This report does not constitute a rating action. This year's steep rise in gas prices caught Europe by surprise, highlighting the region's mounting vulnerability to weather conditions, and increasing competition from other regions for LNG cargoes amid tight supply.
In a report published today, "Price Tremors Threaten Europe's Gas Bridge," S&P Global Ratings says it expects rebalancing the European gas market will take time because certain key drivers are structural, and we believe that Nord Stream 2 alone cannot fill the gap.
"With the EU currently debating the role of gas in the Green Taxonomy and likely new decarbonization pledges at COP 26 in November, extremely volatile gas prices raise questions about how well gas can support security of supply during the energy transition, and at what cost," said S&P Global Ratings' credit analyst Elena Anankina. "We believe that, ultimately, it may become even more difficult for Europe to reconcile its increasing reliance on gas imports with tightening environmental restrictions."
European gas prices skyrocketed in August-September 2021 after showing extreme volatility in recent years. This left many households grappling with higher electricity and gas bills at a time when they are still recovering from the impact of COVID-19. Some market participants put most of the blame on geopolitical tensions, such as those linked to the controversial Nord Stream 2 project.
We believe that, geopolitical factors aside, the simultaneous occurrence of fundamental technical, economic, and weather-related factors led to the unusually high gas prices. We reflect this in our latest gas price assumptions (see "S&P Global Ratings Revises Oil And Natural Gas Price Decks," published Oct. 5, 2021).
Ms. Anankina added "Given the size of the current supply-demand gap, we don't expect a permanent solution to be found soon. Some contributing pressures may gradually subside, but we believe others represent structural shifts. These include Europe's dependence on imports and increasing exposure to global gas markets amid regulatory and technical uncertainties stemming from the energy transition. Europe's so-called gas bridge for its energy transition may therefore prove quite costly."
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