Trafigura, Mercuria predict return to coal as energy crisis bites

March 24, 2022, 4:16 pm | Admin

Plunging Russian oil and gas exports to the west are set to drive up demand for coal, commodity traders say, as European governments and importers prioritise energy independence from Moscow over climate transition goals.

In recent weeks, the US, UK and EU have sought to halt President Vladimir Putin’s invasion of Ukraine by imposing sanctions on Russian banks and initiating plans to halt or scale back oil and gas importsfrom the country.

US President Joe Biden announced a total ban on oil, liquified natural gas (LNG) and coal imports from Russia, the UK said it would stop buying the country’s oil by the end of 2022, while the EU is working to reduce its member states’ demand for Russian gas by two-thirds by the close of the calendar year.

This rush to ditch Russian energy has led to serious questions about how Europe will service its energy needs, with industry figures predicting at this week’s FT Global Commodities Summit that countries will likely ramp up their consumption of coal as a result.

“Obviously, we want to go through the energy transition and [as] we’re looking to move towards renewable energy, you could argue the current circumstances should expedite that further,” said Trafigura’s CEO, Jeremy Weir.

However, this will take “some time”, Weir said. Until then, governments face the urgent task of finding a balance between replacing Russian energy, strengthening their energy security, and decarbonisation.

“In the short-term, quite frankly, hydrocarbons are probably the only solution. As a result of that, I do think we’re going to be burning more coal, and coal is in demand,” he said.

Mercuria’s chief executive, Marco Dunand, also said he expected coal to play a part in the realignment of Europe’s energy trade flows.

Europe will likely “temporarily increase coal consumption” while pushing gas production and importing more liquified natural gas (LNG) from Asia, he predicted.

As reported by Politico, Italy’s Prime Minister Mario Draghi told the country’s lawmakers in late February that “coal-fired power plants may need to be reopened to fill any shortcomings in the short term” as a consequence of Russian aggression in Ukraine.

Carlos Torres Diaz, head of power research at Rystad Energy, tells GTR he expects energy producers around Europe to increase generation from coal, with high gas prices making it the more economical solution.

Gas prices have more than doubled over the last year – though coal prices are up 249% over the same period – with inflation driven by surging demand clashing with supply side shortages, exacerbated by the measures against Russia.

Diaz says there are plants in Europe that could use coal to increase generation “right away,” with countries such as Germany and Poland having underutilised their capacity in recent times.

If Europe is to ramp up its use of coal, importers will still have to address reliance on Russia, which Rystad’s Diaz says accounts for around 70% of the coal coming into Europe.

“Other sources of supply are Colombia, US, South Africa, and Australia and Indonesia to a lower extent,” he says.

“The international market is quite tight at the moment with high demand from Asia, so it will be difficult for European buyers to find new sources of supplies. But with such high prices the US could potentially increase exports and help meet some of this increasing demand.”

However, a return to coal in Europe would mark a dramatic departure from the commitments to reduce consumption made at the Cop26 climate summit in November last year.

More than 40 countries vowed to shift away from coal at the conference, including one major European user of coal, Poland. Other sizeable coal-burning nations in the EU had previously pledged to phase out coal, with Germany having set a 2030 deadline for ending its use of the commodity for energy purposes.

Orith Azoulay, global head of the green and sustainable hub of Natixis’ corporate and investment bank, said at the event the situation has created a “clash between sovereignty and sustainability issues”.

“The counter measures that we are all witnessing, be it coal [plant] closure postponements, or the increase in security when it comes to gas… they’re immediately put in the same basket as [the] energy transition emergency,” she said.

Yet Frans Timmermans, the EU’s Green Deal chief, insists countries looking to burn coal could do so in line with the bloc’s climate goals.

“There are no taboos in this situation,” he told BBC Radio Four’s Today Programme.

Last modified on March 24, 2022, 4:16 pm | 1154