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Can Europe End Its Reliance on Russian Gas?

We see this scenario as highly unlikely, but looking at ways Europe could accomplish such a massive task has important insights for investors.

As events in the Russia-Ukraine conflict continue to progress, investors and other European stakeholders are now wondering if it is feasible to end Europe's reliance on Russian gas. To be clear, we see this as a highly unlikely scenario, but looking at how Europe may accomplish such a massive task has important insights for investors. In 2021, Russia made up about 45% of Europe's gas imports and 40% of its overall gas consumption, with many countries nearly completely reliant on Russian gas. Total 2021 consumption of Russian gas by Europe was about 155 billion cubic meters (bcm). The International Energy Agency (IEA) recently released a 10-point plan to reduce Europe's reliance on Russian supply, and we see some of its proposals as realistic, while others are not. Bluntly, it looks like the best near-term options are liquefied natural gas (LNG) and gas-to-coal switching, resulting in large financial (about EUR 200 billion) and emissions-related costs to European consumers while other options would require years of investment to play out. The largest and most important component of the plan is an increased reliance on liquefied natural gas (LNG), which we see as primarily U.S.-based. We see this as realistic as it is a major supply source that can respond relatively quickly with a re-routing of global flows to meet demand. The IEA suggests about 30 bcm of incremental supply, but Rystad puts estimates higher at 70 bcm, anywhere from 19% to 45% of Russian supply. As a result of the higher European demand for LNG, we expect the enormous LNG marketing spreads to generate an expected $1.7 billion to $1.8 billion in excess profits for Cheniere this year. The large influx of near-term cash flows has shifted our fair value estimates upward for Cheniere Energy LNG to $118 per share and Cheniere Energy Partners CQP to $50 per unit from $104 per share and $44 per unit, respectively.

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