Reducing Europe’s deficiency on Russian gas by next winter presents significant economic, societal and technical challenges
- The Russia-Ukraine war has highlighted Europe’s reliance on energy supplies from Russia, and the threat this poses to security of supply as the conflict escalates. Russia supplies 30-40% of the gas and 50% of the coal used in Europe
- Aurora Energy Research has analysed the impact of a range of scenarios on Europe’s gas markets – from the suspension of Nord Stream 2 (NS2), to possible disruption in flows through Ukraine, to an extreme case of a total loss of gas supplies from Russia next winter
- The suspension of Nord Stream 2 and possible disruption to flows through Ukraine pose limited risks to security of gas supplies in Europe. The market could respond through an increase in LNG imports and pipeline flows from North Africa
- In the extreme case that Russian gas imports cease, due to a decision by either Russia or European governments, this would leave a gap of 109 bcm (38% of projected supply) next winter to be met by other sources or demand reductions. Alternative supplies could be increased through a combination of higher LNG imports, and increased production from domestic and other sources (including the Groningen field in the Netherlands, although this carries environmental risks)
- Storage plays an important role in meeting winter peak gas demand, but European gas stores are currently at low levels. Replenishing storage to fill the supply gap next winter would cost in the order of 60-100 EUR billion and likely require Government intervention
- Even with significant efforts to increase supply, this still leaves a gap of up to 33 bcm which would need to be met through reductions in gas consumption. This can be achieved through a combination of: gas to coal fuel switching, keeping up to 25 GW nuclear and coal power stations online across Europe which were due to retire; demand reduction or fuel switching in industry; and efficiency savings or behaviour change in households. These measures together could reduce gas demand by up to 14% to bridge any supply gap.
- Most of these measures present significant economic, societal and technical challenges. In particular, there are technical and commercial barriers to extending the life of the nuclear and coal plants, as they need to deviate from their decommissioning schedules and secure alternative and adequate fuel supplies.
The Russia-Ukraine war could result in a ‘weaponisation’ of energy and disruption to Russian gas and/or coal supplies to Europe – triggered either by Russia itself, or by European governments wishing to pursue this as an economic sanction on Russia.
Europe depends heavily on Russian gas to meet its needs – representing around 30-40% of Europe’s gas supply mix overall, but higher in some southern and eastern European countries. Russia also provides of 50% the coal used in Europe. Europe’s own gas production is ageing and continues to decline, having decreased by 36% between 2015 and 2021. European gas storage levels are currently at the bottom of the five-year range.
In recent days, European Governments have highlighted the EU’s reliance on Russian energy supplies and associated vulnerability. European Commissioner for Energy, Kadri Simson, has commented that whilst the EU is prepared for Russia to cut gas supplies, coping with a full disruption would be a ‘challenge’. Further analysis is needed to understand possible scenarios and assess the risks.
To this end, Aurora Energy Research has released a report examining the impact of a range of scenarios on European gas markets:
- Delay to the Nord Stream 2 pipeline following suspension
- Potential disruption to Russian gas transit through Ukraine
- Extreme case of total cut in supplies from Russia
NS2 suspension and possible disruption to Ukraine gas flows present cost but not security challenges
Following the start of Russia’s military activities in Ukraine, the German, US and UK Governments have imposed a set of sanctions resulting in the suspension of certification the Nord Stream 2 pipeline (which was otherwise expected to come online shortly). The company behind NS2 has since laid off all local employees.
In a scenario where the NS2 pipeline is delayed until 2025, Aurora’s analysis shows that Europe would be more reliant on LNG than previously expected – with LNG imports increasing to pre-COVID levels of over 100 bcm per annum until NS2 comes online.
In a second scenario, the NS2 suspension is combined with a disruption to flows through Ukraine. In this case, European gas demand would need to be satisfied through increased LNG imports (reaching a maximum of 128bcm in 2024) and North African pipeline flows (increasing to over 50bcm). Higher demand for LNG into Europe would drive up European and global gas prices.
These scenarios do not present a significant security of supply risk to Europe as a whole – but there is significant risk of congestion within Europe due to limited downstream pipeline capacity to bring gas from LNG and African import terminals to consumers. Increasing reliance on LNG and North African pipeline gas would put significant upward pressure on gas prices in Europe. In the last week, Asian LNG prices have jumped alongside European gas prices because of the expected pickup in Europe’s appetite for non-Russian gas sources. In Germany, gas prices have risen by 82% and power prices by 78% since the start of the war, nearing historic highs.
Total loss of Russian gas presents a major security of supply risk to Europe; this can be mitigated through supply diversification and demand reduction measures but at significant cost and uncertainty and requiring strong government intervention in power and gas markets
Aurora has analysed an extreme scenario in which there is a total loss of Russian gas into Europe prior to winter 2022-23 – a loss of around 195 bcm per annum, or 109 bcm during the winter peak period (October 2022 – March 2023).
