Medium-term prospects for the European gas crisis

While Europe was largely dependent on Russia for its gas supplies, aided by a mild autumn, it has managed to reduce its consumption and find alternative sources of supply. The spectre of a gas shortage therefore seems to be dissipating. However, the measures taken are partly temporary and many investments in infrastructure will have to be made at full speed.

Gas in Europe: The state of play

At present, natural gas [note: in this article we refer to natural gas] accounts for 25% of the European energy mix (15% in Switzerland), or 400 billion m3. In 2021, most of this gas (47%) came from Russia, which was the main exporter. The rest came from Norway (20%), Algeria (12%) or liquefied natural gas (LNG). It is mainly transported by pipeline.

Source: Origin of gas consumed in Europe in 2021

This dependence on Russia varies from country to country. Countries in the East of Europe are logically the biggest victims, such as Finland, which imported 100% of its gas from Russia before 2022, Poland (81%), Austria (80%) and Germany (54%). On the other hand, the countries of Western and Southern Europe are much less affected. With 44% of its supply coming from Russia, Switzerland is in the middle of the pack.

Few alternatives

In response to the sanctions imposed on Russia following the invasion of Ukraine, Russian gas exports have fallen by 90% by 2022. Europe has therefore had to urgently find not only new sources of supply but also transport, which is easier said than done. Indeed, the European energy system has historically relied on Russian gas and there are few alternative pipelines that would allow a variety of suppliers. The only options are Norway and Algeria, but their transport capacity is already sold on a very long-term basis. The possible increase in volume is limited to about 15 bcm, which is far from sufficient.

Importing LNG remains the only option to compensate for the volumes of gas that Europe no longer buys from Russia. However, it too poses its own problems. Indeed, it is hardly possible to increase the export capacity of LNG, which comes mainly from the USA and Qatar, before 2025. Furthermore, liquid gas requires regasification and there is a serious lack of regasification capacity in Europe. Many countries, such as Germany, do not have any plants. Most of the capacity of existing facilities is already tied up in 15-20 year contracts, leaving only 80 billion m3 available. The only solution, which can only be temporary because it is costly, is to use floating storage regasification units (FSRUs). This is the option chosen by Germany.

 

A rather positive outcome for Europe

Following the invasion of Ukraine, Europe rapidly implemented a plan to replace Russian gas with other sources. At the same time, gas demand in the industrial sector contracted sharply due to very high price levels.

As a result, a large proportion of Russian gas may be replaced by 2023, mainly by LNG. Out of 185 billion m3 [bcm in the graph above], only 40 billion m3 will remain uncovered, which represents about 10% of Europe’s annual consumption, a shortfall that should be made up by savings if the winter is not too harsh and industrialists continue to ration gas.

Thanks to this reactivity and a very mild autumn, the risk of rationing should be limited, even in winter. Indeed, the level of storage is very high (close to 100% in many countries) and demand has adjusted to the new price level. The study referred to above indicates that even in the most negative case, i.e. a cold winter and a total absence of Russian gas, stocks should prove sufficient for the next 2 years.

However, the price of gas is expected to remain high, as is the price of electricity, so consumers will foot the bill.

How to invest?

It seems clear that Europe has learned its lesson and will strongly develop its gas infrastructure, which until now has relied on Russian imports. With an increased share of LNG in the energy mix, there will be many opportunities for investment in pipelines and regasification terminals. In addition, we should see an acceleration in the deployment of renewable energy.

Amongst the interesting companies, a stock to watch is Cheniere, the leading US LNG exporter. Having invested heavily in the past, it is the only player to have capacity available for export to Europe. Its activity is particularly de-risked, since more than 80% of export volumes are covered by 15-20 year contracts without price risk. Finally, current gas prices have allowed the company to achieve a clean slate, signing new long-term contracts, lowering its financial leverage and even returning cash to its shareholders.