The war in Ukraine has ended the notion that natural gas is a reliable transition fuel for Europe, but it will still need to rely on it for years to come.
European gas futures jumped more than 40% Monday to touch a record $101 a million British thermal units, more than 20 times the U.S. price. While there hasn’t been as much talk of sanctions on natural gas as on oil, commodity traders may be assuming the former could get caught up in the growing web of Western restrictions on economic ties with Russia.
Until recently, gas was the cleaner-than-coal fossil fuel many European countries were counting on to smooth their transition to renewable energy. That was despite a heavy reliance on imports from Russia, which accounts for roughly 40% of supplies. But this is the third time this winter that spot prices have soared. Even before Russia’s attack on Ukraine shattered any remaining illusion that it is a reliable energy partner, Europe was planning to cut its dependence on Moscow.
Natural gas is a regional market, with most used locally or delivered by pipeline, so Europe’s Russian pipeline gas isn’t easily replaced. Limited amounts of the commodity are shipped globally as liquefied natural gas, but most shipments fulfill multi-year contracts signed before a facility is built. Only a fraction is sold on spot markets, where prices are expected to remain volatile.
Europeans are considering signing long-term supply contracts from new LNG facilities. Qatar and the U.S. have expansion plans, but would likely take one to three years to start deliveries. Europe will try to get a bit more gas through its pipelines from Norway, Azerbaijan and north Africa and expand its storage facilities to become more resilient. Officials are also thinking of grouping gas purchases to increase their buying power.
The European Union’s long-term plan for energy security is to decarbonize. Its latest energy plan, expected out this week, will likely cover a host of actions: energy efficiency measures in transport, machines and buildings; accelerated investments in power storage and renewables as well as nuclear energy, hydrogen and possibly even hydropower and marine energy.
EU-level initiatives and funds are already available, along with the windfall from higher carbon prices on its carbon credits. But individual countries will access the EU initiatives as part of their own national plans. Each has drastically different resources, infrastructure and industry and has made its own historic energy choices. Some, such as Poland, have long sought to be independent of Russian energy sources: Its plans include new nuclear plants, LNG facilities and offshore wind farms.
Germany was historically at the other end of the spectrum in welcoming Russian gas. It backed the now-shelved Nord Stream 2 gas pipeline which would have increased its reliance. Last week, though, Berlin updated its energy plan to include: 100% renewable power by 2035, minimum inventory levels for gas storage operators, and plans to build two new LNG import terminals, which will eventually be converted to receive hydrogen.
Ideally, national plans would also outline the infrastructure, market rules and incentives, as well as plans to overcome bottlenecks in areas such as permitting. That may sound like unwelcome red tape, but with so many options national plans help reduce the risk and uncertainty of new energy investments in the region.
Given the scale of the task Europe faces in ending its dependence on unreliable Russian gas, it needs to embrace as many solutions as it can find. For investors, getting clearsighted, long-term plans from national governments could be key to making returns in a chaotic new era.