Page 28 - Russia OUTLOOK 2023

transparency in these markets.
It appears as though the Commission will set this cap well above the market rate
which suggests that they only want to cap prices in an extreme situation, where
high prices (similar to levels seen in August) are sustained. Furthermore, the
longer-term goal of setting up a new benchmark is not going to solve the issue of
bottlenecks in European gas infrastructure. TTF is trading at a premium to LNG
prices because of the bottlenecks in LNG regasification capacity and pipeline
infrastructure. At the end of the day, the only viable long-term solution for Europe
is increasing supply and removing some of the bottlenecks facing the industry.

Europe’s gas storage sites were filled to 95% of capacity as the heating
season started in November 2022, putting them five percentage points above
the five-year average. But high storage levels, a drop in gas prices as a gas
glut built due to the lack of spare storage space, and unusually mild
temperatures “should not lead to overly optimistic conclusions about the
future,” the IEA said.

If Russian gas supply to Europe is halted completely, and if Chinese LNG
imports ramp up, the IEA estimates that there will be a 30 bcm supply-demand
gap for Europe, at a time when the continent will urgently need to restock for
the following winter. This gap could represent nearly half of the gas needed to
fill storage facilities to 95% of capacity by the start of the 2023 heating season.

IEA executive director Fatih Birol said: “When we look at the latest trends and
likely developments in global and European gas markets, we see that Europe
is set to face an even sterner challenge next winter.”

Governments need to carry out “immediate action,” Birol said, “to speed up
improvements in energy efficiency and accelerate the deployment of
renewables and heat pumps – and other steps to structurally reduce gas
demand.”

In the short to medium term, there is little optimism about the world’s ability to
solve the energy crisis, nor about the prospect of lower energy prices – due to
interference with markets.

Despite high prices, oil and gas companies have curtailed capital expenditures
and drilling, choosing to distribute cash to shareholders. Why invest when
there is so much interference from environmentalists, politicians, even
activist-appointed board members? Oil and gas companies are legitimately
concerned that they may end up with stranded assets – oil and gas that will not
be sold, just stuck in the ground.

It appears likely that energy prices will remain high for at least 4-5 years, even
if there is a recession, because hydrocarbon-based energy still accounts for
84% of global energy supply; alternatives appear incapable of taking up the

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