How will the natural gas crisis affect the European paper and board industry? Dependence, policy and shortage

Take a deep dive into the natural gas crisis and its potential impact on European paper and board industry in this introductory article of a multi-part series.

Soaring natural gas prices were already a critical issue for European paper and board producers even before Russia’s attack on Ukraine. As a reaction to the war, the European Union (EU) imposed sanctions on Russia, and Russia responded by reducing its natural gas exports to the EU. In 2021, Russia supplied 49% of the EU’s natural gas imports, and the continuation of reduced – or, worse, a total suspension of – natural gas exports could have severe consequences for European paper and board producers.

In this introductory article of a multi-part series that will explore the potential impact of increased energy prices and the threat of energy shortages on European paper and board producers, we provide an overview of the levels of dependence on natural gas in the region, a few of the policy measures being considered to manage the situation and some of the likely effects of possible natural gas shortages.

European countries differ widely in their dependence on natural gas

European natural gas pipeline network

Austria, Bulgaria, the Czech Republic, Germany and Slovakia are in a far more complex situation than other countries in the EU, due to the high share of natural gas in their energy mixes and/or their high dependency on Russian natural gas imports. Unlike other countries, they lack liquid natural gas (LNG) terminals and pipeline connections to other major natural gas exporters, so they don’t yet have alternatives to Russian gas.

Italy is also very dependent on natural gas, which accounts for nearly 40% of the country’s energy mix. However, the country has recently reduced its dependence on Russian natural gas supplies by securing 11.5 billion cubic meters (bcm) of natural gas, mostly from Algeria, and an additional 1.5 bcm from Azerbaijan through the TAP pipeline. The country expects its strategic gas reserves to be 90% full by October.

Poland and the Baltic countries (Lithuania, Estonia and Latvia) began to reduce their dependency on Russian natural gas several years ago through the expansion of LNG terminals and their own pipeline infrastructure. Although these countries still imported a large proportion of their natural gas from Russia in 2021, they can switch from Russian natural gas to other suppliers.

France has a low dependency on natural gas, varied import sources and a low share of Russian natural gas imports before the war, so a possible halt in exports of natural gas by Russia will be less impactful for them.

Russian natural gas supplies to the Iberian Peninsula and the United Kingdom are almost insignificant. Spain and Portugal are sourcing most of their natural gas imports from Algeria, partly with LNG via vessels. Moreover, the Iberian Peninsula has few connections to the European pipeline network. Only two small pipelines with a total annual capacity of 7 bcm connect Spain with France. The UK sources a substantial part of its supplies from its own production off the Scottish coast and imports from Norway.

We also don’t expect significant issues for the Nordic countries (Finland, Norway and Sweden), because the energy mix in these countries mainly comprises nuclear, hydro and bioenergy power plants. Natural gas accounts for only 6% of the energy mix in Finland and a mere 2% in Sweden. Although a substantial share of their natural gas imports formerly came from Russia, the two countries combined only have to replace 2.6 bcm of Russian gas supplies.

Policies are being enacted to manage the natural gas shortage

In July, EU member states committed to reducing gas demand by 15% next winter in response to decreasing Russian natural gas exports. Some countries, such as Portugal and Spain demanded exceptions in the demand reduction, as their pipeline connection is not sufficient to supply other European countries with a significant amount of natural gas. In Austria, if it becomes necessary for the country to ration natural gas, the government plans to first idle production at the 35 production sites that consume the most gas, with additional idlings possible if this is insufficient.

In Germany, the German Federal Network Agency – the German regulatory office for electricity, gas, telecommunications, post and railway markets – estimated the likelihood of natural gas shortages in several scenarios. For instance, if Russia continues to only export 20% of Nord Stream 1’s capacity, Germany could only avoid gas rationing if it reduced its natural gas consumption by 20% and decreased the natural gas transmission of Russian imports to neighboring countries. But even if Russia increased its exports to the previous 40% of the pipeline’s capacity, without significant reductions in consumption, Germany would still face a deficit of 14.4 bcm of natural gas by December.

The German Federal Network Agency has the authority to decide which industries will decrease or idle their production first. Unlike the Austrian emergency plan, the agency also considers the importance of a company in the supply chain in addition to its natural gas consumption. Hence, some production sites with a high natural gas consumption in Germany could be allowed to continue because they are essential for other industrial sectors.

Even if Russia decides not to further decrease its natural gas exports through the Nord Stream 1 pipeline and sticks to the 20% utilization rate, gas shortages – at least for Austria, the Czech Republic, Germany and Slovakia – will be unavoidable if other countries such as France or Italy don’t at least partly reduce their share of Russian natural gas supplies.

Moreover, finding alternatives to Russian natural gas in the short run will be complex. The International Energy Agency (IAE) estimates that Russian natural gas exports to the EU will fall by over 45% in 2022 to slightly below 80 bcm. Considering that the LNG terminals in Europe have a combined total capacity of 159 bcm annually and are already struggling with capacity constraints, the IAE reports that it will take until at least 2026 for EU member states to be able to opt out of Russian natural gas supplies.

If Russia decides to stop natural gas deliveries altogether in 2022, Germany and Austria would not be the only ones struggling to source enough natural gas for their domestic demand. Every European country except for the Nordic countries and the Iberian Peninsula would be affected in some way by severe gas rationing.

Recycled/non-integrated paper and board producers will be more affected by natural gas shortages

When analyzing energy supplies and the potential effect of shortages on the European paper and board industry, it is important to consider the share of total paper and board that is produced from recycled materials and the geographic location of the producers.

In general, virgin paper and board producers can use energy synergies, which allows them to consume less purchased energy as well as utilize energy sources other than natural gas. Many virgin paper and board producers are partially or fully integrated to pulp production and profit from boilers run by their reject-based biofuels and/or black liquor, depending on the pulp grade they produce.

On the other hand, producers of recycled and non-integrated virgin paper and board depend more heavily on natural gas as their primary energy source and are more vulnerable to natural gas supply shortages.

Geographic location is also critical in estimating possible natural gas and energy shortages. Depending on the country, natural gas can account for up to 40% of the energy mix, and in the past the country may have imported as much as almost 100% of its supply from Russia.

Many European recycled paper and board producers are located in geographical areas with a higher dependency on Russian natural gas imports. Consequently, there are more risks for recycled paper and board grades and their producers than virgin grades.

In the subsequent articles in this series, we will evaluate the impact of possible natural gas shortages on the production of various paper and board grades in the most at-risk European countries.

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