European companies are using more natural gas as prices fall to levels seen before the Ukraine war, putting a potential strain on preparations for another supply-constrained winter in Russia.
The green shoots are mainly evident in the refining industry, which can more easily switch between feedstocks ranging from natural gas to fuel oil. Earlier this month, Dutch data showed the country’s oil sector had the biggest weekly increase in gas use this year, while figures from the French and Spanish gas network indicated that demand of refineries advanced in February compared to the previous year.
The speed of the recovery will be crucial for the European Union as it prepares for a second winter without Russia’s pipeline. The uptick in demand could push prices above €100 ($109) per megawatt-hour this year, from around €43 now, and reduce inventories, according to Swedish bank SEB AB. It is a vision echoed by Vitol Group, one of the largest gas traders.
“Some manufacturing industries last year switched from gas to fuel,” said Patrick Pouyanne, CEO of TotalEnergies SE. “Now this year they’re very reactive, they’re going back from diesel or fuel to gas, so it’s creating additional demand,” he said at a presentation in London on Tuesday.
Along with refineries, petrochemical plants will also be a good indicator of recovery because they can easily switch back to gas to produce power and heat, according to Energy Aspects Ltd.
“Other gas-intensive sectors will take longer to recover through 2023, as their demand reductions are the result of reduced production rather than fuel switching,” the industry consultant said.
As gas prices soared to record highs at the height of the energy crisis, Spanish industrial gas demand fell by as much as 40% in September from a year earlier. Overall factory and plant use fell by around 20% last year in Europe, accounting for almost half of last year’s record drop in total consumption, according to the International Energy Agency. This year, the IEA expects demand in the industry to recover by around 10%.
From a high of more than €340 per megawatt-hour at the end of August, benchmark Dutch gas futures have fallen by around 90%. Spanish refinery use surged 8.1% in February, helping to slow the industry’s overall decline to 9.5% from a year earlier, the operator said of network Enagas SA.
In the Netherlands, gas use in the oil and chemical industries also started to surpass last year’s levels this month, CBS data shows.
“Lower energy costs, possibly combined with stronger demand from China’s reopening, mean we expect industrial production to contribute positively to eurozone growth this year,” said Maeva Cousin, senior eurozone economist at Bloomberg Economics. .
Although Goldman Sachs Group Inc. expects the industrial recovery to begin picking up pace by the end of this month, other analysts warned it could still take some time.
“It will take time for gas tariffs from gas suppliers to drop sufficiently and over a sustainable period for factory managers to make the decision to resume production,” Energy Aspects said.
Factories on the move
Despite the fall in prices, they are still well above the historical average and are expected to remain elevated until around 2025, when new global supply is due to arrive.
That means some demand may be lost forever as factories move to parts of the world where energy costs are lower.
Chemical companies BASF SE, Dow Inc. and Lanxess AG are poised to cut thousands of jobs and shift investment out of Germany because they don’t expect Berlin to reliably provide the energy they need at prices close to what they once paid for the Russian pipeline. .
A survey by Germany’s VCI chemical association earlier this year revealed that almost half of companies plan to cut back on investment in the country this year due to high energy costs. Production is likely to move to countries with similar values and political systems, said Oliver Wojahn, analyst at Alsterresearch AG.
“The outlook for the future has improved somewhat in Germany’s third largest industry,” VCI said in a report this month. “The great fall in the prices of energy and raw materials in recent months has stabilized the situation where it seems that the bottom has been reached. Unlike the pandemic or the global economic crisis, this time there will not be a powerful recovery.”
