Despite the fact that very little Russian natural gas is being piped to the West, Europe has made its way through the winter rather better than expected (so far). The reasons include warmer than expected weather (which has contributed to lower European gas consumption) and, importantly, increased supplies of liquefied natural gas (LNG) from, notably, the U.S. and Qatar.
U.S. LNG exporters boosted shipments to Europe by more than 137% in the first 11 months of 2022 from the same period in 2021, according to data from Kpler, supplying more than half of Europe’s imported LNG and helping the region weather a more than 54% plunge in piped shipments from Russia.
The United States looks set to remain Europe’s top LNG seller in 2023 as U.S. LNG exporters have greater volumes of LNG available for spot market purchases than other major exporters like Qatar, and as additional U.S. export capacity comes on line.
However, Europe’s energy crunch won’t end with one winter. Some of the gas stored on the Continent last year came from Russia before the taps were turned off. That supply will not resume anytime soon, not least because some of the pipelines are not — shall we say — in the best of shape.
That’s why imported LNG will continue to be vital, and why Germany, for example, has been installing floating LNG import facilities at an impressive pace. But LNG bought on the spot market or on short-term contracts, as much of it will be, is likely to be expensive.
US gas executives say buyers have largely not been willing to commit to new multi-decade supply deals needed to underpin a fresh wave of project construction on the Gulf of Mexico that would further lift supply in the coming years.
“[European] buyers are fearful of their governments telling them they can’t buy hydrocarbons 15 or 20 years from now,” said Nick Dell’Osso, chief executive of Chesapeake Energy, one of the largest US gas producers.
“[Things] are at a bit of a loggerheads right now,” he said.
Paul Varello, chief executive of Commonwealth LNG, which is trying to secure buyers for its proposed export plant in Louisiana on the US Gulf Coast, said he was also struggling to find willing European buyers.
“Is it popular in Europe to come to Commonwealth LNG and do a 20-year deal . . . the answer is no,” he said. “Politically, it is just too close to their 2050 carbon-neutral goals.”
One of the reasons that policy-makers in the EU (and its sad-sack British clone) have been able to get large swaths of overly ambitious (a kind description) climate policy approved is that the day when the effect of those policies will be felt has generally been too far away for most voters to be concerned (although protests by Dutch farmers and the gilets jaunes in France are indications of what could well lie ahead). The energy crunch that has followed Russia’s invasion of Ukraine has, however, effectively accelerated that timetable.
Again, the Financial Times:
The long-term contracts, which can be worth billions of dollars over decades, were needed to secure funding from banks to cover the “monstrous cost” of building new LNG plants, said Varello.
Europeans are still focused on covering their energy needs for the next couple of years creating a “mismatch” between them and US LNG producers that need much longer commitments, said Jason Gabelman, an analyst at Cowen Research.
The European Commission and White House last year agreed a deal under which the US would try to send more LNG to Europe — but only until 2030. The EU aims to be net-emissions free by 2050 and wants to replace Russian gas with a huge buildout of clean energy capacity in the coming years.
Nearly a year after Russia’s invasion of Ukraine, only one of more than a dozen prospective US LNG export projects has secured enough buyers to commit to building their facility.
Europe’s mild winter, which has caused a sharp fall in natural gas prices and kept storage levels at healthy levels, has further damped buyers’ appetite for long-term commitments many see as expensive and risky, given the energy transition, say executives and industry bankers.
It is true that the current reference price (around €58/MWh) for natural gas in Europe is far off the extreme peaks briefly seen late last summer (it nearly reached €350/MWh), but that is still nearly six times the price at which gas was trading at this time in 2021, and not, I reckon, a reason for unalloyed celebration.
The idea that Europe will be able to replace Russian gas with renewables (supplemented, fingers crossed, with nuclear energy) anytime soon is laughable. But because climate policy-makers are still unwilling to accept that fact (fundamentalism is like that), Europeans will have to continue scrambling for LNG. That means they will pay a higher price than would otherwise be the case, as there is decent demand for LNG elsewhere.
The Financial Times:
US gas developers are instead turning their focus to potential buyers in China, South Korea, India and elsewhere in Asia where fossil fuel appetite is still expected to grow.
“While the green influence in Europe is impacting their whole philosophy, that’s not true in Asia,” said Varello. “They’re happy about the energy security and they want a good price.”
And if the EU and the Brits continue down this path, they will be paying a high price for gas for years. That’s going to drag them down economically and push more energy-intensive industrial production out of the continent.
In the short term, the knowledge that Europe will still be facing an energy crunch (or the possibility of one) is likely to encourage Russian perceptions that the war against Ukraine is a war of attrition Russia can win.
Green new economy. Green new geopolitics.