17 July 2022 - 09:56
  • News Code: 459494
Once Upon a Time REPowerEU plan

TEHRAN (Shana) -- As tensions between Russia and Ukraine escalate, the world is worried about possible spillover of concomitant instability. Uncertainty after the covid-19-induced two-year damage on the global economy has confused the world. The natural gas market is a particular and the most important channel for transmitting these impacts.The disruption of Russian natural gas exports to Europe and the winter ahead is one of the concerns of the energy market in the short-term.Europe is seriously looking forward to replacing Russia natural gas imports withthe REPowerEU plan.

In 2020, Russia supplied about 44% of the EU’s natural gas consumption, with Germany and Italy being the top two recipients. Approximately, one-third of EU members (Germany, Austria, Bulgaria, Estonia, Finland, Hungary, Latvia, Poland, Slovakia, and Slovenia) import more than half of their natural gas from Russia; some of which is re-exported to other countries. Europe’s domestic production of natural gas has declined for more than a decade and production in 2020 was about 59% lower than in 2011. Although not an EU member, Turkey is a large importer of Russian natural gas. Additionally, Russian investment in European natural gas infrastructure such asstorage and distribution companies provide Russiawith additional leverage over certain countries.

Energy prices are at record highs and remain volatile in recent months. Just before the Russia-Ukraine political tensions, natural gas wholesale prices were around 200% higher than that of a year ago (February 2022)due to low natural gas inventory level and compared to the 5-year average. Strong global energy demand in the post-covid-19 period and significant economic recovery significantly impact the high energy prices, and additional Russia-Ukraine tension is provokingthis crisis.It is quite clear that an escalation of Russia-Ukraine tension could put up to 168 Bcm/y of Russian natural gas export to Europe at risk, if the tension causes Russia to suspend natural gas deliveries to Europe, not to mention the impact of uncertainty on theprice volatility.

Natural gas storage in the EU is apparentlyenoughto meetvarious sectors’ needs bythe end of winter 2023, even in case of full disruption of supplies from Russia. The storage level across Europe is just under 30% now. Member states already have contingency plans, as required by the Natural Gas Security of Supply Regulation that couldbe activated if necessary to guarantee supply. But the question is to know how and from where?The EUrelies onaninterconnected pipeline between member states gas network (including the availability for reverse flows) and LNG terminals. The European Commission believes that all regions now have access to more than one source of natural gas, but is it true? The European Commission has been monitoring the situation very closely and has remained in permanent contact with the member states. Europe has also made efforts to diversify energy supply routes and sources. The Southern Gas Corridor bringing gas from Azerbaijan is operational, and there iscooperation notably with Norway, Qatar, Japan, South Korea and the US, among others.

So why has Europe displayedpassive behaviorin suchan uncertain situation? Do all European countries agree with this action? Which part of Europe suffers the most from Russian gas cuts? Which European countries have the least import diversity?

Europe seems to be ignoring these questionsand intends to imposea raft of sanctions on a selected number of Russian companies, mostly based in Europe, including Gazprom Germania, a Gazprom subsidiary, and EuRoPolGaz SA. An announcement released on May 3, 2022, indicated that these sanctions prohibit Russian companies active in US, Europe and Singapore fromcontinuing business, including fulfilling commitments in the existing contracts. The decree explicitly highlights exports ofraw materials.But the extensive list of Russian sanctioned companies still remains vague.

Even though a total halt of Russia’spiped natural gas is doubtful,in case it comes true, it would put a big strain on European gas markets in winter 2022. Natural gas storagelevel has reachedfive-yearaverage lows, international LNG and European Hub prices are highly volatileand the completion of Nord Stream 2 pipeline from Russia to Germany was halted and depriving Europe of 56 Bcm/yof natural gas.Therefore, Europe’s gas market will facerisky conditions in the coming months.

In terms of LNG regasification as alternative to natural gas, liquefaction plants are already running at100% capacity in Western Europe.

In Eastern Europe,Poland and Lithuania have the leastsurplusLNG regasificationcapacity.We can see significant spare import capacity in Southern Europe, but it seems thereis not enough utility for compensating Russiannatural gas,and the Europeans have to choose piped natural gas importsfrom suppliers like North Africa,Azerbaijan, Turkmenistan and Iran.

