Packaging / Advertising & Office

Even before the Russian-Ukrainian war, soaring natural gas prices were a key issue for European paper and cardboard producers, Watson & Band Import and Export Data Watch reported. In response to the war, the EU imposed sanctions on Russia, and Russia responded by reducing gas exports to the EU. Russia supplies 49% of EU gas imports in 2021, according to import and export data, and if the reduction continues, or worse is suspended entirely, the gas crisis could have serious consequences for European paper and cardboard producers.

In this multi-part series of introductory articles, the potential impact of rising energy prices and the threat of energy shortages to European paper and board producers will be explored. The article outlines the region's reliance on natural gas and some policies under consideration. measures to deal with this situation, as well as some of the implications of a possible natural gas shortage.

European countries vary widely in their dependence on natural gas

Compared with the rest of the EU, Austria, Bulgaria, the Czech Republic, Germany and Slovakia have a much more complicated situation, due to the high proportion of natural gas in their energy mix or the impact of Russian gas, according to Watson & Band Import and Export Data Watch. High dependence on imports. Unlike other countries, they lack LNG terminals and pipeline connections to other major gas exporters, so they don't yet have an alternative 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 reliance on Russian gas supplies, acquiring 11.5 billion cubic meters of gas, mainly from Algeria, and an additional 150 million cubic meters from Azerbaijan via the TAP pipeline. The country expects to reach 90% of its strategic natural gas reserves by October.

Poland and the Baltic states (Lithuania, Estonia and Latvia) began a few years ago to reduce their reliance on Russian gas by expanding LNG terminals and their own pipeline infrastructure. While these countries still import most of their gas from Russia in 2021, they can switch from Russian gas to other suppliers.

France is less dependent on natural gas, has various sources of imports, and had a lower share of Russia's natural gas imports before the war, so Russia's possible cessation of natural gas exports will have less impact on them.

Russian gas supplies to the Iberian Peninsula and the UK are almost negligible. Most of Spain and Portugal's natural gas imports come from Algeria, partly through ships using LNG. Furthermore, the Iberian Peninsula has few connections to the European pipeline network. Only two small pipelines with a combined annual capacity of 7 billion cubic meters connect Spain with France. Much of the UK's supply comes from its production off the coast of Scotland and imports from Norway.

No major problems are expected in the Nordic countries (Finland, Norway and Sweden), whose energy mix mainly consists of nuclear, hydro and bioenergy power plants. Natural gas accounts for only 6% of Finland's energy mix and 2% in Sweden. Although a significant portion of their gas imports previously came from Russia, the two countries combined need only replace 2.6 billion cubic meters of Russian gas supplies.

Policies are being developed to manage gas shortages

In July, EU member states pledged to reduce gas demand by 15% next winter to counter a drop in Russian gas exports. Some countries, such as Portugal and Spain, have called for a reduction in demand because their pipeline connections are insufficient to supply large amounts of gas to other European countries. In Austria, if rationing of gas is necessary in the country, the government plans to first shut down the 35 production sites that consume the most gas, and if that is not enough, further shutdowns are possible.

In Germany, the German Federal Network Agency - the German market supervision office for electricity, gas, telecommunications, postal and railways - has estimated the probability of gas shortages in several scenarios. For example, if Russia continues to export only 20% of the capacity of the Nord Stream 1 pipeline, Germany can only avoid gas rationing by reducing gas consumption by 20% and reducing the delivery of Russian imported gas to neighboring countries. But even if Russia increases its exports to 40% of its previous pipeline capacity without a significant reduction in consumption, Germany would still face a gas deficit of 14.4 billion cubic meters by December.

The German Federal Network Agency has the power to decide which industries will reduce or idle their production first. Unlike Austria's contingency plan, the agency takes into account the company's importance in the supply chain in addition to gas consumption. As a result, some production sites with high gas consumption in Germany can be allowed to continue operations, as they are vital to other industrial sectors.

Even if Russia decides not to further reduce gas exports through the Nord Stream 1 pipeline and insists on a 20% utilization rate, gas shortages, at least for Austria, Czech Republic, Germany and Slovakia, will be inevitable, if other countries do Because neither France nor Italy have at least partially reduced their share of Russian gas supplies.

Also, finding alternatives to Russian gas in the short term will be complicated. The International Energy Agency (IAE) estimates that Russian gas exports to the EU will fall by more than 45% by 2022, to just under 80 billion cubic meters. Considering that Europe's LNG terminals have a combined annual capacity of 159 billion cubic meters and are already grappling with capacity constraints, the IAE report said EU member states will not be able to fully opt out of Russian gas imports until at least 2026.

If Russia decides to stop gas supply entirely in 2022, Germany and Austria will not be the only countries struggling to procure enough gas for domestic demand. With the exception of the Nordic countries and the Iberian Peninsula, every European country will be affected to some extent by severe gas rationing.

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

Watson & Band Import & Export Data Watch reports that when analysing the potential impact of energy supply and shortages on the European paper and board industry, it is important to consider the share of paper and board produced from recycled materials in total paper and board, as well as the production business location.

In general, virgin paper and board producers can take advantage of energy synergies that allow them to consume less purchased energy and utilize energy other than natural gas. Many base paper and board producers are partially or fully involved in pulp production and profit from boilers that run on waste-based biofuels or black liquor, depending on the pulp grade they produce.

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

Geography is also critical in estimating possible natural gas and energy shortages. Depending on the country, natural gas can account for 40% of the energy mix, and the country may have imported as much as nearly 100% of its supply from Russia in the past, according to import and export data.

Many European recycled paper and board producers are located in geographic regions that are highly dependent on Russian gas imports. Therefore, recycled paper and board grades and their producers are at higher risk than virgin grades.