The EU has a credible strategy to mitigate the worst effects on gas markets of a cut-off of Russian gas imports starting in 2023, but this is contingent on swift adjustments to the supply and demand balance, and policy response, Fitch Ratings says in a new report.

Our analysis indicates the EU gas market would remain well-balanced, assuming low Russian gas flows at 20% of pipeline capacity from August 2022 and zero Russian gas deliveries from 2023. This underlines a planned increase in alternative gas supplies, especially record-high liquefied natural gas (LNG) imports, and demand destruction. We have assumed demand compression of 15% in 2023 compared with 2021.

We expect LNG imports to rise to about 120 billion cubic metres (bcm) in 2022 and further to 155bcm in 2023, taking into account the limitations of LNG and pipeline infrastructure in Europe.

Levels of uncertainty in our projections are high and principally hinge on the evolution of the war in Ukraine, timely delivery of LNG volumes and coordinated efforts among the EU member states to overcome infrastructure bottlenecks.

Exposures to Russian gas and responses to a cut-off vary substantially across countries. Countries with high gas consumption and limited existing supply diversification, such as Germany, will have little room for error as they execute on the procurement of additional imports while paring back demand for Russian gas.

The economic impact of the adjustment process will weigh on the eurozone economy and its corporates, but less severe than some early estimates by market participants.
Source: Fitch Ratings