Sizing Up Europe’s Options for Reducing Dependence on Russian Natural Gas

Europe has cause for cautious optimism in its efforts to reduce its dependency on Russian gas in the years ahead, but the near-term challenge remains significant, according to a panel presenting the 2022 State of Global Energy Transition report jointly commissioned by UBS from Aurora Energy Research.

“In broad terms, what we've seen is an acute shortage of gas in Europe, driven by a disruption of the supply from Russia,” noted Benjamin Collie of Aurora. “That's led to spikes in prices, and that's driven up inflation quite dramatically.”

Since Russia's invasion of Ukraine in February 2022, the amount of gas that Europe has been receiving from Russia has dropped by about three quarters, Collie noted. To offset this decline, European countries have had to import more LNG from other sources. 

“To bring in all of that LNG, we've had to pay really high prices to compete against demand in Asia,” Collie noted. “That's pushed up gas hub prices, and also power market prices.”

The challenge is clear: Reducing Europe’s energy dependency on Russian gas will mean replacing about 160 billion cubic meters (bcm) a year of gas that Europe imported last year, a total that includes both pipeline gas and LNG shipments from Russia.

Europe could ease this dependence by increasing renewable energy capacity and burning more biomethane and hydrogen in place of natural gas. The Aurora report estimates that low-carbon energy substitutes could replace from one-third to two-thirds of Russian-sourced gas by 2030 under different scenarios. In addition, Europe could electrify more of its energy demand and improve the level of energy efficiency.

But low-carbon substitutes would still leave a 60 bcm to 100 bcm of Russian gas consumption that will need to be replaced, Collie noted. Increased LNG imports are the most likely solution to addressing that shortfall. Current LNG import capacity in Europe is about 216 bcm, but a further 28 bcm is under construction, and an additional 81 bcm in capacity has been proposed. It’s possible that Europe could have an additional 109 bcm of capacity in place by about 2027, Collie said.

Ramping up LNG imports implies a significant increase in long-term investment in infrastructure, Collie noted, notably in additional liquefaction capacity in gas-exporting countries. Investors in this infrastructure will likely demand long-term commitments from LNG purchasers.

“It's likely that European markets will have to sign up to long-term fixed-price contracts, possibly leading into the 2030s at prices that might be quite high compared with historical gas prices, even if they are not quite as high as in the peaks of the current price crisis,” said Collie.

While, in the longer term, replacing Russian gas imports with low-carbon fuels is solvable problem, in the short-term, the gas deficit may have to be bridged by a combination of more coal generation and reduced demand, the Aurora report notes.

In 2022, switches from gas to coal at existing plants will replace about 7 bcm of Russian gas consumption in Europe and bringing closed-down coal plants back online could replace another 8 bcm. On the demand side, reducing residential demand by about 4% through steps such as setting thermostats lower and a 10% reduction in industry demand will be needed for the remainder of 2022.

By 2023, Russian gas imports are expected to be at very low levels and LNG imports won’t have had time to ramp up. The report’s 2023 estimates assume a similar level of coal generation replacing gas, but also a 5% reduction in residential demand. Under the report’s model, industrial demand would decline much more – by 30%, raising concerns about the business and economic impact. But Collie noted that current trends suggest that the outcome could be less onerous, and there are reasons for cautious optimism.

"What we expect will happen in practice is that we might see some of the green and sustainable pieces…ramp up a little bit more quickly than we expected,” he said. More investment in energy efficiency measures and fuel-switching by companies are also likely to accelerate. “We're already seeing some companies trying to put oil-burning generation on site in order to mitigate some of the reduction in gas usage,” he noted.