SindreKnutsson, vice president for gas and LNG market analysis at Rystad Energy, believes: “Despite Europe’s hidden policy to reduce its dependence on Russian natural gas asdemonstrated by the significant build-up in LNG import facilities on Western Europe’s coast in recent years,Russia plays a pivotal role in helping meet the region’s natural gas needs. As a result, any military conflict could have serious impacts onEuropean natural gas supply.”

In terms of natural gas security and due to energy diversification, most Western countries are properly secured and are resilient to Russia. The situation for Eastern European countries is quite different; however, as they are striving to find some sort ofsolution in the run-up to winter.

The EU decision to lowerdependency on Russian natural gas importsis a critical decision,as there may be no way back. In the meantime, achievingfull diversification takes time whether existing long-term contracts remain in placeor not, and if LNG regasification capacity is not enough. Economically the Europeans have to compare investment costs for alternative natural gas sources with that of Russia.

The degree of dependenceon Russian natural gas is different for European consumers. In terms of flexibility, it seems that LNG importers will be the biggest winners. Wood Mackenzie believes European LNG imports will double to more than 200 Bcm/y by 2030 from 114.8 Bcm/y in 2020.

Natural gas prices inthree major gas hubs dropped torecord lows due to covid-19 lockdowns in 2021.The EU gets about 40% of its required natural gas from Russia for heating homes, generating electricity, supplying the industry needsand supplying the required feedstock of fertilizer plants. That amounts to around 31% of the EU’s total natural gas consumption, with dependency rising to 65% in Germany.

Against the backdrop of this challenge, how can Europe replace Russian natural gas imports? On March 8, 2022, in response to Russia-Ukraine tension, the European Commission proposed a framework of REPowerEUto make Europe independent of Russian fossil fuels well before 2030, starting with gas.

This plan also outlines a series of measures to respond to the rising energy prices in Europe and to replacenatural gas stocks for the next winter. Europe has been facing increased energy prices for several months, but now uncertainty on supply is exacerbating the problem.

REPowerEU will seek to diversify gas supplies, speed up the rollout of renewables and replace gas in heating and power generation. Accordingly, the EU demand for Russian gas is expected to drop by two-thirds before the end of the year.

REPowerEUwill rapidly reduce EU’sdependence on Russian fossil fuels throughfast-forwarding the clean energy transition and adapting the green continent’s industry and infrastructure to different energy sources and suppliers. Additional investments of €210 billion are needed between now and 2027 to phase out Russian fossil fuel imports, which iscurrently costing European taxpayers nearly €100 billion ayear.

REPowerEU is the European Commission’s plan to put an end to dependency on Russian fossil fuel imports. Itis alsoa plan for saving energy, producing clean energy, and diversifying energy supplies. It isbacked by financial and legal measures to build the new energy infrastructure and system that Europe needs. RepowerEU actions significantly reduce the EU’sdependency on Russian fossil fuels already this year, and accelerate the energy transition trend. Building on the “Fitfor 55” packages of proposals and completing the actions on energy security of supply and storage, this REPowerEU plan puts forward an additional set of  measures to be taken on the following:

1- Energy saving;

2- Energy  diversification;

3- Accelerating clean energyprojects and quickly substitute fossil fuels by accelerating Europe’s clean energy transition; and

4- Investment and reform and combininginvestments and reformssmartly.

Escalation of Russia-Ukraine tensionsbrings abouteconomic consequences for the global economy and international trade as well. Inflation in the Eurozone hit a new record of 8.1% in May, up from 7.4 % in April 2022, amid rising energy and food prices fueled in part by this politicaltension.All over Europe countries arefacing rising commodity prices, with Europe's expected economic bounce-back from the coronavirus pandemic remaining vulnerable.

In reality,Russia-Ukrainetensions haveexacerbated the energy crisis by driving global fears it may lead to an interruption of oil or natural gas supplies from Russia.The UN World Food Program (WFP) and Food and Agriculture Organization (FAO)supposed prices would hit an all-time record in February 2022 and again in March 2022, and the World Bank forecasts that wheat prices could rise more than 40% this year.How can this be managed?

