent years due to earthquakes associated with production drilling at the site.

The production quota for the current gas year, which started on 1st October, has been set by the Dutch economy ministry at just 3.9Bcm, a far cry from the field’s most recent output peak of 54Bcm in 2013. The closure of Groningen is expected to leave at least 450Bcm of gas in the ground, around one year's worth of gas demand in the EU and UK. Under current plans, the majority of Groningen’s production will halt in mid-2022, but parts of the field will be kept open as a "back-up" gas source, with full closure likely to occur between mid-2025 and mid-2028.