There is “no physical solution” to the energy shortage in Europe

A “political solution” is the only way to supply energy needed to warm homes through Europe’s winter, according to an energy sector specialist with PGIM.

There is “no physical solution” to the energy shortage facing global markets in the near term, and there has to be “some kind of political solution,” according to an energy sector specialist with PGIM, the principal asset management business of Prudential Financial.

Today’s shortage of oil and gas has been years in the making, according to David Winans, principal and credit analyst for PGIM Fixed Income’s US investment grade credit research team.

Companies capital spending had been slowing ever since the 2014 oil glut that followed the “shale revolution” in the United States that started around 2006, but when the pandemic hit companies slashed capital to the bone and production finally rolled over.

The OPEC price war and ESG pressures also put pressure on investment and spending levels before oil and gas demand snapped back quickly after Covid-19. Then came the Russian invasion of Ukraine, and now Russia’s cutting off of gas supplies to Europe.

In a podcast discussion with Julia Newbould, managing editor of Conexus Financial, Winans said Europe’s gas shortage cannot be quickly resolved by US exports due to limits to liquefaction capacity. The US also faces its own supply issues due to the reluctance of oil and gas majors to invest heavily in the sector, and other issues such as ongoing legal challenges to pipelines (such as the Mountain Valley Pipeline), Winans said.

While Liquefied Natural Gas is a good alternative energy source, the greatest challenge is in getting it where it needs to be, Winans said. There is “plenty of gas in Canada at low prices,” and Canadian Prime Minister Justin Trudeau had expressed interest in the possibility of exporting gas to Europe, “which is very interesting, considering there’s no LNG export facilities in Canada,” Winans said.

You have to liquefy it, and these facilities take at least two years to build and they’re billions of dollars and it’s too late to do anything about it this winter,” Winans said. Gas pipelines from Africa could be part of the solution, “but once again these are long-term solutions and the crisis is now, so I don’t know what the answer is going to be, but there’s going to have to be a political solution to this,” Winans said.

Renewables will not satisfy aviation demand, trucking, shipping and other industrial uses, he said. They are also “not that great for heating your home,” and will not get Europe through winter.

Newbould asked his thoughts on balancing short term gains with the longer term transition to a lower carbon world.

The ongoing transition to green energy has put pressure on the supply side of the equation, but “oil demand and gas demand hasn’t moved at all,” Winans said, admitting he is not convinced markets have yet seen the peak in demand for fossil fuels.

For investors in the short term, “the money is there in oil and gas,” he said. Longer term, there are questions about the impact ESG considerations will have on supply.

“So, an oil price of $90 a barrel is telling you we need more supply investment now, but the funny thing is the ESG considerations have got many companies, like maybe some of these European oil majors, saying, “we don’t want to make those investments anymore.

“So there has to be some kind of supply response at some point, if you think the demand is going to be there,” Winans said. “And, despite this energy transition, I haven’t seen any clear evidence that demand is really rolling over anywhere, aside from European natural gas which is going to definitely get some demand destruction… globally, it’s still strong. People want this stuff…and we can’t replace all of it that easily.”