Mission Impossible in Short-Term

The European Commission has adopted the following strategies in the short-term:

· Common purchases of natural gas, LNG and hydrogen via the EU Energy Platform for all Member States whichwant to participate, as well as Ukraine, Moldova, Georgia and the Western Balkans;

· New energy partnerships with reliable suppliers, including prospectivecooperation on renewables and low carbon gases;

· Rapid rollout of solar and wind energy projects combined with renewable hydrogen deployment to save around 50 Bcm of gas imports;

· Increase the production of biomethane to save 17 Bcm/y of gas imports *Approval of first EU-wide hydrogen projects by the summer;

· An EU Save Energy Communication with recommendations onhow citizens and businesses couldsave around 13Bcm/y of gas imports;

· Fill gas storage to 80% of capacity by 1 November 2022; and

· EU-coordinated demand reduction plans in case of gas supply disruption.

As mentioned, it seems Russian natural gas replacement in the short term isdifficult and Western Europeis moving toward a dangerous game.Which European players could compensate for the huge quantity of Russian natural gas exports to Europe?This game may put pressure on Russian economy but Europe cannot escape from its harmful spillover impacts. Escalating this game will amplify inflation and will increase recession possibility in the Eurozone in the midterm.

The Eurozone appears to include two categoriesof natural gas importers from Russia; the first category has more dependency on gas imports from Russia and the countries in the categoryare located more or less in Eastern partof Europe but the second one has less dependency on Russian natural gas imports and the countries in this category are located in the western Europe.

The first category is more flexible andeven more cautious than the second one, and they look forward to finding a significant solution for the ongoing political tension, but the second category has a rigid political stance against Russia.

In addition, this winter is a critical time for the Eurozone and it depends on certain major factors such as natural gas demand growth, level of natural gas storage and degree of weather in the coming winter.

In Baku Energy Week in May 2022, some eastern European countries hadserious concerns about the coming winter.They were unsatisfied in terms of Russian natural gas suspension and struggling for finding temporary source of supply for this year.EuropeanCentral Bank (ECB) recently estimated thata total cut-off could mean 5 percentage points of lost European economic output and higher inflation.

TheEuropean Commission publishedREPowerEU back in March; likewise, the IEA published a similar ten-point plan asalternative for Russiannatural gas. However, its foreseenreductions are more conservative than those in REPowerEU.

The IEA estimates that more than one-third of Russian natural gas exports to the EU would be eliminated.

The IEA calculates that entering no new gas contracts with Gazprom could save 15Bcm/yby the end of 2022 and replacing Russian gas with alternative sources could save another 30Bcm/y. Switching to renewable energy sources such as solar and wind, and maximizing generation from bioenergy and nuclear, could reduce gas usageby another 19Bcm/y. Finally, energy-saving measures focused on consumers and heat pumps could also save 14Bcm/y in 2022.

The IEA's numbers add up to savings of more than a third of current Russian gas supplies to Europe, but the agency subtracts some of the gas from alternative sources to replenish gas storages, ending up with total savings of “more than 50 Bcm/y”.

Bruegel-aGerman think tank institute-suggests that in theory, the EU should be able “to replace Russian natural gas flows entirely”, even in the short term. While recognizing this is complicated in practice, Bruegel analysts calculate that the EU has a spare gas import capacity of 1,800 terawatt-hours (TWh) from alternative suppliers of LNG and pipeline gas,i.e., more than the 1,700TWh Russian gas accounted for in 2021.

In sum, based onthe most conservative estimates, the EU should be able to reduce its reliance on Russian gas by at least one-third by the end of 2022. Based on REPowerEU plan,European Commissionhas the most ambitious scenario, with the biggest reduction in the shortest periodof time.

Assuming that 168 Bcm/yfor Russian gas imports to Europe in 2021 does not change in the coming years, and in an optimistic scenario developedby the REPowerEU plan, Europe urgently needsa minimum of 66 Bcm/ynatural gas and LNG, more or less equal to the North Stream 2 capacity.

How can the Europeans prepare this quantity in the next 6 months?

