Alarm bells are sounding in Europe that the spike in global natural gas prices could threaten economic recovery and saddle industrial and residential consumers with record high bills in the coming winter months.

Gas prices in Europe rose to the equivalent of more than $24 per million British thermal units on the spot market in September, about five times higher than a year earlier.

In the UK, which relies heavily on natural gas for heating and electricity generation, high utility prices have so far shut down two fertiliser plants — with a knock-on effect being that domestic output of industrial carbon dioxide came to a sudden halt, threatening production across the food chain — and forced some of the country’s steel manufacturers to suspend operations at times of peak demand.

The sense of looming crisis prompted the UK government to intervene in the sector via a short-term agreement to cover some operating costs, allowing US-based CF Fertilisers to restart CO2 production that had become loss-making.

Gas demand in Europe has been on the rise for several years as countries phase out coal-generated electricity in favour of renewable energy and retire ageing nuclear plants.

On the supply side, European gas production has seen a steady decline, hastened by production caps at the Groningen field in the Netherlands and reduced exploration potential in the North Sea.

The decline was seen by many as manageable as countries moved to cleaner energy.

Pipeline gas from Russia and liquefied natual gas imports, including cargoes from the growing US industry, helped "fill the gap" created by declining European production, said Howard Rogers, distinguished research fellow at the Oxford Institute for Energy Studies.

The crisis has been compounded by very low European gas inventories in underground storage facilities that were depleted after a long and cold 2020-2021 winter, and there is little time left to replenish them ahead of the coming cold-weather season.

Bear in the room

Russian state-controlled gas monopoly Gazprom has declined to export additional gas above its long-term contractual commitments, as it has done in the past.

Gazprom is apparently waiting for the now-completed Nord Stream 2 pipeline to Germany to be approved for gas exports before selling additional volumes, prompting moves by some members of the European Parliament to investigate whether manipulation of markets is taking place.

“I think people expected more gas to come from Russia in order to meet Europe’s current demand and to help with the annual task of filling underground gas storage in Europe ahead of the winter heating season,” said Rogers.

“So, whilst Russian flows into Europe have been higher than in the Covid year of 2020, they’re not as high as people wanted, and this comes to the issue of Nord Stream 2.

"The question is, has Russia held back some volumes that it could have flowed to Europe because it wants to see approval of Nord Stream 2? At the moment, there is no way of knowing whether that is true or not.”

Gazprom has said higher-than-normal demand inside Russia has prevented it from boosting exports to Europe, while suggesting volumes could be increased next month.

“If they do, this will help,” said Carlos Torres Diaz, head of power and gas market research at Rystad Energy.

“But I think that because stock levels are quite low, prices will remain quite high (throughout the fourth quarter).”

Hopes that US LNG exports would offset shortages in Europe have been dampened as spot supplies from the US are being sucked toward Asia, which is also seeing high demand and record prices for gas.

Problems have been compounded by an extended period of low winds in western Europe, reducing electricity generated by renewable power.

In the UK, this coincided with scheduled and unplanned gas facility shutdowns in the North Sea, a fire that knocked out service on a subsea cable providing electricity from France to the UK grid, and the rocketing price of carbon in Europe, which increases gas demand by making coal-fired power generation much more expensive.

Norway’s Equinor this week said it would increase exports from the Oseberg and Troll fields, exporting an additional 2 billion cubic metres of natural gas to the European market for the year starting 1 October.

“In the short term, this is really good for Norwegian exporters," said Torres Diaz.

"But if we think of the longer term, it may not be such a good thing for the gas business as a whole.”

However, a sustained period of high gas prices could increase calls for a faster transition away from fossil fuels, he added.

UK industry lobby Oil & Gas UK (OGUK) had a different take.

“The crisis coincides with discussions on whether to open new gas fields in the North Sea to replace those running out or becoming economically unviable to produce,” the group said.

“OGUK predicts that UK North Sea output will roughly halve by 2027 unless new fields are opened. If that happens the UK will be even more reliant on imports than now.”

The debate could amplify as the UK prepares to host the 2021 United Nations Climate Change Conference — COP26 — in November.

Debate intensifies

“What we may see is the pro-renewables lobby saying this is evidence that we should have got out of fossil fuels a long time ago, and people on the other side saying you can only move to renewables over quite an extended time frame due to the sheer scale of financial investment and the logistics required to build up a realistic level of renewables generation,” said Rogers.

The crisis underlines “the challenges posed by the variable or intermittent nature of renewables,” he added.

“There has been a lot of wishful thinking about, if you build interconnectors, that smooths things out.

"But if you’ve got no wind over half a continent, that doesn’t help... What hasn’t been resolved is the balancing function — a replacement to gas as the means of balancing a grid through flexible, on-demand, dispatchable generation.”