Climate : goodbye Russian gas, hello coal

In the short term, this inevi­ta­bly means repla­cing Rus­sian gas with coal for part of the ener­gy mix and repla­cing ano­ther part of the mix with lique­fied natu­ral gas (LNG) impor­ted by sea. The imme­diate conse­quence of the war in Ukraine is that poli­cies to reduce green­house gas emis­sions are put on hold, as coal-fired power gene­ra­tion emits about four times more CO2 than gas-fired gene­ra­tion. In the long term, this means buil­ding infra­struc­ture to increase LNG imports and deve­lop rene­wable energy.

In 2021, about 45% of the gas impor­ted into Europe was of Rus­sian ori­gin. This depen­dence does not have the same weight in dif­ferent coun­tries. France imports 17% of its gas, Ger­ma­ny 50%, while Fin­land and Lat­via, for example, import over 90%. Brea­king this depen­dence in the short term will the­re­fore require very dif­ferent efforts from one coun­try to another.

The demand for Rus­sian gas in Europe can be redu­ced by 18–20% by using coal or dual-fuel power plants. Rus­sian natu­ral gas accounts for 11% of total pri­ma­ry ener­gy consump­tion in Europe. So, we are tal­king about repla­cing around 2% of the ener­gy consu­med in Europe today in the form of gas with coal. That’s about the annual ener­gy consump­tion of a coun­try like Aus­tria, or 10% of Ger­ma­ny’s ener­gy. An impor­tant detail : we could go fur­ther and start up old coal-fired power sta­tions again. This is pro­ba­bly what will hap­pen if we do not reduce the demand for hea­ting and elec­tri­ci­ty sufficiently.

An exit from Rus­sian gas can be esta­bli­shed through a three-pron­ged stra­te­gy. The first is the repla­ce­ment of gas by LNG. The Uni­ted States and Qatar account for 26% and 24% of EU imports and are mas­sive expor­ters. Howe­ver, there are tech­ni­cal constraints. Europe, espe­cial­ly Ger­ma­ny, lacks gas port ter­mi­nals and LNG rega­si­fi­ca­tion plants. The world tan­ker fleet is 600 ships. This will not be enough to meet the rapid­ly gro­wing demand. Final­ly, once the gas is deli­ve­red, it must be trans­por­ted across Europe. The second is the use of coal (impor­ted from South Afri­ca). Final­ly, it will be neces­sa­ry to reduce the consump­tion of indus­tries and hou­se­holds. It is through the com­ple­men­ta­ri­ty of these three axes that Europe can reduce its depen­dence in 2022, even if the two-thirds sce­na­rio seems rather unrea­lis­tic. A reduc­tion of 50 to 60% is more like­ly. A com­plete halt to Rus­sian gas imports in 2027 will require mas­sive invest­ments, par­ti­cu­lar­ly in rene­wables and LNG infra­struc­ture. Nuclear power requires lon­ger deve­lop­ment times.

The Inter­na­tio­nal Ener­gy Agen­cy esti­mates that if eve­ryone in Europe redu­ced their hea­ting by one degree, this would represent a saving of 6% in the volume of gas impor­ted from Rus­sia. In order to reduce French consump­tion as a whole, it would the­re­fore be neces­sa­ry to reduce the tem­pe­ra­ture to heat buil­dings in Europe by more than 3 degrees. This remains theo­re­ti­cal, as some of this gas is consu­med by industry. 

Ger­ma­ny uses 25% coal, 22% wind power and 17% natu­ral gas to pro­duce its elec­tri­ci­ty. France, on the other hand, has inves­ted less in natu­ral gas, as 70% of its elec­tri­ci­ty comes from nuclear power. Gas is used in par­ti­cu­lar for hea­ting, for indus­try and for power sta­tions used during peak per­iods. In addi­tion, a large pro­por­tion of the gas impor­ted into France comes from Alge­ria and Nor­way, trans­por­ted by pipe­line. This situa­tion should rein­force Fran­ce’s nuclear strategy.

An obser­va­tion of futures mar­kets indi­cates that we will not go back to nor­mal before the third quar­ter of 2023. This seems a long way away, but does not mean a constant increase in gas prices until then. It is impos­sible to pre­dict the price of gas, but stable and high prices are like­ly. In this increase, the effect of anxie­ty and self-sanc­tio­ning, cau­sed by the announ­ce­ment of the Ame­ri­can and Bri­tish embar­go on Rus­sian gas and oil, are unde­niable. Banks and com­pa­nies are refu­sing to conclude contracts with Rus­sians for fear of repri­sals. The mini scan­dal sur­roun­ding the com­pa­ny Shell, which has not put an end to its acti­vi­ties in Rus­sia, illus­trates this well. To avoid attrac­ting atten­tion, and thus dama­ging their repu­ta­tion, tra­ders apply sanc­tions them­selves, which leads to higher prices.

The way we store this resource is the­re­fore stra­te­gic. Espe­cial­ly as we are just coming out of a dif­fi­cult year for this sec­tor, due in par­ti­cu­lar to the health cri­sis. Nor­mal­ly, Euro­pean coun­tries start the spring with about 40% of their sto­rage capa­ci­ty, whe­reas this year, this 40% had alrea­dy been rea­ched in mid-Janua­ry. It is the­re­fore impor­tant to restock gas, but doing so at high prices is a risk for buyers. Espe­cial­ly since, if this is the stra­te­gy cho­sen, it pro­vides Rus­sia with an addi­tio­nal wea­pon that it could exploit to push prices down.

Interview by Pablo Andres