The gas market has been revolutionised in a way that could never have been expected. Due to the concatenation of a series of factors, already unusual in themselves, the scenario has changed in the space of twenty-four months. Paying the bill is an entire economy and, in particular, one that was thought to be well established on the old continent. Natural gas remains the Achilles heel of the European manufacturing industry, especially for the «energy intensive» sectors. The only way to survive is to adopt new strategies.
Within the manufacturing industry, the paper industry is among the most «energy intensive» sectors. The absolute protagonist is natural gas, which accounts for a large share of this industry’s energy consumption and expenditure (figure 1).
Since 2020, the infamous year of the Covid-19 pandemic, there have been several factors affecting the cost of gas: economic recovery, droughts in Latin America and Asia, and maintenance problems. All this caused the first post-pandemic price rise, with high levels reached by the cost of gas long before Russia invaded Ukraine.
With the war came the loss of Russian supplies, which caused prices to rise.
Data from the Italian paper association Assocarta, according to the report «Paper Industry 2022», testify to the full weight of the heavy price increases: natural gas rose from EUR 10.4/MWh in 2020 to EUR 45.8/MWh in 2021 (+343%), reaching a record in March 2022 with EUR 126.6/MWh.
«In this state of affairs and based on what the market numbers suggest» explained Antonio Michelon, director and office head Italy of Afry, during the Miac Energy 2022 Conference, «what we must expect is still a gas price at very high levels, not to mention the risk of a further reduction in gas supplies from Russia to Europe».
This out-of-control price dynamic was the same throughout Europe, so much so that for Italy the value of the price differential with other European countries was less significant.
Not only gas
If this is true for gas, then there is the issue of electricity. Higher prices persist in Italy than in other European countries, and the close link between electricity production and the use of gas for this purpose has meant that for every euro per megawatt-hour increase in gas, there is a two-euro increase in electricity. This, says Michelon, is true in all countries where technologies that use gas to produce electricity are used.
Energy costs as a whole, which have always accounted for around 30 per cent of the operating costs of paper production, are approaching 50 per cent under current market conditions. The drastic increase in energy costs could now distort market dynamics. The data also suggest that all paper producers in Europe are in exactly the same situation, with no differences between one country and another. The price Germany pays for gas, Afry’s director continues, is the price Italy also pays. Indeed, on a competitive level, Italian paper producers have an extra advantage, due to the energy efficiency measures they have been able to introduce over the years, precisely to cope with higher energy costs than elsewhere.
A «cold war» gas
The balance between total gas supply and demand in Italy in recent years has settled between 70 and 75 billion cubic metres (bcm) per year. Russia, before the invasion of Ukraine, covered 40 per cent of this gas demand, the same percentage as European demand, explains Michelon. Thus, the volume arriving in Europe from Russia before the war ranged between 150 and 180 bcm.
In 2022, the availability of Russian gas decreased due to the war in Ukraine. Imports into Italy – in the first nine months of the year – halved compared to the same period in 2021, but still accounted for 19% of the total supply, thus maintaining a key role in Italy’s gas supply. The reduction in imports had to be compensated for, on the one hand, by an increase in the supply of gas from Norway and Azerbaijan, and on the other, by also increasing the amount of LNG, liquefied natural gas.
A change in the market balance that has affected the entire old continent and that in the coming years will benefit, among others, the United States of America, a country that could also become a strong competitor to Europe in terms of paper and cardboard production.
The US, Michelon explained, has become a major producer of gas in the last ten years thanks to «fracking» or hydraulic fracturing, the technique used to extract natural gas. It is conceivable that it will be the stars and stripes gas supplies that will replace the Russians when they are further depleted.
The issue will then become one of wider competition, because lower gas and energy costs in general also mean lower production prices.
Rethinking energy strategies
If the forecasts of a further reduction or a total interruption of imports from Russia were to come true, the scenario hypothesised by Afry is one of a new gas supply arrangement, but with some difficulties, especially for Italy which, despite diversification of supply, is still dependent on Russian gas. An imbalance between supply and demand of 10 billion cubic metres could be created. This, Michelon continues, would force the country to find the equivalent of 10 bcm from other sources or drastically reduce consumption.
It therefore becomes imperative that companies also study a new, forward-looking energy supply strategy.
In the meantime, the Italian state already announced plans in 2022 to achieve savings of 8.2 billion cubic metres of gas. Approximately 6.1 bcm would be saved in distribution, there would then be a reduction of 2.1 bcm in electricity generated from gas, using different fuels: 1,8 bcm of gas replaced by coal and oil, and 0,3 bcm by biofuels.
Just under 2 billion cubic metres of the 10 billion cubic metre gap are still to be covered. The latter part could be made up by making cuts in the industrial sector.
A condition that must certainly make one think, but which should not worry the paper industry specifically, says Afry’s director. The details have not yet been worked out, but there are two hypotheses: either a uniform reduction in gas supply to all industrial sectors, or reductions that take into account certain parameters such as, for example, the number of employees per gas consumption, i.e. the capacity of a given sector to create and maintain employment, or the intensity of the economic added value of gas demand, in essence how much GDP per cubic metre of energy used a sector is able to produce. In any case, Michelon emphasises, the paper and paper industry would be no more at risk than other industries of seeing its energy supplies rationed, considering the GDP it produces and the ancillary industries it drives, even with high energy consumption.
Once again, it is a question of strategy. All «energy-intensive» industries should review their energy and decarbonisation strategy to consider the various short-, medium- and long-term challenges on the horizon.
What to expect
Needless to be under any illusions, in the coming months the industry will be called upon to operate in a scenario where energy prices will be high, Michelon concludes. It will be necessary to revise the supply strategy, with greater firmness in setting a gas price that is not free or subject to possible adjustments, implement energy efficiency measures, aiming at the use of different fuels and vectors, such as hydrogen, and the construction of plants and machines that are designed to consume less energy. There are technologies that are ideal for going down the road of decarbonisation, technologies that are already available that can help companies lower their energy consumption. This needs to be implemented.