In a major shift of energy policy, the European Commission is looking to drastically reduce Europe's imports of fossil fuel from Russia following Russia's military actions in Ukraine.
In a report published today "Europe's Exit From Russian Gas: 10 Questions On Utilities," S&P Global Ratings says it believes this is unlikely to end well for European gas players, mainly because other gas sources cannot replace the large volumes from Russia. What's more, we believe some energy-intensive industrial sectors like fertilizers, steel, and paper could face temporary plant closures, hampering the eurozone's GDP growth, with a potential knock-on effect on utilities.
The Commission unveiled the outline of its plan to make Europe independent from Russian oil and gas on March 8. The proposal--REPowerEU--will seek to diversify gas supplies, speed up the rollout of renewable gases, and replace gas in heating and power generation, thereby reducing EU demand for Russian gas as soon as possible, with the target initially set at two-thirds before the end of the year. As essential as such a plan is for Europe's energy security, it may not be easy to implement. Gas production in Europe has been in structural decline for years. In addition, there are limited sources of gas globally and supply lags due to underinvestment, while expanding regasification capacity will take time. Also, most of the world's liquefied natural gas production is currently locked into long-term contracts not destined for Europe, and large supply increments are unlikely before 2025-2026.
The move away from Russian gas implies a sharp reduction of gas usage over the coming decade, whereas we previously expected gas volumes would remain flat or decline slightly over that period compared with 2019 levels. With lower gas volumes and the EU's willingness to accelerate the shift to electric heating, we believe the business models of some gas infrastructure networks may need to evolve.
At the same time, we believe the EU will push ahead with projects on decarbonized gas, such as hydrogen and biomethane, which may stimulate investments in new infrastructure faster than currently anticipated. This could benefit gas network operators, to the extent that these investments are effectively developed and there's a favorable regulatory framework. Another key factor for gas operators' credit quality is their ability to address balance-sheet headroom while managing an investment peak in the coming years.
At this stage, we still see more downside than upside for rated gas infrastructure networks and--in all cases--increasing uncertainty regarding the long-term sustainability of their business models.
