European oil and gas industry grapples with gas crisis

Since February 24, the Russian-Ukrainian conflict and Western sanctions against Russia have continued for nearly half a year, and there is no sign of easing. Recently, in order to cope with the shortage of natural gas caused by geopolitical conflicts, and the EU has passed the gas restriction agreement, European countries and major companies, especially oil and gas companies, have tried their best to speed up the construction of liquefied natural gas (LNG) import facilities, or through the process Adjustment to save natural gas in response to the natural gas crisis.

Countries speed up the construction of LNG facilities

In the context of geopolitical conflict, most countries in Europe are planning or are building LNG import facilities. The first choice of countries is the floating LNG import facility. Such a facility could be built faster than a permanent LNG import terminal built onshore. Projects for floating LNG import facilities across Europe are advancing at an unprecedented pace, driven by the urgent need to replace Russian pipeline gas. About 25 new floating storage and regasification units (FSRUs) will be installed in EU countries over the next few years, with the first facilities expected to be operational by the end of 2022, according to S&P Global Commodities.

Among the countries, the most affected by Russian gas is Germany. Germany is actively promoting FSRU construction. In August, Germany's largest gas pipeline operator, Essen-based Open Grid Europe (OGE), started laying a new gas pipeline four weeks ahead of schedule, connecting the FSRU in Wilhelmshaven in northern Germany with the German Gas Pipeline. network connected. In May, the German parliament also passed a new law aimed at speeding up the approval process for LNG import terminals. Germany is currently advancing the construction of five new FSRUs and two onshore permanent LNG import facility projects. Germany has now decided on the locations of its four leased FSRUs, two of which are deployed in Wilhelmshaven and Brunsbüttel and will be commissioned by the end of this year; the other two FSRUs in Stade and Lubmin are due in 2023 Put into use in May. In addition to the four state-backed FSRU projects, on July 13, Deutsche ReGas announced a fifth project, which will be delivered by France's Total Energy in Lubmin in December.

In addition, Greece also plans to build 5 FSRU projects, with the goal of becoming a natural gas supply center in Southeast Europe. The Netherlands, Italy and Ireland all plan to build two FSRU projects. France, Finland, Estonia, Cyprus and Poland also plan to build a new FSRU project.

Refiners adopt 'self-help' measures to reduce consumption

European refiners are also grappling with the negative impact of soaring gas prices. Refiners said they were doing their best to reduce the use of natural gas as the market was squeezed by the disruption to Russian gas supplies due to the conflict between Russia and Ukraine.

Shell Chief Executive Van Beurden said its refining division was taking "self-help" measures to reduce gas consumption. The company will strengthen its own gas production in the refining process to reduce the need to obtain natural gas from outside. Van Beurden said Shell had cut gas use by 40 percent at its Rotterdam refinery, 50 percent at its Muldijk chemical plant, and 70 percent at Germany's Rheinland energy and chemical park. Separately, BP said it had cut gas use at its European refineries by 50%. Italy's Eni Group is also discussing similar measures.

Van Beurden said: “We were able to reduce the use of natural gas in the process without changing the refining output. An effective response is to optimize the operation of the refinery. Our refineries in Germany and the Netherlands are complex refineries, Operations can be optimized to generate more gas and fuel oil as a fuel in place of natural gas during cracking and other processing to provide heat and electricity to refineries.”

Reducing gas consumption is part of a trend for European refiners to shift energy from gas to oil. However, it partially reverses an industry trend in which refiners are using more natural gas in the refining process to limit carbon emissions. According to government figures, between 2009 and 2019, the use of natural gas in British refineries increased from 5.3 billion cubic feet per year to 9 billion cubic feet, while the country's refining capacity fell by about 30%. Analysts at S&P Global estimate that the shift in European industrial users from gas to oil will add an additional 198,000 bpd of oil demand in the third quarter of 2022 and 195,000 bpd in the fourth quarter of 2022.

Ultra-high natural gas prices help low-sulfur crude oil

Reducing the use of natural gas by refiners could also spur manufacturers to ramp up processing of light, sweet crudes, such as those from the North Sea. In the refining process, desulfurization requires hydrogen, and the hydrogen in the refinery mainly comes from natural gas to produce hydrogen. Obviously, low-sulfur crude oil can save a lot of natural gas. That pressure, along with sanctions on Russian crude, has helped maintain a premium for North Sea crude amid sluggish regional output. Crude production in the U.K. North Sea, while already recovering from 2021 lows, is still hurt by depleted fields and shutdowns of oil-producing platforms.

Rebecca Foley, S&P Global European oil market analyst, said: "High gas prices continue to weigh on the refining margins of European refiners that rely on natural gas as a fuel. Those able to use cheaper fuels such as low-sulfur fuel oil European refiners who replace natural gas will have higher refining margins.” A crude oil trader told S&P Global that the current market preference for low-sulfur crude will intensify into winter.

Weak North Sea crude production has in turn stimulated Europe to increase imports of light, sweet crude oil, especially from the United States, according to BP's Statistical Yearbook. For Britain, the share of U.S. crude oil processed by its refineries rose from 21% in 2019 to 26% in 2020, according to the British Petroleum Industry Association. At the same time, the amount of European crude oil imported from Turkey is also increasing.