Europe is expected to focus on importing more gas from other countries, while speeding up the expansion of renewable sources of energy, as Russia's state-controlled energy company Gazprom shuts off gas supplies to the continent through the Nord Stream 1 pipeline.
The Nord Stream, which runs under the Baltic Sea to supply Germany and other nations, had been due to resume operating on Saturday after a three-day halt for maintenance.
But Gazprom claimed it could no longer provide a time frame for restarting deliveries after finding an oil leak that meant a pipeline turbine could not run safely.
“Gas transmission via the Nord Stream pipeline has been fully shut down until the operational defects in the equipment are eliminated,” Gazprom said on Friday.
Europe is heavily dependent on Russian gas supplies.
In 2021, EU members imported 155 billion cubic metres (bcm) of natural gas from Russia, which accounted for about 45 per cent of the bloc's gas imports and close to 40 per cent of its total gas consumption, figures compiled by the International Energy Agency show.
Europe is “bracing for a bleak winter ahead,” as Russia continues tightening the noose on natural gas flows to the continent, amid the Ukraine conflict, S&P Global Ratings said in a report this week.
“Italy and Germany are the two large European countries most vulnerable to a gas supply shock given their heavy use of natural gas and significant dependency on Russia,” it said.
In Germany, natural gas provides 26 per cent of overall energy requirements, with about 15 per cent of electricity generation dependent on the resource.
In 2020 about 60 per cent of the country's natural gas supply was piped from Russia, largely under long-term contracts.
The Italian economy is also dependent on gas, which provides slightly above 40 per cent of its total gross energy supply and generates half of its electricity.
The country, however, has made more progress than Germany in diversifying its sources, with more than three-fifths of its gas now coming from non-Russian sources, principally Algeria.
Earlier this year, Italy signed an agreement with Algeria for 9bcm of natural gas to reduce its reliance on Moscow for energy imports.
“Russia already cut the majority of its gas supply to Europe and even before yesterday’s news, we were no more than at 20 per cent of the usual capacity,” said Swissquote Bank senior analyst Ipek Ozkardeskaya.
“The continent is preparing for a complete halt of the supplies although losing the last 20 per cent is another blow before winter.”
In July, Gazprom cut gas flows through Nord Stream 1 to 20 per cent of its total capacity, citing issues related to the operation of a gas turbine.
Europe will be looking to “increase LNG imports from the US and Qatar, and accelerating the shift to alternative energy sources,” to cope with the crisis but “the transition takes time and is costly," she said.
Losing Russian gas will cost Germany about €260 billion by the year 2030, she added.
Azerbaijan is an alternative for Europe's gas needs.
Energy Minister Parviz Shahbazov told the World Utilities Congress in Abu Dhabi in May that Azerbaijan was focusing on upgrading its energy infrastructure to export more gas to Europe.
“We are now working very intensively with the European Commission,” he said.
"We are working on the ways, in a relatively short period of time, upgrade this infrastructure and subsequently increase our energy supply to Europe in terms of natural gas."
The central Asian currently supplies 10bcm of natural gas to southern Europe and 6bcm to Turkey through the Southern Gas Corridor — a network of pipelines crossing through Turkey and other countries.
The US, as well as Norway, are also delivering gas to Europe.
Norway is Europe's second-largest energy supplier after Russia accounting for 23 per cent of the continent's gas.
The US is also boosting exports to Europe and other parts of the world. In the first half of 2022, the country had already become the largest LNG exporter worldwide, with a total export volume of about 42 million tonnes, up 17 per cent compared to the same period in 2021.
“With the uncertainty of Russian gas supply and resistance from some EU members towards gas consumption cuts, more US LNG exports are expected to flow to Europe, although a downside is expected during the US hurricane season,” Rystad Energy’s analyst Karolina Siemieniuk, said.
The EU is also looking at additional supplies, with the help of Nigeria, Egypt, Israel and Cyprus, according to Rystad.
Germany, Europe’s largest economy is also planning to boost utilisation of coal for power generation, “prioritising near-term energy security over longer-term environmental targets,” Rystad said.
The country had a total of 46.7 gigawatts of installed coal power generation capacity in 2020, all of which was planned to be gradually decommissioned by 2038 to meet greenhouse gas emissions targets. Capacity was expected to drop to 36.1 gigawatts already this year with the closure of at least 24 units.
“These plans have now been reversed, and the government is trying to extend the life of 10 gigawatts of mothballed coal capacity until March 2024,” Rystad said.
Apart from this, 4 gigawatts of solar and wind capacity due to start up before the end of the year could add another 2 terawatt hours of electricity generation.
“The extra coal, solar and wind generation could together replace 5bcm worth of gas-fired power generation, equivalent to one-quarter of the gas normally consumed by Germany’s power sector," Rystad, said.
Earlier this year, the International Energy Agency also proposed a ten-point plan to reduce the EU’s reliance on Russian natural gas as Moscow’s military conflict with Ukraine continues.
The proposals include halting new gas contracts with Russia, replacing Russian supplies with alternative sources and accelerating the introduction of renewable energy as well as increasing power generation from bio-energy and nuclear plants, among others.
European nuclear power stations are not producing at capacity and many were facing shutdowns or reductions but the recent development with Russia could possibly reverse their closure or extend their operation.
Seven European nuclear power plants were earmarked to be shut down between July and the end of the coming winter, according to Rystad.
These power plants total 7.03 gigawatts of installed capacity, representing about 1 per cent of Europe’s dispatchable capacity and 10 per cent of the remaining nuclear power plants. These plants include the Doel 3 and Tilhange 2 plants in Belgium, the Isar 2, Emsland and Neckarwestheim 2 plants in Germany, and the Hinkley Point B plant in the UK, according to Rystad.
"The announcement that the pipeline will not return to operations as planned will reignite market apprehensions surrounding the continent’s capability to fully manage gas storage through the entire winter," Ehsan Khoman, director of emerging markets research for Europe, the Middle East and Africa at MUFG Bank, said.
"We are convinced that in the absence of a return to Nord Stream 1 run rates of 20 per cent (or higher) before the weekend draws to a close, the full shutdown will lead to a significant leg higher in European natural gas prices on Monday’s open, potentially mirroring last month’s record highs."