EU measures to secure alternate gas supplies as a result of Russia's invasion of Ukraine could reshape Europe's energy market, but a plan to ramp up and diversify LNG imports faces challenges with infrastructure bottlenecks.

The EU imported 155 billion cubic meters of gas from Russia in 2021, and the European Commission is aiming to slash that amount by about two-thirds by the end of this year, on its way to securing energy independence from Russia "well before 2030."

It will reduce its reliance chiefly by finding alternate sources of LNG, while also increasing production of biomethane and renewable hydrogen. Higher LNG imports, for example from Qatar, Egypt, West Africa and the U.S., could account for 50 Bcm, while diversifying pipeline sources to include Azerbaijan, Algeria and Norway could add another 10 Bcm, the commission said.

However, some analysts think the commission's assumptions — particularly around LNG — are unrealistic. "The numbers that they're talking about are extreme and there isn't the flex in the global system to provide that incremental supply," said James Waddell, head of European gas at consultancy Energy Aspects, adding that boosting LNG imports to 30 Bcm would be more feasible.

A lot more gas from the U.S. could be the solution to lower current prices and boost supplies, according to Marco Alverà, CEO of Italian gas utility Snam SpA. With European gas trading at hefty premiums to the U.S., cargoes are already coming. "A big plan to build more liquefaction capacity in the U.S. ... could really help mitigate any shortfalls," Alverà said on Snam's March 17 earnings call.

Limiting factors

Most global LNG production is locked into long-term contracts, including many with destination clauses, according to analysts at S&P Global Ratings. Europe also has to compete with Asia for LNG contracts.

While Europe has spare import capacity, it is not in the countries already importing Russian gas. The majority of spare capacity, 42.5 Bcm/year, is located on the Iberian Peninsula, which is not reliant on Russian imports and is only able to export 8 Bcm/year eastward to the continent, according to analysts at S&P Global Commodity Insights.

Spain and Italy have pipeline systems coming from North Africa, which are likely going to be running at full steam if the countries want to wean themselves off Russian gas, said Peter Kollmann, CFO at Austrian utility Verbund AG. There is also the possibility that plans for higher interconnection capacity between Iberia and France could be rekindled via the MidCat pipeline, Commodity Insights analysts said in a March 16 report.

For the rest of Europe, "that basically leaves us with LNG," Kollmann said on a March 17 earnings call. Verbund analysis, he added, shows Europe can only increase imports by around 10% to 15% in the short term, with more possible at a later time. Under the commission's plan, imports would increase fivefold by the end of 2022.

"It's not the ships, it's not the LNG at this point in time. The limiting factor is the terminals," Kollmann said, adding that building new facilities to regasify LNG will take time.

Regional dislocation between countries with spare regasification capacity and those heavily dependent on Russian gas is driving renewed interest in building new terminals, according to Commodity Insights analysts.

Germany, which currently receives more than half of its gas from Russia, already committed to new LNG terminals in recent weeks in light of the war in Ukraine. "We will do more to ensure our country's energy security and we will change course in order to overcome our import dependency on single energy suppliers," Chancellor Olaf Scholz said Feb. 27.

The country has no existing LNG terminals, with two projects currently in the development stage: the 8 Bcm/year terminal at Brunsbüttel and a 12 Bcm/year facility in Stade. Scholz also said that plans by Uniper SE for a floating terminal in Wilhelmshaven could be revived.

Building terminals fast enough to respond to the current energy crunch will be a challenge. "Within a year, at a push, you can get them online, particularly in a well-connected market like Europe," Waddell said.

Storage the 'hardest question'

Gas storage is a key facet of the European Commission's plan to wean itself off Russia, with reserves in the EU only filled to about 26% as of mid-March, according to Ratings analysts.

Refilling storage reserves will help the EU in the event of any supply disruptions, the commission said, as it laid out new proposals under which EU storage facilities must be filled to 90% capacity by Oct. 1 each year, in preparation for the winter. Gas storage usually supplies 25%-30% of the gas the EU consumes in winter, it added.

"Getting to that [90%] level ... you're having to refill storage sites that are very depleted at the moment," Waddell said in an interview. "You cannot simultaneously rebuild [storage] stocks and get rid of Russian gas."

Forward gas prices are much lower than the current record spot market values, discouraging traders from holding onto stored volumes, a market phenomenon also known as backwardation.

"In a deeply backwardated market like we're seeing, it is uneconomical for shippers to store gas today," Alverà said. "And so we're in discussion with the EU and national policymakers to think about the right instruments that are required to make sure the storages are filled."

How to incentivize higher levels of storage is the "hardest question for the gas market" right now, Waddell said, adding that one option could be for regulators to mandate that supply obligations include a certain level of gas from storage reserves.

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