Europe can replace Russian gas in the medium-term only

The replacement of Russian gas in the European energy mix could be challenging in the short term, which will keep gas prices high, but is feasible in the medium term, Fitch Ratings said.

The search for alternatives has accelerated due to the Ukrainian crisis and related European sanctions that may lead to supply disruptions or even a complete supply cut-off. The European Commission’s (EC) policy package aims to reduce dependence on Russian gas by two-thirds by year-end.

Europe imports about 60% of its gas demand according to BP’s Statistical Review of World Energy, with Russia supplying about a third of European gas consumption; 152 billion cubic metres (bcm) by pipeline and 17bcm as liquefied natural gas (LNG). The dependence on Russian gas varies by country, with Germany and Italy importing the highest volumes, Fitch Ratings said.

The EC’s REPowerEU package proposes to replace about 100bcm of Russian gas by year-end with 50bcm from additional LNG supplies from elsewhere, with the rest coming from wind and solar expansion, energy savings and diversification of pipeline gas sources.

The EU has sizeable LNG import capacity of about 157bcm a year, according to the EC, of which only 80bcm was used in 2021, leaving room for additional volumes. However, most LNG import terminals are concentrated in Spain, Portugal, France and Italy with limited existing pipeline infrastructure to deliver gas to Germany and some Central and Eastern European countries that are most dependent on Russian pipeline gas.

The European market’s resilience would be tested in the event of a full near-term supply cut-off by Russia but the impact would depend on its duration. Russia’s ability to redirect gas volumes earmarked for Europe is limited, which may deter it from unilateral long-term supply stoppages. Russia only exported 3.9bcm of gas by pipeline and 6.9bcm as LNG to China in 2020.

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