Yves here. I suggest reading this post in combination with the latest offering at Doomberg, Measure Twice: Sizing Europe’s Natural Gas Crisis. He converts the too often varied gas figures to billion cubic feet as opposed to the more common (but still far from standard) billion cubic meters measure.
Regardless, the Biden offer of an additional 15 billion cubic meters of LNG to Europe is only 10% of the annual amount it gets from Russia. Doomberg pushes some other numbers around and concludes that the amount of LNG needed to fill Europe’s Russia gap is 30% of global supply. Mind you, what is produced now is largely subject to long-term contract.
Consider this part of his article, which confirms doubts about implementation issues that we and readers have raised (emphasis original):
Aside from securing commercial agreements for alternative supply, there is also the issue of whether Europe has the capacity to accept more LNG imports. Regasification requires specialized import terminals and pipelines to distribute the gas, both of which seem to be in short supply. Here are two quotes from a Reuters story published prior to Russia’s invasion of Ukraine:
“This means most of Europe’s LNG terminals are operating at full capacity, especially in north-west Europe, where they feed large economies Britain, France and Germany, raising the question of how much more LNG can be processed.
“Spain has the continent’s biggest capacity, with six terminals, while Germany has none. The utilisation rate for the Spanish terminals was just 45% in January, data and analytics firm Kpler said.
‘The problem with Spain is that it has limited pipeline connections with the rest of Europe with only one pipeline that could take gas from Spain to France and so capacity is restricted somewhat,’ Laura Page, senior LNG analyst at Kpler said.”
Germany recently announced its intention to build several new LNG import facilities, and three projects are progressing at an accelerated pace. A terminal in Brunsbuettel is slated to process 0.8 bcf/d, a project at Dow’s Stade site will handle 1.3 bcf/d, and a previously-shelved 1.0 bcf/d project in Wilhelmshaven has been resuscitated and accelerated. Although these projects will offset 20% of Europe’s reliance on Russian supply, they will not be operational until the 2025-2026 timeframe.
Needless to say, this situation is not pretty. And that’s before you get to the issue of price impact, the focus of Irina Slav’s discussion.
By Irina Slav, a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice
- Europe is determined to wean itself off Russian natural gas following Putin’s decision to invade Ukraine, and U.S. LNG is one of the major alternatives.
- Biden has already committed to sending an additional 15 billion cubic meters of natural gas exports to the EU this year, a move that sent prices higher.
- Natural gas prices hit the highest level in thirteen years last week and, while the coal price rally was partly to blame, rising LNG exports played a part.
Meet Europe, the newest and unlikeliest star on the LNG stage. Europe recently had to reconsider its emissions-cutting ambitions in light of the danger of an unprecedented energy crunch. U.S. natural gas producers are only too happy to help. Cue worries about a domestic shortage.
European Union governments have been discussing for weeks ways to cut their reliance on Russian oil and gas.
There have been claims that the EU can make it through the summer even if gas imports from Russia are cut because there is enough gas in storage. Still, Brussels has stopped short of imposing an embargo on Russian gas, with Germany admitting it cannot afford one.
There have been plans to reduce the overwhelming dependence on Russian gas by urgently finding alternative suppliers, including pipeline gas from North Africa and Central Asia, and liquefied natural gas from Qatar and the United States. And the United States has been eager to help.
President Biden pledged an additional 15 billion cubic meters of natural gas exports to the European Union this year in the form of LNG, while the EU pledged to create the demand for 50 billion cubic meters annually of U.S. LNG “until at least 2030”.
Before the mutual pledges, Europe had already become the largest buyer of U.S. LNG at the start of this year, taking in a record 12.5 billion cubic meters in the form of the super-chilled fuel. But there is a problem. Demand, especially from Europe, is set to rise sharply this year: Wood Mac expects European LNG to add 25 metric tons by the end of 2022. Global supply, on the other hand, is seen adding 17 million tons.
The signs of this imbalance are already visible in the United States. Last week, natural gas prices hit the highest level in 13 years, and while some analysts blamed it on the coal price rally, record LNG exports certainly contributed to the trend.
Natural gas prices are “sensitive to any near-term supply concerns created by events like a ban on Russia coal exports, abnormally cold weather,” Tortoise portfolio manager Rob Thummel told MarketWatch last week. But perhaps more importantly, U.S. natural gas stocks have fallen.
For the week ending April 1, the Energy Information Administrationreported that national natural gas stocks were 17 percent below the five-year seasonal average. The agency noted that stocks of working gas were within the five-year average, and yet prices continued to rise.
Reuters’ John Kemp noted in a recent column that U.S. natural gas stocks ended the winter of 2021-2022 at a three-year low of 1.382 trillion cubic feet. Working stocks, he also reported, were 19 percent below the pre-pandemic five-year average for the start of April. And all that was because of higher exports.
Summer is normally a lower-demand season, so prices may stabilize at more palpable levels while U.S. exports to Europe remain high, provided Europe has freed up space for the incoming gas. But then exports are likely to remain strong as the northern hemisphere heads into the winter of 2022-2023.
Sanctions against Russia will still be in place; the EU and the U.S. have made this clear, regardless of how the war in Ukraine develops over the next six or so months. If anything, by then, there will be more sanctions, possibly ones that directly target the country’s hydrocarbons industry besides coal. And this suggests that the supply-and-demand situation with natural gas in the U.S. may become tighter.
Earlier this month, U.S. shale gas and LNG producers met with delegations from several EU member states eager to boost their purchases of U.S. liquefied gas. This eagerness could be crucial for final investment decisions on new LNG export capacity. But besides the eagerness, gas producers would need substantial long-term commitments in order for these projects to make economic sense.
Most of the eager LNG importers are quite small gas consumers, such as Latvia and Bulgaria. Others that took part in the meetings, such as Germany and France, on the other hand, are worthy future clients, despite renewable energy plans that may compromise their worth over the longer term.
Indeed, the industry itself said as much: “The capacity challenges in 2022 are great, but the opportunities in a few years are really terrific,” said Fred Hutchinson, the chief executive of trade body LNG Allies, on the sidelines of the meetings.
These opportunities are not in Europe only, either. Asia is eager to reduce its pollution levels, and it is investing billions in gas import infrastructure, Tortoise senior portfolio manager Matt Sallee said this week during a regular podcast.
“The projects target using primarily US gas to reduce Asia’s dependence on coal which cuts CO2 over 50%, a critical tool to achieving global emissions goals,” Sallee said, noting, “As you can imagine the majority of investment is in China where over 30 LNG import terminals are under construction. The bottom line is between reducing Russian dependence for Europe and coal dependence for Asia an absolutely massive call on US gas exists over the next several years.”
In all likelihood, therefore, we will be seeing more LNG export capacity coming on stream in the United States over the next few years. The problem is that during these years, prices for the commodity may remain higher than comfortable at home as demand from abroad runs high production tries to catch up with it. In other words, we may well see a repeat of the higher-for-longer scenario we are already seeing in crude oil.