"Europe's ambitious plan to cut its reliance on Russian gas by two-thirds this year just might work. But it will come at a price -- economically or environmentally.
The European Union is expected to release another round of sanctions this week covering industries such as steel and luxury goods, but the kind of bans on Russian energy introduced by the U.S. and U.K. aren't on the table. The bloc's road map to end its dependence on Russian fuels by 2027 gives it plenty to do.
The EU wants to reduce Russian gas imports to an annual run-rate of around 55 billion cubic meters next year from about 155 billion cubic meters currently. It can source about 10 billion cubic meters more gas through existing pipelines from Norway, Algeria and Azerbaijan, but it will need to buy five times that amount as liquefied natural gas.
Europe probably has enough import capacity to make it work, but it will mean the complications and inefficiencies of moving more fuel around the bloc. Spain, France and Italy have several LNG terminals but Germany, the bloc's biggest gas importer, has none as it previously opted to rely on Russian pipelines. It now plans two LNG facilities, but these will take years to build.
Then there is the question of supply. With Washington's help, Europe imported a flood of LNG in the first two months of this year, but it will be very expensive to win that much of the limited global spot market indefinitely. Between 40% and 50% of China's LNG imports in the past two years have been spot volumes, but that fell to 10% to 20% in January and February, says Sindre Knutsson, an analyst at consulting firm Rystad Energy. China and Europe risk getting into a bidding war as they look to refill inventories.
Eventually, Europe can lower LNG costs by signing long-term supply contracts for expansion facilities in the U.S. or Qatar. The earliest these could come online is 2024, said Mr. Knutsson.
The EU plans to increase the energy efficiency of buildings and homes to save 14 billion cubic meters annually, including 10 billion cubic meters from turning down heat by 1 degree Celsius in buildings. The bloc has a patchy record of hitting efficiency targets, but today's high energy costs and public goodwill in the effort against Valdimir Putin should help it do more this time.
If these measures don't work, there are dirtier options. For now, the EU plans don't include switching on mothballed coal-fired power plants, which could offset as much as 40 billion cubic meters, says Simone Tagliapietra of EU think tank Bruegel.
Some so-called demand destruction is also likely as industrial users cut projects rendered uneconomic by higher costs. Historically, demand was destroyed when oil costs exceeded 4% of gross domestic product, says Neil Beveridge, an analyst at Jefferies. They are now at 4.5%.
Investors have a few ways to buy into the EU plan. Energy-efficiency suppliers Schneider Electric and ABB are profitably capitalizing on the electrification megatrend. Wind-turbine makers Vestas, Nordex and Siemens Gamesa look set to gain, though they are particularly exposed to cost inflation. Renewable developers Iberdrola, Enel and EDP will likely also benefit, as could LNG suppliers Shell, Equinor and Cheniere Energy, though some of these companies face a risk of windfall taxes.
It remains unclear who will end up footing the bill for higher energy costs. Most likely the pain will be broadly shared by governments, consumers and companies. Europe can do without Russian gas, but its economy will take a hit." [1]
That will help China to win the
competition with Europe. The competition will destroy Europe’s high precision machinery and automotive
industries. With the industries gone, Europe will become pastures and
forests one more time. Mother Merkel, we miss you already...
1. Europe's Energy Security Comes at a High Cost
Toplensky, Rochelle.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 15 Mar 2022: B.11.
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