Gas. Very alarming situation in Europe

Russia has re-injected gas into the Nord Stream 1 gas pipeline after a 10-day shutdown for maintenance. But the situation remains very worrying, because Russian exports are at the level of 30-40% of the pre-war level. And Russia can completely stop exporting gas to Europe at any time.

This will depend on Western arms supplies to Ukraine and its impact on the advance of the Russian army into Ukraine, as well as Western sanctions. Under the latest sanctions, the EU will ban imports of Russian-origin gold and freeze some assets of Sberbank, but under international pressure, in particular from Africa (more than 50% of wheat imports came from Russia and Ukraine), the EU must ease some sanctions against Russian banks to facilitate the transportation of grain from Russia and Ukraine. It is important that world trade in agricultural and food products does not stop.

But the risk of Russia cutting off gas is significant. You must prepare for this. The International Energy Agency (IEA) recommends reducing gas consumption by 30% and has issued ten recommendations for this, which mainly relate to the use of vehicles. The EU wants to cut gas consumption by 15% to counter possible disruptions in Russian gas supplies, in particular by reducing heating and air conditioning in buildings. Politicians have not yet dared to talk about rationing, but emphasize the responsibility of citizens for saving gas and oil for the next winter. While things are moving faster in Germany, with some municipalities shutting off public hot water at night, a major property owner has warned that heating will be limited to 17 degrees next winter, and a large group is considering returning to work from home next winter. so as not to overheat the offices. According to the IMF, Germany is the country most at risk, with a potential cumulative loss of 4.8% of GDP between 2022 and 2024 compared to 2020 GDP. We are not going to avoid restrictive measures, as in private transport and heating , but they will have to be done at the European level and they will be introduced after the summer holidays, in our opinion.

European countries are not in the same boat. Some countries are 100% dependent on Russian gas.

2022.07.22. Share of Russian gas imports
Source: Brueghel/Heravest.

Europe announces the filling of gas reserves by 55% in early July against 45% a year earlier. The European Commission’s target is at least 80% by 1 November 2022 and at least 90% by 1 November 2023. France would like 100%. Is that enough to keep Europe warm this winter? We will have to combine stocks, which will not be easy, because 75% of the storage capacity is shared by 5 countries, Germany, Italy, France, the Netherlands and Austria. Portugal is in the best position with 100% inventory, followed by Poland, Denmark, the Czech Republic and Spain. On the other hand, Belgium, Italy, Austria, Slovakia, the Netherlands, Romania, Hungary and Bulgaria are underfilled.

In 2021, the European Union consumed 400 billion cubic meters of gas (BMC). Of these 400 billion, 90% were imported, i.e. 155 billion from Russia and 205 billion from other suppliers, mainly from Norway and Algeria. In January 2022, the United States imported 4 billion cubic meters. m of LNG and pledged to supply 20 billion cubic meters. m of LNG at the end of 2022 and 60 bcm. The largest storage capacities are in Germany (22% of the total), Italy (18%), the Netherlands (13%), France (12%) and Austria (9%).

As a result, Europe was in a tense flow, and if Russia completely stops gas exports to Europe, then, obviously, the European Union will not have enough gas for its annual consumption. With 80% of reserves filled, Europe will only have enough gas to get through the winter. With annual consumption, the balance will be largely in deficit, and this situation will continue beyond 2022. Within one year there will be a deficit of 130 billion cubic meters. m, i.e. 30% of EU needs, which explains why the IEA recommends a 30% reduction in consumption.

Two conclusions stand out: in the short term, rationing is inevitable, and in the medium and long term, other suppliers must be found quickly. On the negative side, this context of the crisis is reviving interest in coal for at least the next two years – Europe has no choice – and on the positive side, the EU is accelerating investment in renewables. In terms of investment, we avoid European companies involved in distribution infrastructure and the purchase of Russian primary energy resources. We buy power generators with a significant environmental component such as RWE, Iberdrola, SSE, Orsted for the larger ones and Solaria, Neoen, Encavis for the smaller ones. We also buy Equinor and Cheniere Energy.

Geravest SA is an independent boutique top-down investment advisor and investment solution provider.

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