Russia Sanctions

The fear of energy sanctions on Russia saw gas and power prices spike early March 7 before European leaders moved to play down the likelihood of such a move.

"Europe has deliberately exempted energy supplies from Russia from sanctions," Germany's Chancellor Olaf Scholz said in a statement.

Similar statements by Dutch Prime Minister Mark Rutte and UK Prime Minister Boris Johnson followed, deflating front-month Dutch TTF gas on the ICE exchange from Eur345/MWh in the morning to a Eur227.20/MWh settle -- still a record for the contract.

Similarly, front-month German baseload power was up over 54% at one point to Eur675/MWh on the EEX exchange before falling back to Eur440/MWh late afternoon, again above the contract's record settle.

Economic sanctions already imposed on Russia, twinned with ongoing military action inside Ukraine and deteriorating relations between the Russian State and the West continue to cast enormous uncertainty over the immediate availability of Russian gas to Europe in 2022, S&P Global Commodity Insights analysts said.

The following are key developments impacting power and gas assets in the region:

Trade
Russian gas transport through Ukraine has been in decline in recent years and fell sharply at the start of 2022, but is now flowing at maximum contractual levels as Gazprom-contracted gas becomes more competitive versus hub gas. So far, the war has not led to any disruption to gas transit.

- Ukraine remains a key transit route for Russian gas to Europe, accounting for a little under 10% of Europe's gas demand in 2021.

- Under a five-year transit deal between Gazprom and Ukraine's Naftogaz in 2019, the Russian company agreed to send a minimum of 110 million cu m/d of gas via Ukraine to Europe under ship-or-pay terms in 2022, meaning it must pay for that level of transit whether it uses the route or not.

- Deliveries via Ukraine fell sharply in January, but have been at the contractual maximum of 110 million cu m/d in recent days.

European electricity transmission system operators are to consider Ukraine's request for emergency synchronization with the continental European network in mid-March, enabling flows of power from the west.

- The Ukraine power system has been operating in independent mode after delinking from Russia and Belarus Feb. 24.

- The network has maintained stable supply despite localized outages since the conflict began, coal stocks having been built up at power stations ahead of desynchronization.

Russian Gas

In a major shift of energy policy, the European Commission is looking to drastically reduce Europe's imports of fossil fuel from Russia following Russia's military actions in Ukraine. S&P Global Ratings believes this is unlikely to end well for European gas players, mainly because other gas sources cannot replace the large volumes from Russia. What's more, we believe some energy-intensive industrial sectors like fertilizers, steel, and paper could face temporary plant closures, hampering the eurozone's GDP growth, with a potential knock-on effect on utilities.

The Commission unveiled the outline of its plan to make Europe independent from Russian oil and gas on March 8. The proposal--REPowerEU--will seek to diversify gas supplies, speed up the rollout of renewable gases, and replace gas in heating and power generation, thereby reducing EU demand for Russian gas as soon as possible, with the target initially set at two-thirds before the end of the year. As essential as such a plan is for Europe's energy security, it may not be easy to implement. Gas production in Europe has been in structural decline for years. In addition, there are limited sources of gas globally and supply lags due to underinvestment, while expanding regasification capacity will take time. Also, most of the world's liquefied natural gas (LNG) production is currently locked into long-term contracts not destined for Europe, and large supply increments are unlikely before 2025-2026.

How Dependent Is Europe On Russian Gas?

The EU imports 90% of the gas it consumes and, on average, about 40% of that comes from Russia (45% in 2021). This represents about 140 billion cubic meters (bcm) per year. In the U.K., the situation is very different, since Britain imports only 5% of its total gas needs from Russia.



We believe that, in the best case, all else being equal, Europe can find about 50 bcm of gas elsewhere, leaving a shortfall of about 90 bcm. According to S&P Global Platts Analytics, the most likely sources this year would be, in order of likelihood: international imports of LNG (25 bcm), Italy's strategic reserve (4.6 bcm), a potential increase in Norwegian production (10 bcm), additional flows to Italy from Algeria and Libya (10 bcm and 4 bcm respectively), and increased production in the Netherlands by expanding the Groningen permit (2 bcm).

We see additional LNG imports beyond these levels as challenging. Notably, this is because it takes two to three years to build an LNG terminal, so an immediate increase in Europe's regasification capacity is not possible.

Nord Stream 2

The recently created German subsidiary of the Nord Stream 2 operating company -- Gas for Europe GmbH -- expects to be wound up, the company said on its website.

In an undated message on the home page of its website, Gas for Europe said: "Due to current developments, also at our shareholder Nord Stream 2 AG, Gas for Europe GmbH will probably be wound up."

Switzerland-based Nord Stream 2 AG said in late January that Gas for Europe GmbH had been established to operate the 54-km section of the pipeline located in German territorial waters in response to an order from the German regulator as part of the certification process for Nord Stream 2.

Nord Stream 2 AG denied March 2 reports that it had filed for bankruptcy, however, saying it had only informed local authorities that it had terminated employee contracts.

Numerous media reports, citing sources and Swiss officials, on March 1 said Nord Stream 2 AG had filed for insolvency or was planning to after US sanctions were imposed against the company on Feb. 23.

Regulation

The European Commission March 23 proposed new rules on minimum gas storage obligations, saying storage sites in the EU would have to be filled to 80% of capacity by Nov. 1 this year, before rising to 90% in subsequent years.

Effect on Energy Transition

The European Commission's plan to replace Russian gas imports in part with higher renewable gas production is a "decisive" step toward a more rapid development of the sector, European gas industry groups said March 8.

The EC on March 8 unveiled new energy security proposals under the REPowerEU initiative that seek to reduce European demand for Russian gas by two-thirds by the end of 2022.

It said it would seek to diversify gas supplies, speed up the roll-out of renewable gases and replace gas in heating and power generation.

On biomethane specifically, the EC said production in 2022 could deliver 3.5 Bcm to replace Russian gas, and reach 35 Bcm/year by 2030.

That is higher than the 17 Bcm the EC had flagged by 2030 under its "Fit for 55" proposals published last year.

"REPowerEU is a decisive step towards the rapid development of the biomethane industry in Europe," the European Biogas Association (EBA) said in a statement.

"The sector is ready to deliver the 35 Bcm by 2030 proposed by the EU and calls for the inclusion of this target in the recast of the Renewable Energy Directive, currently under development," it said.

"Close cooperation between the European Commission, member states and the biomethane value chain will be required to ensure immediate action."

'Key steps forward'

As well as the more ambitious biomethane target, the EC said some 20 million mt/year of hydrogen supplies would replace 50 Bcm of Russian gas by 2030.

Twelve gas industry groups said March 8 these developments in particular were "key steps forward".

The groups -- including Eurogas, the EBA, Gas Infrastructure Europe, Gas Naturally, and the NGVA -- already last year launched a joint call for binding EU targets to reduce the greenhouse gas intensity of gas consumed and increase demand for renewable gas.

"Such targets would send clear signals to investors in terms of decarbonizing gas and scaling up renewable gases," they said. "At the time of the original call, binding 2030 targets were deemed urgent."

Further Reading