Winter is Coming: A Look at the European Energy Outlook for 2023

A favourable climate has led to moderate energy consumption across Europe, in spite of warnings of gas shortages and the shutting down of nuclear plants. Various tariff shields are making it difficult to draw clear conclusions about the economic reality facing Europe this winter, but a number of short- and long-term alternative energy sources are being considered. A look at what to expect this coming winter.

In spite of widespread predictions that Europe would struggle to make it through the winter of 2022-2023 in a climate of gas shortages and industrial paralysis, the continent managed to hold strong and fend off the more consequential scenarios. The Russian aggression in Ukraine and the resulting diversification of energy supplies, especially natural gas imports, seems not to have had the chaotic, end-of-days effect that some commentators predicted. Indeed, by November 2011, gas imports from the Russian federation were hovering around 12% (compared to over 50% at the beginning of 2021), with the EU successfully sourcing Liquified Natural Gas (LNG) in the period from January to November 2022 from countries like Norway (24.93%), Algeria (11.62%) or the US, Qatar and Nigeria (25.72%).

However, Europe is not out of the woods yet. The question of energy supply remains a hot topic in the corridors of Brussels and Strasbourg, even if the tone of panic has somewhat subsided. Imminent rationing is no longer on the table, with a record volume of gas in storage (EU + UK volumes amounted to 632 terawatt-hours (TWh) on March 31, according to Gas Infrastructure Europe). Although concerns about oil and gas supplies have eased over a year after the Russian invasion of Ukraine, short- and long-term solutions are nonetheless being explored in order to reinforce European energy resilience in the case of dire winter conditions. All options remain open, and long-term economic threats from a resurgent China may require a re-think of this recent complacency.

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Short term

Moscow’s belief that it had an unyielding stronghold on Europe with regards to oil and gas supplies has proven to be misplaced. Europe weathered the storm in 2022 in no small part thanks to increased energy collaboration with the United States, which provided 50% of its LNG supplies and 12% of its oil supplies that year. “Europe’s energy divorce from Russia is nearly complete,” said Andrew Lipow, president of oil industry and market consulting firm Lipow Oil Associates. “We’re seeing a permanent change as far as how Europe gets its energy in the future. One result is the United States and European energy policy are going to be more closely intertwined.”

The United States’ has spent 2023 cementing its place as a key energy supplier for much of Europe, most prominently in shale gas exported in the form of LNG. It is purported to be opening several new export facilities around the Gulf coast to facilitate this transition away from Russia. The move has obvious geopolitical advantages for the United States, with European and US energy security now a serious weapon in the global fight against Russian aggression. Energy has “become part of the arsenal of NATO,” according to Daniel Yergin, vice chairman of S&P Global.

US LNG suppliers have therefore begun signing massive contracts with European firms. Cheniere, for example, signed a 15-year deal to supply Norway’s Equinor with around 1,75 million tonnes of LNG per year, Venture Global LNG signed a 20-year deal with Germany’s Securing Energy for Europe (SEFE), and France’s TotalEnergies bought a $219 million stake in a Texas terminal to transport LNG, which is currently in the development  phase at Houston-based energy group NextDecade. “The European buyers are giving an additional tailwind for US projects to push towards the finishing line,” said Michael Stoppard, global gas strategy lead at S&P Global Commodity Insights in the Financial Times. “It can really help a US LNG project if it can get a portfolio of Asian and European buyers together as it reduces the risk for them.”

The relatively low prices of US shale gas and the European fracking boom in some US states, notably Texas and Louisiana, have helped offset immediate concerns regarding European energy security.

Long term

The threat of a real energy crisis in 2022 and the concrete steps taken by European powers and business has left Europe much better prepared this year. Short term solutions are, however, short term. 2050 climate objectives have meant that EU lawmakers have been cautious about making long term commitments to US LNG, and the EU has so far failed to come up with an equivalent to the Inflation Reduction Act, introduced by the Biden administration in order to provide businesses with large tax breaks for clean energy investments. 

Nonetheless, natural gas and LNG are widely accepted to be a crucial transitional energy source as the world tries to move away from fossil fuels over the next decades. This is why new sources of LNG are being explored by the international community, Europe included. While the EU is strengthening its partnerships with well-known suppliers such as Qatar, whether at the EU level or the bilateral level, such as contracts between the Gulf state and Germany. It is also exploring the possibilities that new producers might offer.

One project making waves in the energy sector is the Mozambique LNG project, which started back in in 2010 with the discovery of a vast quantity of natural gas off the coast of northern Mozambique, leading to a $20 billion Final Investment Decision in 2019. Europe and Asia are the main buyers that have already acquired future production. The Mozambique LNG consortium, one of the two main operators of the gas fields, is representative of this configuration, as it includes energy companies from Japan, Thailand and India, and is headed by French firm TotalEnergies, which holds a leading 26.5% stake in the project. The program has been held up since 2021 following Islamist violence in the northern Cabo Delgado province where the project is located. The other consortium, operating entirely offshore, is led by Italy’s ENI, which imported its first cargo of Mozambican LNG into Spain and Croatia last winter.

The security situation seems to be improving and it is not out of the question that the land-based project could be restarted in the coming months, according to the Mozambican government. Investing in such projects will further reinforce European energy resilience over the next decade as the continent searches for reliable net zero solutions to the energy transition without threatening gas supplies during potential harsh winters to come.

Positive outlook

 At the beginning of May 2023, Kadri Simon, European Commissioner for Energy, spoke of a “positive outlook for the coming winter”, mentioning “stocks that are half full”, thanks in large part to the previous winter, which was kind to the continent and our gas reserves. This short-term optimism in no way solves the long-term problems facing the continent: Europe cannot continue to pay high prices for gas forever. This is why investment in long term projects is so important.

European businesses and industry certainly agreed to “play the game” last year by reducing their consumption, but at what price? “Although Europe avoided a recession, output in the energy-intensive industrial sector contracted significantly,” explains Bloomberg analyst Javier Blas. “Ask any European industrialist, and they would tell you the crisis isn’t over for them.”

This state of affairs only serves to underline the need to find short- and long-term alternatives, whether for energy in general or gas in particular, which is irreplaceable in many cases (heating in certain countries and industrial applications). As far as energy is concerned, the reopening of French nuclear power stations and the prolonged use of German coal-fired power stations (whose disastrous ecological impact is well known…) will provide some relief for the continent. For the rest, salvation is bound to come from LNG. “In the absence of major Russian flows, liquefied natural gas will necessarily be the cornerstone of the balance between supply and demand on the continent,” points out Edouard Lotz. The most important thing right now is flexibility and resilience, which European leaders are working hard to reinforce.