Energy crisis: how will Europe cope?

The next six months look tough, but a bigger test awaits further out.

Natural gas stores, consumption-reduction measures and temperatures will be key in determining Europe’s fate this winter. In our base-case scenario of a full cut-off of Russian gas flows and normal temperatures, the EU could just about get through the winter months without having to resort to rationing, albeit with regional differences. Should it be a colder-than-average winter, some rationing would be likely, with major consequences for energy-intensive industries and economic growth.

Whatever happens this winter, Europe is likely to enter spring with low gas inventories. European authorities will then face a new challenge: vamping up gas inventories before the next winter. European authorities’ ability to rebuild inventories rapidly in the spring is likely to be hampered. New liquefied natural gas (LNG) import capacities will help but are likely to arrive too late. In our base-case scenario, EU gas stores will only reach 40% of capacity by next September.

In our base-case scenario, we expect gas stores in the EU to fall to 17% of capacity in April. From then on, additional import capacity should come online in two waves, mainly thanks to the delivery of Floating Storage and Regasification Units (FSRU). By the end of 2023, Europe’s LNG import capacity is expected to reach 180bcm per year, thus matching Russian gas imports before the invasion of Ukraine. 

But despite the huge effort involved, the additional import capacity is unlikely to come online in time to rebuild sufficient gas inventories before winter. In our base-case scenario, we expect EU gas stores to reach just 40% of capacity by next September.

Besides, ensuring sufficient regasification capacities is only one side of the coin. For the market to achieve balance, there also needs to be sufficient supply. Proven global gas reserves, estimated to be around 188 trillion cubic meters are, in theory, sufficient. However, capacity to liquefy gas is limited. A typical LNG project takes a minimum of five years to be completed, and the next major leg of additional supply capacity is only expected in 2025-26. This means the abrupt interruption of Russian gas exports to Europe is likely to have a major impact on the global gas supply-demand balance until at least 2025. The obvious consequence is high gas prices for some time.

And increases in European LNG imports have occurred to the detriment of other parts of the world, particularly South-East Asia. Since major supply increases are only expected in 2025-26, the cost of energy will likely remain high in the meantime. A Chinese economic recovery would only add fuel to the fire.

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