Europe will remain heavily reliant on Russian gas for at least another decade, according to a leading rating agency.
Fitch said a lack of alternative sources meant policymakers would have no choice but to continue buying gas from Russia until at least the mid-2020s and “potentially much longer”.
Europe already buys a quarter of its gas from Russia, and analysts expect consumption to increase by a third by 2030 as economies recover from the debt crisis and gas-fired electricity generation replaces old coal and nuclear power.
Many of the main gas pipelines into Western Europe run through Ukraine (Source: Fitch)
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Analysts said it would be difficult for countries to secure alternative sources of supply in the medium term, leaving them at risk of being “held hostage by dominant suppliers”, including Russia.
“Any attempt to improve energy security by reducing European reliance on Russia would require either a significant reduction in overall gas demand or a big increase in alternative sources of supply, but neither of these appears likely,” Fitch said in a report on Tuesday.
Growing tensions between Ukraine and Russia over the latter’s annexation of Crimea have led to a raft of tit-for-tat sanctions between Russia and the West. The European Commission (EC) has laid out plans to reduce Europe’s reliance on energy imports, including promoting indigenous sources of renewable and nuclear energy, and a single energy market.
Many countries rely on Gazprom, Russia’s state energy company, for their gas imports (Source: Morgan Stanley, Gazprom)
Finland, the Czech Republic and much of eastern Europe rely heavily on Russia for gas, while Germany imports a substantial amount from Russia. Fitch said overhauling Europe’s current infrastructure and making the network more resilient to shocks would cost around €200bn (£160bn). Although around half of this can be funded by capital markets, there is a risk that consumers may also be forced to pay for the upgrade through higher energy bills.
Analysts also highlighted Russia’s dominant role across the energy market. “Even if coal-fired and nuclear energy were favoured over gas, the impact on energy security would be limited because Russia also supplies 26pc of the EU’s hard coal and is the sole supplier of fuel rods to nuclear power plants in several countries,” it said.
Fitch said the Trans-Anatolian gas pipeline, which stretches from the Shah Deniz gas field in Azerbaijan to Europe via Turkey, could transport considerable amounts of gas to Europe, although it would not be enough to cover the increased gas demand expected in Europe (Source: Fitch).
Fitch said Azerbaijan’s Trans Anatolian gas pipeline could provide an alternative source of energy for Europe once construction is completed in 2018, providing 31 billion cubic metres (bcm) of Europe’s expected overall demand of around 565 bcm of gas a year by 2026. But analysts added: “That is not enough to cover the incremental increase in gas demand we expect over the period, let alone replace any supplies from Russia.”
The International Energy Agency (IEA) estimates that Europe has 13 trillion cubic meters of natural gas in shale reserves. However, concerns about fracking, has led to many countries banning the development of reservoirs in Europe (Source: Fitch, IEA, KPMG)
The rating agency also cast doubt over an American-style shale gas revolution in Europe. “We do not expect meaningful shale production for at least a decade by which time it could at best offset the decline of conventional gas production,” it said.
“We believe Russia and Gazprom would react with lower natural gas prices should they perceive their market share in Europe was at risk,” Fitch added. “Europe, despite efforts from Russia to diversify its customer base, would remain a key market and source of revenue and especially profits.”