If European industrials want to wean themselves off Russian natural gas, they must cut their consumption by 55 billion cubic meters this year. Is that possible?
McKinsey & Company says they reduced their demand by 25 billion cubic meters. Any more than that, and it says that more than half of industries won’t meet their capacity levels for two years. At the same time, it adds that China and India could replace that by consuming 35 billion cubic meters, which they get at a discount.
The solution? As much as Europe doesn’t want to do so, it may need to delay coal plant retirements and nuclear energy units. The continent has already accelerated the pace of renewables. The good news is that it experienced a warm winter, deployed energy efficiency techniques, and found alternative natural gas suppliers, resulting in deep cuts to Russian supplies — supplanted in large part by U.S. LNG from such companies as Cheniere Energy, Shell, Exxon Mobil, Chevron, and TotalEnergies.
“Our analysis shows there is little bandwidth to further reduce Europe’s gas demand without substantial economic damage. If the EU achieves all its gas-savings measures this could see a 24 percent reduction in consumption yet other potential factors such as more competition from Asia could reduce Europe’s supply by an even greater amount,” says Namit Sharma, senior partner at McKinsey via Energy Voice.
“This may require businesses to consider diversifying their energy sourcing and managing demand, investing in natural gas substitutes or storage and closely monitoring movements in the energy market,” the analyst adds.
Enter Ukraine, which is not just fighting on the battlefield but in the energy markets as well. In a conversation with this writer, Naftogaz Chief Executive Oleksiy Chernyshov explained that the company is seeking foreign investment from Exxon, Halliburton, and Chevron. The goal is to amp up the company’s production not only to achieve energy independence but also to export natural gas to Europe.
Naftogaz is Ukraine’s largest state-owned energy company, developing oil, natural gas, and some renewables. It produces, refines, distributes, stores, and sells natural gas. It kept 12.5 million Ukrainians warm this winter while Russia waged its war, knocking out electrical grids and central stations.
“For years, Russia has manipulated energy in Ukraine to keep us dependent. This year, we are targeting our self-sufficiency — to produce as much gas as we consume. We plan to increase our gas production by 1 billion cubic meters, allowing us to avoid imports. It is absolutely possible,” says Chernyshov.
Will Europe Delay Nuclear and Coal Retirements?
Ukraine has Europe’s third highest natural gas reserves, behind Norway and the United Kingdom, with 905 billion cubic meters. It produced 70 billion cubic meters in the 1960s and 1970s, falling by more than half in 1991 when Russia shifted production to Siberia. Now it is less than 20 billion cubic meters, adds Chernyshov, with Naftogaz accounting for 75%-80% of that. With an end to war and more foreign investment, Ukraine could achieve energy freedom.
However, none of this happens overnight. Ukraine had to import almost 1 billion cubic meters to sustain its people and economy this winter, relying on domestic production for the rest. Ukraine has been a throughway from Russia to Europe. It has several natural gas pipelines with a 146 billion cubic meters capacity annually. It also has 31 billion cubic meters of storage. While it needs about half of that, Europe could access the balance. Interestingly, some of the Russian natural gas is still flowing through Ukraine. While Ukraine no longer consumes it, it is committed to servicing its European allies.
Until Ukraine can increase production, the United States stands ready to deliver more LNG to Europe. It supplied about 3.5% of Europe’s gas and now provides 40%. That’s 56 billion cubic meters. Meanwhile, Europe uses 19% less gas. But in the future, it is storing more natural gas just in case the winters are frigid. It also added 23 LNG import terminals, allowing ships to carry the frozen fuel to it before liquefying and piping it to where it is needed.
“If Europe can sustain and accelerate several gas-demand reduction measures, the market is likely to remain balanced without significant price spikes in the coming years. Europe could drive substantial gas demand reduction by accelerating industrial-electrification measures like fuel-switching and build-out of renewable energy source and through longer lifetime extensions of nuclear and coal,” says Thomas Vahlenkamp, senior partner at McKinsey, via Energy Voice.
Will Demand Continue to Diminish with Moderating Prices?
The transition from Russian gas to alternative suppliers and energy sources has been challenging. Natural gas prices peaked at $100 per million metric British thermal units, while oil prices spiked to $130 a barrel. McKinsey says that caused consumers to pay more than $1 trillion more on oil, gas, and coal prices between 2021 and 2022.
Skyrocketing prices have been a critical reason why natural gas demand fell by 57 billion cubic meters — 11% less between 2022 and 2021. Specifically, McKinsey says the buildings sector used 15% less, and industry consumed 18% less.
“Industry saw two main drivers of gas demand reduction in 2022: energy efficiency and production shutdowns. For example, according to the ifo Institute, three-quarters of surveyed German industrial companies were able to reduce gas consumption in the last six months of 2022 without cutting production by leveraging energy-efficiency measures,” says McKinsey.
“Meanwhile, energy-intensive industries, such as fertilizer, chemicals, and steel, saw significant production curtailment in 2022,” it adds. “European aluminum and zinc production stalled at around 70 to 80 percent of total production capacity in the second half of 2022, down from the pre-war baseline of 90 to 95 percent. Additionally, fertilizer production dropped to 30 percent of total production capacity in the third quarter, down from the pre-war baseline of 80 percent.”