Analysts have warned that UK gas prices could increase four-fold to over £10 per therm, if flows from Russia to the continent are cut off amid potential conflict in Eastern Europe.
American investment bank Stifel suggests such an alarming outcome would be the knock-on effect from rolling blackouts in Europe, caused by rationing and sky-high prices if crucial energy imports from Russia are suspended.
In its latest energy update, Stifel argued Europe remains fundamentally unable to replaced piped Russian gas with potential alternatives, despite the US holding talks with Qatar and large exporters over recent days to try and ensure Europe has contingency supplies in the case of any further volatility in the region.
Chris Wheaton, managing director, oil and gas at Stifel said: “We see Europe as unable to replace piped Russian gas with liquefied natural gas (LNG), given the capacity constraints on the global LNG industry, and therefore energy rationing would be inevitable in this scenario, which would be disastrous for the European economy.”
The bank has highlighted that the European Union (EU) now relies on Russia for 50 per cent of its imports and 30 per cent of its consumption needs.
This means if supplies are restricted through sanctions if Russia invades Ukraine, or through disruption caused directly by military conflict, Europe is deeply vulnerable.
Consequently, the EU would have to weigh up the possibility of sanctions very carefully, with the possibility of antagonising Moscow likely to have profound consequences on its ability to provide sufficient resources to European households.
In such an event of shortening gas supplies, Stifel also forecasts the possibility of a quadruple digit bounce in UK gas prices to over 1000p per therm,
While the UK only directly buys 5-10 per cent of its gas from Russia, it still buys energy from Europe, and gas supplies generally have a knock-on effect on the cost of electricity prices.
This is because the energy source is used to generate more than a third of power in the UK and about 20 per cent in Europe.
For context, when Bulb Energy entered special administration, it revealed it was unable to shoulder costs of £4 per therm to buy supplies.
So far, prices have peaked at £4.52 per therm during the crisis and a potential hike to £10 per therm would cripple the UK’s energy market.
Such an increase would change the nature of the current discussions over the consumer price cap and hedging controls, and potentially result in far more urgent policies such as limiting supplies for consumers.
Europe’s gas crisis: A legacy of poor policies
Alongside the prospect of geopolitical volatility, the report also suggests that Europe is prone to gas supply disruption due to low levels of gas in its storage facilities, which are currently only filled up to 43 per cent of available capacity.
The decade-plus lows have been caused by a combination of LNG supplies flowing to Asia, strong recovery in gas demand post pandemic, and declining European domestic gas production across developed economies.
Were it not for a flotilla of US tanks boosting supplies over Christmas, blackouts in Europe could have extended beyond Kosovo and Moldova in recent months.
The continent’s push to a green energy transition has exacerbated the problem, with the UK’s rough storage site in Yorkshire among many examples of decommissioned fossil fuel sources across Europe as part of wider net zero carbon emissions plans.
This was a view echoed by Ole Hansen, head of commodity strategy at Saxo Bank, who also suggested environmental measures had caused inflated prices for consumers.
In his latest gas update, he said: “In Europe, the fragility of an energy market focused on decarbonising energy production has become increasingly apparent during the past six months. The result has been greenflation, driven by punitively high prices of gas and power prices putting heavy energy-consuming industries at risk while hurting consumers’ propensity to spend and to keep the economic recovery on track.”
By contrast, Stifel is more bullish about Russia’s ability to “weather the storm financially.”
It estimates Russia would lose $45bn annual revenue – just under $4bn per month – from loss of gas exports to Europe if the current situation escalated.
However, Stifel also suggests the perception of geopolitical risks could push oil prices above $100 per barrel, and the additional tax revenues generated from the higher oil prices could offset the loss of gas export revenue.
While Europe remains Kremlin-backed gas giant Gazprom’s key market, it also believes Russia will find new buyers for its supplies amid a global energy crunch.
The US has been engaged in extensive negotiations with Russia, which has moved over 100,000 troops within close proximity of Ukraine’s borders.
It is looking to dissuade Russia from engaging in any potential military conflict in the region and also wants to protect the interest of its European and NATO allies.
Meanwhile, Russian President Vladimir Putin is seeking commitments NATO will not expand its territories further, nor invite Georgia and Ukraine to be members.
Aggravating factors to the current crisis include Gazprom missing its export targets to Europe over the full-year, with the International Energy Agency accusing the country of deliberately throttling supplies.
Russia has also called on Europe to approve Nord Stream 2, which has already been constructed.
If certified by German regulators, it would double exports from Moscow to Berlin of natural gas and further increase Europe’s dependence on Russia for its energy supplies.
Separately, the Yamal-Europe pipeline has reported eastward flows for over a month, with no expectations of a reversal in the near future.