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

  • 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 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.
  • 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 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.
  • 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
  • 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

Acuity Knowledge Partners

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