European utilities are better prepared for temporary disruption to Russian gas supplies via Ukraine than they were the last time the taps were closed in 2009, Fitch Ratings says.
The launch of a new pipeline, upgrades to existing infrastructure, good reserve levels and lower reliance on natural gas for electricity generation have all improved the sector's ability to cope should supply be disrupted for a few weeks. A longer-term shut-off would have much more severe implications and even a temporary interruption would probably lead to curbs on gas usage by industrial consumers and an increase in price volatility.
The last blockade in January 2009, which halted all gas flows through Ukraine for around two weeks, had a limited impact on the utilities sector credit profile. Since then, the volume of Russian gas routed to Europe via Ukraine has dropped.
This is in part due to the opening of the Nord Stream pipeline direct from Russia to Germany. Assuming any pipeline closures by Russia were intended purely to put pressure on Ukraine, volumes through the Nord Stream pipeline may not be affected or could even be increased to partially compensate for the loss of the Ukraine route. Other pipeline infrastructure has also been upgraded in the last few years to allow gas to flow from west to east and improve cross border flows, which could provide alternative sources for Central and Eastern European countries that are most reliant on the route via Ukraine.
Gas demand across much of Europe has also fallen since 2009, especially for power generation. This is in addition to the seasonal trends and warm weather that have contributed to currently healthy storage levels. The decline in demand is continuing and is due to the increase in renewable energy generation and structural changes to the market as well as relatively cheap coal, leading to many gas-fired power stations being mothballed or decommissioned.
The financial impact is also likely to be muted as gas supply margins are very slim. A shut-down would probably be considered force majeure, exempting utilities from paying penalties to their customers.
While all these factors mean utilities are better prepared for temporary and partial disruption, a more significant and long-term reduction in Russian gas imports to Europe due to sanctions would have major and far-reaching consequences for many corporates and the wider economy, although the importance of this market to both Russia and Europe limits the political appetite for sanctions on both sides.
Fitch has today published a report on the potential long-term winners and losers in the oil and gas sector if Europe were to try and reduce its reliance on Russian gas. We expect to publish further commentary on the impact of currency depreciation in affected countries.