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45-50bcm, considering a reduction
of gas consumption by two thirds to
accelerate decarbonisation trends.
Most existing production of liquified
natural gas (LNG) is locked into long-
term contracts – largely bound for Asian
markets. Furthermore, after years of
underinvestment, expanding Europe’s
regasification capabilities will take time.
LNG terminals themselves take two to
three years to build, making large supply
increments unlikely before 2025-2026.
Gas storage levels are well below the
80 per cent target, and the volatility
of the situation poses further risks to
European supply. Physical escalation of
the conflict or its geographic expansion
could damage gas infrastructure. Supply
could well be cut off through legal routes
if Europe strengthens its sanctions,
but Russia may also intervene to ban
exports before Europe is prepared.
Furthermore, a lack of physical delivery
from Russia could lead to massive losses
if companies are forced to buy gas from
alternative sources at high prices to
meet their commitments, though in our
central case we anticipate the state will
intervene in such an event.
Supply could well be cut
off through legal routes
if Europe strengthens its
sanctions, but Russia may
also intervene to ban exports
before Europe is prepared
A CRISIS COMPOUNDED
Of course, energy prices had already
begun to rise – on the back of the
planned closure of coal, lignite and
nuclear plants – before Russian military
intervention in Ukraine. Now, the
fear of shortfall in gas supply and the
resulting price surge have led to a sharp
rise in spot and forward power prices,
as gas is the marginal price setter on
European electricity markets.
As of 17 March, Europe’s main gas
index was trading 10 times higher than
the 2020 average, and was above its
December 2021 peak, which, at that
The magnitude of this plan should could yield 25bcm), use of Italy’s time, had led to heavy margin calls
not be underestimated. The EU imports strategic reserve (4.6bcm) a potential for major industry players. Even if the
90 per cent of the gas it consumes increase in Norwegian production longevity of coal and nuclear plants
– about 40 per cent of which comes (10bcm), additional flows to Italy from could be extended, it would unlikely be
from Russia (45 per cent in 2021). Algeria and Libya (10bcm and 4bcm enough to curb price rises. The most
This represents about 140 billion respectively), and increased production recent market indicators suggest power
cubic meters (bcm) per year, a huge in the Netherlands by expanding the prices in 2023 will be two or three times
volume that other sources cannot easily Groningen permit (2bcm). higher than expected in our base case,
replace. According to S&P Global Platts However, even in the best-case and an enduring gas supply-demand
Analytics, the deficit could be mitigated scenario, these options may only supply imbalance could keep pushing up
by international imports of LNG (which 50bcm of gas, leaving a shortfall of about prices beyond 2025.
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