Alternative supplies could be increased to fill the gap in Russian supply, through the following measures:
- Increasing domestic production in Europe and North African pipeline imports can together provide an additional 25 bcm in total and have limited scope to increase this any further. Algerian and Libyan flows are below capacity due to higher domestic demand and stagnant production
- The Dutch Groningen field is planned to be mostly shut by the end of 2022, but if kept online, it could add some supply. However, this carries environmental risks, as many wells have been shut to reduce earthquake risk, and production limits are legally binding
- European wholesale gas customers would need to compete on the LNG spot market to secure the balance of additional volumes, amounting to 24 bcm, at substantial cost. LNG imports are limited due to pipeline constraints between Spain-France, which is too small to maximise use of Spanish LNG import capacity during the winter season.
- In addition, Europe gas customers would need to ensure sufficient injections into storage prior to next winter. Storage typically plays an important role in meeting winter peak gas demand. If European stores were replenished to ~90% of capacity ahead of a loss of Russian supply next winter, they could deliver up to 75bcm next winter and eliminate the supply gap. However European gas stores are currently at low levels because gas prices were already too high during the 2021 summer injection season to incentivise strong injections. The cost of filling storage to 90% is in the order of EUR 60-100 billion based on prevailing gas prices. Hence there may be a need for intervention by European governments ensure storages are filled – indeed the German government is already intervening to require minimum storage levels ahead of next winter.
Any remaining gap in supply would need to be bridged by measures to reduce gas demand across all sectors of the economy. Such measures could include the following:
- Economically driven gas to coal switching – if gas prices remain high then this will push coal into merit in the power sector, reducing gas demand by in the order of 6 bcm next winter compared to a baseline scenario. This has the downside of pushing up CO2 emissions and undermining European efforts to decarbonise.
- 25 GW of nuclear and coal plant closures across Europe could be delayed to offset ~12 bcm of gas demand by gas-fired power plants. However, the feasibility of doing this on this scale is subject to considerable technical and commercial uncertainties, as each plant would need to deviate from existing decommissioning schedules. It is likely technically and commercially challenging to source adequate fuel supplies from non-Russian sources at short notice, particularly for the nuclear fleet
- Prolonging the use of the coal fleet in European countries will also increase coal demand (~13Mt), which would need to be secured, and increase GHG emissions by 22 Mt CO2 eq, in a further setback to European decarbonisation efforts. In the event that Russian coal imports were also halted, this would exacerbate an existing and significant challenge by coal power plant operators (particularly in Germany, Belgium and the Netherlands) to secure alternative supplies of coal to maintain existing levels of coal-fired power generation
- Industrial demand reductions are only possible in the short term through fuel switching or curtailment of production (some of which will happen economically as a result of high prices). This scenario carries risk of impacting production and hence revenues for energy-intensive industrials.
- Modest reductions in residential gas demand could be achieved over this timescale. Demand would fall partly as a result of high prices, although this comes at the expense of standard of living as more households risk falling into fuel poverty. Demand reductions could be accelerated through behaviour change or energy efficiency programmes – although this offers more potential in the medium to long term than short term horizon.
- A colder or warmer than average winter would affect the supply-demand balance. Variability in gas consumption historically suggests that demand in winter could be ~+/- 5 per cent (+/-10 bcm). If we experience a colder winter, then this increases the challenge of securing sufficient gas supplies.
Richard Howard, Research Director at Aurora Energy Research commented:
“The Russia-Ukraine war has exposed Europe’s dependency on Russian energy imports. In the event of a cut in Russian gas supplies, Europe could diversity to some extent to LNG imports, and achieve a modest boost in domestic production. Gas storage could play a role, but replenishing gas storage ahead of next winter is likely to cost in the order of €60-100 billion given prevailing gas prices and low storage levels, and require strong government intervention. Gas demand could also be reduced to bridge the gap – for example by keeping nuclear and coal on the system longer, and through efficiency improvements or behaviour change – but these measures involve significant cost and delivery risk.”
Anise Ganbold, global energy markets lead at Aurora Energy Research commented:
“As the Russia-Ukraine war escalates, the ‘weaponisation’ of energy in Europe is becoming more likely. Our analysis shows that only by pulling out all the stops would Europe be able to fully offset a loss in all Russian gas. Europe could get more gas supply from LNG, Africa, and domestic production, but additional action to cut gas demand would also be needed. Reducing gas use can come for example by keeping coal plants running and reducing industrial use – but many options will carry significant economic and climate cost, and require coordination between governments. Governments and regulators have already intervened in European energy markets to limit consumer bills – these interventions will now be needed for longer to protect against rises in consumer bills and supplier insolvency.”
Manuel Koehler, Managing Director EMEA at Aurora Energy Research commented:
“Is it feasible for Europe to cope without Russian gas next winter? It would cost tens of billions and require significant regulatory intervention in gas and power markets, but yes, the EU could stem its use of Russian gas. To put this into perspective, the associated cost and extent of regulatory intervention required will likely be an order of magnitude below the level which the EU and its members state were able to mobilise to cope with the COVID-19 crisis”
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