By Laura Sanchez

Investing.com – Europe continues to look for viable alternatives to not relying on gas from Russia to meet its energy needs. Russia is currently supplying Europe with approximately 35-40% of its energy needs. Europe must diversify its sources of gas and work towards a transition to cleaner energy. This has been highlighted by the conflict in Ukraine. The International Monetary Fund warns us that we won’t have enough gas for the winter if our supply from Ukraine is interrupted.

The question is: Is Europe’s “REPowerEU” plan to decrease dependence on Russian gaz a viable one? The plan’s five major objectives are discussed and analyzed by the Schroders team of energy specialists – Mark Lacey (global energy and precious metals portfolio manger); Alexander Monk (global renewables analyst); and Felix Odey (manager’s global renewables analysts).

Objective 1: Import additional 50 million cubic metres of LNG from other sources

Europe has been decreasing Russian gas consumption since before the invasion. It also imported more LNG. Problem is, the US is unable to provide such a large supply and Europe competes with other countries for LNG import cargoes.

Global LNG markets are currently estimated to be around 400m tonnes annually (mtpa) or 560,000 BCM. The market is predicted to increase by 20-25 million tonnes each year in the coming decade as major markets such as India and China expand their LNG import capabilities.

One problem with LNG is its liquid nature. It must then be made into gas. It is called “regasification” and Europe does not have a lot of LNG regasification capability.

The imports of European LNG have almost doubled in the past quarter 2021 and reached 16Bcf/day (billion cube feet) February 2022. This figure is very close to 20Bcf/day.

The European market doesn’t have gas access just because the theoretical capacity is there. Spain and Portugal for instance have 7Bcf combined capacity daily. However, the pipeline capacity for the rest of Europe averages closer to 4Bcf/day making it difficult to transport all the additional gas to markets such as Germany and Austria.

Europe has plans for an expansion of its LNG import capacities. However, the negative news is that infrastructure construction has still not begun.

Goal 2: To increase non-Russian pipe imports by 10,000 Bcm

What about expanding supply via existing pipelines if shipping more LNG isn’t an option? It will require further field development to make this possible. The fields currently producing are working at their full potential.

Algeria produces around 3.5Bcf/day. Sonatrach is currently working on the Tinrhert expansion. The project will supply an additional 0.4Bcf/day, but no major expansions of gas fields are currently planned.

The UK and Norway together supply Europe currently with around 15 Bcf/day. Unfortunately, in the recent past, there has not been much field development, like it was in Algeria.

Goal 3: Increase renewable energy production to reduce natural gas consumption by 20,000 Bcm

The most sustainable and logical solution is to focus on renewable energy. But, this is not a sustainable solution. It will only provide enough gas to replace 20000 bcm in 2023.

Cost-wise, renewable energy generated from solar and wind is still significantly less expensive than that from coal and CCGT (combined cycles). Recent increases in electric and gas prices have made the cost ratio argument unassailable.

But, the capital investment required for renewable energy generation remains far lower than what is necessary to reach 2030/2050 goals. This is also true of the investment required for transmission and distribution network infrastructure.

Not political will, or the return on investment are the main obstacles to more renewable energy production. The problem with logistics and transporting equipment from factory to project site is the biggest obstacle. Because of the recent re-emergence Covid-19 in China, the supply of chip industries remains restricted and there is a severe shortage of containers and cargo ships.

This is the expectation of equipment manufacturers and developers in renewable energy. This isn’t a quick fix.

Goal 4: Reduce the demand for energy by using efficiency measures of 15,000 billion dollars

While the first three target areas we addressed are mainly focused on the supply side of the equation, what about the demand side? Could measures like turning down thermostats or installing heat pumps be effective in reducing the temperature?

 Gas is used to heat around 35% of commercial and residential buildings in the EU. There is no doubt that the current high gas  and electricity prices are causing a temporary and permanent destruction of demand.

High gas prices are prompting many industries to announce short-term closures, especially cement manufacturing and fertiliser. According to a Bloomberg analysis, an average 1.75° Fahrenheit temperature drop could result in a 10% reduction in Europe’s residential and commercial annual demand (or approximately 14,000 billion cubic meters).

Where feasible, heat pumps are an effective way to reduce overall gas  consumption. With the goal of increasing the EU’s market share by 10 million units over the next five year, the EU is accelerating their use in homes. This will result in natural gas demand being replaced by 1.5-2 billion cubic feet per year, according to our estimates. Residential and commercial consumers face the greatest hurdle: the cost of the boiler, which costs more than twice as much as a traditional boiler. The relative price of a boiler will rise as more people buy it.

Goal 5: Increase storage capacity to 80% by November

Finaly, REPowerEu plans include a goal to fill storage capacities to 80% by November 2022, then to 90% over the next five years. The target is somewhat standard, as it stipulates that the market participants (utilities/storage providers) will have to purchase gas at all prices during summer. This would avoid another winter peak.

The current gas storage levels for Europe are about 25% below the normal but higher than 2018’s lows.

US farmers will be the beneficiaries

There are not easy solutions for Europe in terms of natural gas substitutes. Europe currently relies heavily upon imported LNG volume to supply its energy needs. The REPowerEU action program will speed up the transition to lower-risk suppliers.

America is on track to be the leader. There is a large resource base available in Texas, Texas, the Permian and Appalachian regions. This gives the country the potential to be a major exporter. The majority of the gas will likely be exported to Europe.

The forward prices of gas contracts in the US are already higher than they were two years ago, at $3.50-4.00/Mcf. As the US grows in importance as a global supplier of gas, long-term price could rise.

The US will benefit the most from increased prices and demand by companies that have a lower-cost resource base as well as easy access to US LNG export capabilities.