Investing.com – Europe continues to explore viable alternatives to depending on Russian gas for its energy needs. Russia currently supplies Europe with 35-40% of its . The war in Ukraine has highlighted the urgent need for Europe to diversify its gas sources and the long-term goal of switching to clean energy sources. Meanwhile, the International Monetary Fund (IMF) is warning that there will be insufficient gas in the region next winter if supplies from Ukraine are halted.
It is therefore questionable whether Europe’s REPowerEU plan to reduce dependence on Russian gas is viable. The team of energy experts from Schroeder (LON:) — Mark Lacey, Global Energy and Precious Metals Portfolio Manager, Alexander Monk, Global Renewables Analyst, and Felix Odey, Manager’s Global Renewables Analyst — discusses the plan’s five key objectives and the challenges they face.
Goal 1: Import an additional 50 billion cubic meters of LNG from alternative sources
Even before the invasion of Ukraine, Europe had reduced its consumption of Russian gas and was importing more LNG. The problem is that the US cannot offer such a rich supply and Europe is competing with other countries for imported LNG cargoes.
The global LNG market is currently around 400 million tons per year (mtpa or 560,000 bcm). It is expected to grow by at least 20-25 million tons per year over the next decade as key markets such as China and India increase their LNG import capacity.
Another hurdle is that LNG, as the name suggests, is a liquid and needs to be converted back to gas before it can be used. This is a process called “regasification” and Europe has very little LNG regasification capacity.
European LNG imports have already nearly doubled since the first quarter of 2021, reaching 16 Bcf/day (billion cubic feet) in February 2022. That number is close to the “theoretical capacity” of 20 billion cubic feet per day.
Unfortunately, “theoretical capacity” does not mean that the European market has access to gas. For example, Spain and Portugal have a combined capacity of about 7 billion cubic feet per day. But pipeline capacity to the rest of Europe is closer to 4 billion cubic feet per day, making it impossible to get all that extra gas to markets that need it, like Germany or Europe.” “Austria.
The good news is that Europe plans to further expand its LNG import capacity; The bad news is that construction of the necessary infrastructure has not yet started.
Goal 2: Increase non-Russian imports by pipeline by 10 billion cubic meters.
If shipping more LNG isn’t the answer, how about increasing supply through existing pipelines? This will be very difficult without additional field development. The production fields are currently working at full capacity.
About 3.5 billion cubic feet per day comes from Algeria, where operator Sonatrach has the Tinrhert expansion project under construction. This project will provide an additional supply of 0.4 billion cubic feet per day; however, no further major gas field expansions are planned.
Together, Norway and the UK currently supply Europe with production of around 15 billion cubic feet per day. But as in Algeria, field development has been very limited in recent years.
Goal 3: Reduce demand by 20,000 bcm by increasing renewable energy production.
Focusing on renewable energy is the most logical and sustainable solution. However, this is a long-term solution that will not provide enough capacity to replace 20 trillion m3 of gas in 2023.
From a cost perspective, renewable energy generation from wind and sun is already significantly cheaper than energy generation from combined cycle power plants and coal, even with recently increased commodity prices. Given the recent hikes in gas and electricity prices, the cost ratio argument is unassailable.
However, investments in renewable energy generation are well below what is needed to meet the 2030/2050 targets. The same applies to the associated investments in transmission and distribution grids.
The main obstacle to increasing renewable energy production is not political will or return on investment, but the problem of logistics and moving the equipment from the plant to the project site. This is explained by the confinement of major Chinese cities due to the resurgence of Covid-19, the fact that supplies to the chip industry remain limited, and the fact that cargo ship availability and container capacity remain seriously disrupted.
Equipment suppliers and renewable energy developers expect these supply chain constraints to gradually ease in 2023. Again, this is not a panacea.
Goal 4: Reduce consumption by 15,000 billion cubic meters through energy efficiency measures
The first three targets we’ve covered broadly cover the supply side, but what about the demand side – could actions like turning down the thermostat or installing heat pumps make a difference?
Around 35% of commercial and residential buildings in the EU are heated with gas. There is no doubt that today’s high gas and electricity prices will lead to a temporary and permanent drop in demand.
On the temporary side, many industries — including fertilizer and cement manufacturing — are announcing short-term plant closures due to high gas prices. Meanwhile, a recent Bloomberg analysis suggests that a 1.75 degree Fahrenheit drop in the thermostat could reduce annual residential and commercial demand in Europe by 10% (or about 14 trillion cubic metres).
Where possible, heat pumps are an effective means of reducing overall gas consumption. The EU wants to accelerate their introduction into homes, with a goal of expanding the European market by at least 10 million units over the next five years. We estimate that this will contribute to the substitution of natural gas needs by around 1.5 to 2.0 billion euros. The main obstacle for the private (and commercial) consumer remains the initial cost, which is more than double that of a traditional boiler. We believe relative costs will improve over the next five to ten years as volumes increase.
Goal 5: Restore storage to 80% capacity by November.
Finally, the REPowerEu plan includes a storage capacity fill target of 80% by November 1, 2022 and 90% in all subsequent years. This is a rather conventional target as it essentially dictates that market participants (suppliers/storage operators) must buy gas in the summer market at all costs to avoid a new winter peak.
Currently, gas storage levels in Europe are around 25% lower than normal, but above the 2018 lows.
US natural gas producers will benefit
In summary, there is no easy answer for Europe when it comes to replacing natural gas. Europe is now largely dependent on imported quantities of LNG to meet its energy needs, and the REPowerEU Action Plan will accelerate the transition to new, lower-risk suppliers.
The United States stands ready to lead the way. It has significant resources in the Appalachian, Texas and Permian regions which offer the opportunity to become a major exporter of natural gas. Most of this gas is likely to be destined for the European markets.
US gas futures prices are already up from less than $3.00/Mcf two years ago to between $3.50 and $4.00/Mcf today. We believe long-term prices could continue to rise as the US becomes an increasingly important global gas supplier.
The US companies best positioned to take advantage of this increased demand and price will be those with an inexpensive resource base and easy access to US LNG export facilities.