The following unsustainable alternative sources could work in the short-run:

1- Increasingnatural gas production from domestic sources such asthe Netherlands and Norway;

2- New natural gas spot  cargo purchasesfrom Azerbaijan,Turkmenistan and Iran or spot LNG SPA from the US and Qatar to ramp up the level of gas storage before winter; and

3- Increasingthe capacity of nuclear power and renewable energy generation.

Possible Mission in the Long-Run

The European Commission has adopted the following strategies in the mid-term:

· Implementing new national REPowerEU Plans under the modified Recovery andResilience Fund – to support investment and reforms worth €300 billion;

· Boosting industrial decarbonization with around €3 billion of frontloadedprojects under the Innovation Fund;

· Introducing new legislation and recommendations for faster permittingof renewables especially in dedicated ‘go–to areas’ with lowenvironmental risk;

· Investments in an integrated and adapted gas and electricityinfrastructure network;

· Increased ambition on energy savings by raising the EU-wide target onefficiency for 2030 from 9% to 13%;

· Increasingthe European renewables target for 2030 from 40% to 45%

· Offering new EU proposals to ensure industry has access to critical raw materials;

· Regulatory measures to enhanceenergy efficiency in the transport sector;

· Constructing ahydrogen accelerator to build 17.5 GW by 2025 of electrolysers to fuel EUindustry with homegrown production of 10 million tonnesofrenewable hydrogen; and

· Developing amodern regulatory framework for hydrogen.

In this case, medium-termmeasures are to be fulfilledby2027. The possibility of replacing Russian natural gas in the longer term by the Eurozone is high.The European Commission and IEA scenarios are aligned with the EU's ’Fit for 55decarbonization goals’ but do not predict investing in fossil alternatives to Russian gas. Europeans’commitmentsto new infrastructure such as LNG ports, requires longer-term commitments to justify the expenses.

In mid-term,German think tank Agora estimates that by investing in energy efficiency, energy saving and renewable energy alone, 80% of Russian natural gas imports could be replaced by 2027. If combined with alternative gas supplies such as LNG, it could even be 100%, Agora suggests.

The Agora study finds that 49bcm/ycouldbe reduced from buildings by renovation, connecting homes to district heating networks and ceasing the installation of gas boilers. Another 23Bcm/ycouldbe saved in industry, and gas use couldbe reduced most of all in the power sector, with a potential saving of 51Bcm/y from maximizing renewables utilization.

Conclusion

The Europeans are trying to reduce their dependence on Russian gas as much as possible.

In Eastern Europe, there is more dependence and less diversity in the energy mix,whileIn Western Europe, countries have less dependence and more diversity in their energy mix.

Inflation, due to rising energy and commodities prices, is a thoughtful problem in the European economy. In the short-term, Europe's game against Russia could have detrimental consequences for both players. This winter also intensifies this fragility.

REPowerEU is the European Commission’s plan to put an end to dependency on Russian fossil fuel imports. REPowerEU is a plan for saving energy, producing clean energy, and diversifying EU’s energy supplies;however,it is unlikely to help Europe in the short-term.

Europe faces a dual policy with Russia. On the one hand, Eastern Europe will have to suffer a lot if Russia completely cuts off natural gas flow, and on the other hand, the domino impactof inflation couldsignificantly reduce economic growth in Europe, and the result of this game is lossfor all parties.

If Russian exports paused completely, Europe would fight to meet its gas needs from various LNG or pipeline supply of various sources in the short-term. Eastern Europe would be most severely hit, as the region is the most dependent on Russian gas imports;however, in theory, Western Europe could fill the loss with increased LNG imports, primarily from the US. Western European countries have nearly enough LNG import capacity to replace all Russian natural gas, but would need an extra8Bcm/y of domestic production to make up for the difference to 2021 levels.But is it possible in the reality,? How much infrastructure investment is needed? In addition, how long does this replacment take? What will happen to the countries, which are strongly dependent on Russian gas? Who will support energy security of them?

In my opinion, the only way to get out of this crisis for Europe is findinga peaceful and diplomatic solution with Russia, asthe escalation of tensions will definitelyexacerbatethe crisis.

The world can no longer tolerate another major crisis after the recent pandemic.

Courtesy of Iran Petroleum

Afshin Javan

Director General and National Representative to OPEC & GECF

News Code 459494

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