Page 29 - Russia OUTLOOK 2023

slack sufficiently quickly and are constrained by supply of key minerals
(copper, aluminium, battery metals, etc.). Bringing new gas, oil or nuclear
projects on stream is capital intensive and takes at least 4-5 years.

15% reduction in EU gas consumption

Given the likelihood of another energy crisis next winter and the limited
supplies of gas available given the infrastructure constraints, one of few
courses of action left available to Europe is to tackle the demand side of the
equation. The EU adopted a plan to reduce consumption by 15% in July.

Germany’s ability to cut winter gas demand appears real, down c20% y/y
as of December. Faced with the loss of much of its Russian gas supply and a
sharp energy crisis, in July EU member states agreed to reduce gas demand
by 15% by winter, while Germany targeted a more ambitious 20% cut.

BCS GM analysis shows that Germany appears to have handily exceeded its
15% reduction goal. The country’s total annual gas demand is typically around
90 bcm, with about 60% of that coming in the winter months of November
through March. As can be seen in the chart above, gas consumption has
dropped noticeably this fall and early winter vs the same period last year at any
given temperature. Summer base load demand was also notably lower (с25%)
in 2022 as compared to 2021.

Demand reduction may help offset loss of Russian imports or a cold
winter. In other words, it appears that Germany may be able to reduce gas
demand in the gas year of July 2022-June 2023 by perhaps 18-20 bcm, a
significant portion of the 50 bcm of gas it typically imports from Russia in any
given year. If we extrapolate this to broader Europe, a 20% fall in demand for a
full year could imply a demand reduction of some 100 bcm, very close to the
c90 bcm drop analysts expect for Russian exports to Europe and Turkey for
2022.

Alternatively, as each 1°C of temperature drop below 15°C increases gas
demand by c3.7%, the gain in efficiencies could compensate for a winter
substantially colder than last year. Finally, analysts note that these efficiency
gains were doubtlessly not easily achieved: much of the savings probably
came as German consumers, faced with unaffordable energy bills, simply set
their thermostat at temperatures well below comfort level as temperatures
have dropped.

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