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Russian gas cutback threatens Europe’s economy

04.23.2014  | 

Europe would suffer from gas shortages and elevated prices if Russian supplies were cut as “there would be very little ability to substitute gas by another energy source", the report said.



A cut to Russian gas supplies to Europe due to escalating tensions in Ukraine would threaten the region’s economic recovery and gas-intensive industries including steel and chemicals, according to Fitch Ratings.

“A ban on Russian gas imports to Europe stemming from a deepening of the Ukraine crisis is a low-probability, high- impact scenario,” Fitch analysts including London-based Stephane Buemi said in a report. “Risk premia would spike and undermine Europe’s fragile recovery.”

Russian President Vladimir Putin threatened on April 10 to halt gas shipments to Ukraine over unpaid debt of more than $2.2 billion. About 15% of Europe’s demand is met by Russian imports flowing through Ukrainian pipelines. Supplies to the continent were disrupted in 2006 and 2009 amid freezing weather due to price disputes between the two countries.

If Russia were to cut supplies, rising gas prices might result in accelerated mothballing or closing of capacity among energy-intensive industries, Fitch said. Energy expenses represent more than 50% of a chemical producer’s costs and there’s little room for energy-efficiency improvement in Europe’s steel industry, according to the report.

“The shale gas revolution in the US and new capacity being built in other gas-rich areas could force operators to close their European activities earlier than previously anticipated,” Fitch said, estimating such energy-intensive sectors account for 18% of Germany’s annual gas demand.

LNG Market

Europe would suffer from gas shortages and elevated prices if Russian supplies were cut as “there would be very little ability to substitute gas by another energy source to heat residential and commercial spaces,” the credit-rating company said. The region’s demand for Russian gas equates to half of global production of the liquefied fuel, or LNG, and so tapping that market would “yield limited volumes,” it said.

“We anticipate that LNG spot prices could shoot beyond what Japan pays for its LNG, already at a structural premium over European gas prices,” Fitch said. “LNG prices under long- term contracts could also rise materially as we expect the oil price against which the gas is indexed to rise on increased risk premia from heightened tensions from the Ukrainian crisis.”

While Europe has “plenty” of LNG regasification capacity, most plants are located far from the countries that most need to replace Russian gas, according to the report. The nearest facilities to central and eastern Europe are Zeebrugge in Belgium and Gate in the Netherlands, with respective capacities of 9 billion and 12 billion cubic meters.

Pipeline Supply

The UK, Norway and Holland could increase gas production by 10 billion to 20 billion cubic meters, or 7% to 14% of Russian supplies, Fitch estimated. Still, economic, political and logistical hurdles mean that additional output would only be available for a short time, it said. Algeria could also supply an additional 15 billion cubic meters of gas to Spain via pipeline, according to the report.

“A temporary disruption just affecting gas supplies via Ukraine is a more likely scenario, for which Europe is better prepared due to high reserves and the recent opening of a new pipeline from Russia to Germany,” Fitch said.

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