Nord Stream 1 shut on Monday for what the gas pipeline's operators said is routine servicing.
If Russian gas flows from Nord Stream 1, a 1,224-kilometre pipeline under the Baltic Sea, do not resume, Fitch projects that there will be an “intensification of energy saving measures, higher prices and reduced production in some industries, especially in late autumn and during winter”, across Europe.
“We estimate that the shortfall in natural gas will not exceed 10 per cent of annual European consumption, although the actual amount will depend on factors such as weather that are difficult to predict,” the rating agency said in a note on Monday.
“While the logic of gas rationing is embedded in local regulation, the details on the impact for specific issuers or the merit order for industries is more difficult to estimate,” it added.
Lower flows in one pipeline are usually balanced out by higher flows elsewhere, but that may not be an option this time “since flows of natural gas from Russia via Slovakia continue to be lower than earlier in 2022 and in 2021”.
Europe’s largest economy, Germany, is particularly concerned about whether gas supplies will resume via the pipeline after maintenance is completed.
A complete shutdown would add to its energy woes. Last month, Germany declared a gas emergency and called on people to save power, so that their lights will stay on in winter.
The move would also cause problems for other European countries, after modelling by German regulators said the country would have to curb its onward exports to countries such as Austria and the Czech Republic.
If Nord Stream 1 stops and Germany does not limit exports, even a 20 per cent reduction in gas consumption for the rest of the year would leave the country short of energy, the modelling found.
State-owned Russian exporter Gazprom had already reduced delivery through Nord Stream 1 earlier this year, for what it claimed were technical reasons linked to compressor units.
Nord Stream 2, a parallel pipeline which was completed last year, never went online after German Chancellor Olaf Scholz suspended the project in February.
European gas demand in industry dropped 6 per cent on an annual basis in the October-March period, according to energy watchdog the International Energy Agency. Demand is further anticipated to shrink by 9 per cent annually this year, the Paris-based inter-governmental agency said.
Meanwhile, prices have been rising.
Dutch Title Transfer Facility (TTF) — a virtual trading point for natural gas in the Netherlands — gas prices currently trade at around $55 per thousand cubic feet (mcf) against $20 per mcf in early June, a year-to-date average of $32 per mcf and Fitch's assumption of $25 per mcf for 2022, the agency said.
“Recent price increases were driven by lower shipments via the Nord Stream 1 pipeline and the risk of lower liquefied natural gas supplies following an accident in June at the Freeport LNG terminal in the US,” it said.
Natural gas prices will be “heavily influenced” in the near term by decreased Russian gas supplies to Europe, Fitch said.
High prices will add to the pressure on margins and cash flows of European companies, which are already at risk for “natural gas shortages, rising inflation and waning market sentiment on slower economic growth”.
Utilities exposed to the gas value chain, particularly those involved in the import and transit of Russian gas, are among companies that have taken the greatest hit so far from rising European gas prices.
While refining, chemical, fertiliser and industrial companies have been able to pass on higher prices through product prices, “they may find it more challenging to increase prices further without causing reducing demand”, Fitch said.
In particular, fertiliser companies with high concentrations of assets in Europe face risks of reduced production and competitiveness compared with non-European competitors.
Companies in ceramic and steel and aluminium industries would also be exposed to shortages of natural gas supplies, Fitch said.
Upstream oil and gas companies in Europe are the largest beneficiaries of the current market situation, it added.