The energy conundrum — can Europe cope if Russia’s gas supply is disrupted?

  • The US and allies banned Russian banks from SWIFT payment systems
  • Germany halted the Nord Stream 2 approval process, and the US imposed sanctions on Nord Stream 2 AG, which is planning to file for insolvency under the Swiss legal framework
  • Oil and gas majors such as Shell and BP exited stakes in Russian projects
  • President Biden banned US imports of Russian oil, gas and coal
  • In 2021, there was a surge in long-term contracts from Asian buyers with the US, which could limit the scope of the US supplies getting shipped to Europe
  • In addition, a Qatari minister announced that most of Qatar’s volumes are tied to long-term deals with Asian buyers and only 10–15% of its volumes could be diverted to European buyers in the event of need.
  • Supply from Australia remains uncertain, according to Credit Suisse, despite assurances from the country’s ministers. Production plants are already running at full capacity amid high LNG prices, and LNG producers will likely sell surplus LNG volumes to the highest bidders, most often Asian customers. Producers also need to keep Australia’s domestic gas market on the east coast well supplied.
  • Spain, which accounts for 29% of the region’s import capacity, can export pipeline gas only to France and has limited connection to the rest of northwest Europe
  • The UK, which accounts for 23% of import capacity, is already running at maximum capacity and does not receive physical Russian flows
  • Germany, which received 34% of Russian gas supplies in 2020, has no direct access to LNG
  • The EU will make a legislative proposal by April 2022 to target filling 90% of gas storage tanks by 1 October each year
  • The EU is already speaking with countries such as Algeria, Azerbaijan, Egypt, Israel, Japan, Korea, Nigeria, Norway, Qatar, Turkey and the US to obtain gas via pipeline or LNG
  • The region plans to produce 35bcm of bio-methane by 2030
  • Other steps include creating a hydrogen accelerator, investing in energy efficiency in residential and commercial areas to save 25bcm of gas a year and accelerating the rollout of renewables
  • The International Energy Agency (IEA) plans to reduce reliance on Russian gas, enter no new gas supply contracts with Russia and replace around 30bcm of gas through non-Russian supplies.
  • EU and US plans to work together for procuring 15 bcm of LNG supplies in 2022 as the region seeks to cut Russian gas by two-thirds in 2022 and end all fossil fuel imports by 2027
  • Germany signed long term energy deal with Qatar
  • In addition, Slovenia has also initiated talks with Qatar over a potential supply deal in near future
  • Infrastructure spending: Limited additional supply of LNG globally and the various issues surrounding the use of LNG regasification infrastructure make it difficult for the EU to replace Russian gas immediately. However, it is taking steps to resolve these.
  • Snam, Italy’s leading infrastructure operator, is accelerating infrastructure spending, focusing on a new Spanish subsea pipeline and LNG receiving route from Spain to Italy
  • GNL Rovigo, Italy’s largest LNG terminal, operated by Adriatic LNG, has submitted plans to increase its capacity to 9bcm a year from 8bcm
  • Germany, which receives 40% of its gas from Russia, has announced plans to build its first LNG terminal and develop another terminal to the west at Wilhelmshaven. It has also agreed to a gas deal with Qatar to help end dependence on Russia
  • Increase domestic supply: Norway and the UK, the region’s largest gas producers, have taken the following steps.
  • Equinor has announced plans to increase production by 1.4bcm from its Norwegian fields Oseberg and Heidrun
  • The UK’s Treasury has decided to encourage banks/lenders to fund North Sea oil and gas projects
  • The region is also contemplating delaying the closure of the Groningen gas field, largest gas field in the region. The risk of earthquakes remains a key limitation if the Groningen gas field continues to operate
  • Increase output from other fuels: In the event the EU plans to replace energy derived from Russian gas with energy derived from other sources, we believe it has to increase energy output (assuming increase from single source) from oil by 24% or coal by 83% or nuclear by 80% or hydro by 161% or renewables by 70% in the region’s energy mix (analysis based on BP statistical data). However, there are several headwinds challenging increasing generation from alternative sources:
  • Higher coal generation is a possible scenario to adopt in the event of disruption, but if Russian coal is also banned, a shift to coal would be difficult, as Russia is a key supplier of high-quality coal to Europe.
  • Countries would have to delay phasing out nuclear generation
  • Record-high oil prices, with US banning Russian oil and Russia being a key oil exporter to Europe, make it less possible to increase the share of oil in the energy mix
  • The uncertainty and volatility around significantly increasing the share of output from hydro and renewables in the energy mix makes reliance on these green sources a risky option




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Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.

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