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

Published on April 7, 2022 by Gaurav Sharma and Surbhi Joshi

The Russia-Ukraine crisis has led to a major shock in the energy sector, with significant pressure on the world to impose as many sanctions on Russia as possible. The US has already banned Russian oil and gas imports, and Europe is announcing plans to reduce its reliance on Russian gas.

However, with the Europe Union (EU), it is easier said than done. The region relies on Russia for c.46% of its gas supplies (including liquefied natural gas, or LNG) and imported around 152.8bcm of gas from Russia in 2021; the remainder was from countries such as Norway, Algeria and, Libya and others.

With domestic production falling steadily and consumption remaining steady, the region would have to consider a number of options when phasing out its reliance on Russian gas.

Figure 1: EU — the domestic production and consumption gap

In 2021, the EU’s gas imports from Russia were more than double its overall LNG imports. The region imported 67.32bcm of LNG, of which c.20% came from Russia, making it the single most important exporter to the region.

Russian gas also plays an important role in maintaining the region’s storage levels; all additional gas goes into storage, helping manage any high demand during winter.

The EU’s gas storage levels have currently hit a bottom, with merely 26% full as of 05 April 2022, below the three-year average. Any disruption to Russian flows could significantly reduce the already low storage levels, reducing the region’s ability to meet demand when the heating season starts (in less than seven months)

Figure 3:EU’s gas storage levels 4

In response to Russia’s aggression towards Ukraine, both the US and the EU have imposed sanctions against Russia.

  • The US and allies banned Russian banks from SWIFT payment systems

However, the bigger questions are whether the EU can totally move away from Russian gas, and what the possible roadmap for achieving this would be.

Can LNG supply offset the halt of Russian gas flows to the EU?

The global spike in LNG demand after the pandemic-related slump, along with the highest number of long-term deals in 2021 and few FIDs in the past two years, has led to limited spare capacity.

Supply limitations from top exporters:

  • 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

Bloomberg expects Asia’s LNG demand to grow by 5% in 2022, with China’s imports increasing by 10%, driven by its economic recovery and a push to switch from coal to gas, to meet its climate change-related targets. Europe would need to compete with Asian buyers, which would be difficult.

However, higher spot prices, driven by a disruption in Russian supply in both the Pacific and Atlantic Basins could lead to a destruction in gas demand in both regions. Nevertheless, the record-high prices of oil and coal would make the switch to either of these challenging.

Europe’s LNG import capacity (excluding Turkey) stands at around 152.50MMTPA or 12.7MT/month. The region has limited available capacity to absorb extra supply from exporters in the event Russian flows are disrupted.

  • 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 EU compiled REPowerEU, a proposal to reduce the purchase of Russian gas by two-thirds before end-2022.

  • 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 has already started exploring options to procure gas/LNG and reduce its dependency on 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

As it plans to reduce its dependence on Russian gas, the EU has to work on a number of areas:

  • 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.

The shift will require making tough decisions. The EU would have to prioritise energy security over energy transition as net zero goals take a back seat. The move towards coal and oil would delay reaching carbon-reduction targets, but these may be needed to be viewed as transition fuels while the region steps up investment in cleaner energy.

About the Authors

Gaurav has close to 14 years of experience working across oil and gas value chain. He has varied experience working on various strategic research projects involving market intelligence, competitive intelligence, market sizing models, industry benchmarking and market entry strategy. At Acuity Knowledge Partners, Gaurav is leading a team to support a major LNG player in various strategic research projects. He holds a MBA degree in Oil and Gas Management from University of Petroleum and Energy Studies and a BE degree in Mechanical.

Surbhi has close to 4 years of experience in oil and gas sector, with a major focus on LNG and upstream. At Acuity Knowledge Partners, she supports a leading LNG player in various strategic research projects involving market intelligence and competitive intelligence. Surbhi holds a MBA degree from University of Petroleum and Energy Studies and also B-tech degree in Chemical engineering.

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