Europe’s gas supply could be at risk again in the coming months. China has lifted the strict Covid restrictions that dampened its energy demand last year and helped Europe import record amounts of LNG from around the world. The end of COVID restrictions and stimulus plans in various sectors of the Chinese economy could increase China’s gas demand. As China’s demand is the big unknown for 2023, a bullish scenario could see its liquefied natural gas imports increase by up to 35% in 2023 if its economy grew rapidly, the International Energy Agency (IEA) said. This would stimulate global competition for fuel and could push prices back up to levels seen last summer.
Coupled with energy-saving measures and a mild winter, LNG purchases allowed Europe to survive the heating season with much lower Russian flows and drove gas prices down by more than 85% from those record levels. But that doesn’t mean the energy crisis is over. BASF is a good example. The German group announced last week the closure of several gas-intensive plants and the shedding of thousands of jobs. The largest chemical producer in Europe will instead serve its customers in the region from plants like the US and China. Prices have come down, but BASF expects them to remain considerably higher in the long run.
Reflecting the uncertainty over Chinese demand, the IEA measured a 40 billion cubic meter difference between the lowest and highest estimates of the country’s net LNG imports this year. The upper end of the range would see Chinese imports rising well above the previous peak in 2021. The estimated gap is around 8% of Europe’s consumption this year.
Europe managed to avoid an energy catastrophe this winter. The continent survived with a much lower Russian supply thanks to a concerted effort to reduce consumption and ramp up alternatives such as liquefied natural gas deliveries. But the key to this success was the decision by many companies to shut down or slow production in response to the gas price surge. The EU’s demand for industrial gas fell 15% last year compared to the 2019-2021 average.
Désindustrialisation has not swept Europe, but it does require a reconfiguration. Industries most dependent on gas, such as ammonia and fertilizer makers, are looking to shift production to lower-cost and fuel-abundant locations such as the US or remove gas altogether from their supply chain.
More worryingly, the energy crisis has changed some industries’ perceptions of Europe. The continent is no longer seen as a manufacturing hub. The question is: how to attract industrial investments with such a big unknown: energy costs.