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.
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Interesting quote in one of the last paragraphs that natural gas reduces CO2 emissions by 50%. Not a word about methane…
Locking in LNG is a guaranteed way to lock in permanent high energy prices. There is a natural floor to LNG prices due to the coast of production (it takes a lot of energy to cool and compress).
There is also a key division in Europe between those countries in Europe that use natural gas as the main source of electricty (Italy for example), those who use it mostly for peak and back up supply (France) and those who use it mostly for direct industrial and home heating (Germany). Only 12% of Germanys electrical generation is from natural gas (only slightly more than biomass and much less than wind). Germany’s concern is not having the lights go out, its a huge increase in costs for key industries. For Italy, it most surely is a case of the lights going out.
What would be interesting would be to see a realistic assessment of how quickly alternative forms of energy can be rolled out. Very large plant such as nuclear plants or new LNG facilities take an absolute minimum of 5 years to go from greenfield to producing energy, and thats assuming no legal or regulatory issues. Gas storage facilities can be created quite quickly if there is infrastructure in space (such as worked out gas fields). Gas CCGT plants can be built quickly. Pipelines cannot. If there is production and grid capacity, wind turbines and solar farms can but put up in a matter of months (realistically, this means importing from China as most European factories are at capacity). China constructed 16GW capacity of off-shore wind in 2020 alone.
The real problem in Europe for movement in anything is likely to be political/regulatory. For example, in Ireland there is 2GW of solar capacity, full approved and with grid connections in place. This would be sufficient to provide at least half the islands electricity during the long days of summer. But its not going ahead because of a stand-off between the industry and government over supports and pricing. Expect all sectors to engage in similar brinkmanship to extract as favourable terms as they possibly can. Off-shore wind is already experiencing legal issues as there are huge lacunae in international maritime law about putting so much infrastructure outside the normal national waters of individual countries. Expect gas infrastructure proposals to clog up the courts.
‘between those countries in Europe that use natural gas as the main source of electricity (Italy for example)’
Just saw Italy and gas mentioned not five minutes ago, I checked and found that Italy imports approximately 40% of its gas from Russia and intends to secure an additional 9 million cubic meters of gas from Algeria. I hope that they can import that extra gas from Algeria in the next coupla weeks as they have just said that they are going to refuse to pay the Russians in Rubles for their gas. If they have a long term contact for Russian gas they may have time to buildup some replacement sources but if they get their gas from the spot market, then they will be screwed sideways-
https://www.rt.com/business/553916-italy-rejects-ruble-russia-gas/
No so long ago Nick Corbishley analysis Spanish Government Reaps Whirlwind After Antagonizing Its Biggest Natural Gas Supplier of Italy, Spain, pipeline capacity, etc.
I seem to remember that when Germany set up the first large-scale wind turbine parks offshore its Northern coast, it took several years for them to make an actual contribution to power generation.
The electrical grid was organized to send electricity generated in the West (coal from the Ruhr) and in the South (hydro from Bavaria) to the rest of the country — there were no lines configured properly and with sufficient capacity to bring wind-generated electricity from the North southwards. The grid had to be overhauled first, and thus wind took much longer than expected to make a difference. Somebody with more knowledge might correct or fine-tune my recollections.
Germany has a long term problem with north to south interconnection – the German grid is very decentralised compared to most in Europe as it has its origins in lots of small grids organised by the Lander. Most renewables are on the coast and the north, so this has proven a limiting factor as to how much wind capacity they can build out in the north.
But then again, it also works the same in reverse. Off-shore turbines in the Baltic should improve matters as when they are developed further there will be interconnections between Scandanavia and Germany and Denmark. The bigger the grid, the easier it is to distribute intermittent loads.
Laender
I can’t/won’t speak for Europe, but I deal directly with major infrastructure projects in the US. A whole lot will need to change for infrastructure to be built quickly.
Germany’s “green” biomass generation is ridiculous. First cut down pine forests in the US south, then process that biomass into pellets, then ship it to Germany, then transport it to generation stations, then burn it. Of course even compressed biomass pellets are not terribly energy dense. They’re great for local heating or water heating because they’re more dense than raw wood, but compared to coal for generation its laughable. And it does not solve one of the major issues of coal generation: the huge amounts of infrastructure and energy needed to scrub the exhaust stream. You still have the problem of fly ash (probably more than coal in total quantity) and the siphoning off of generated electricity to run the precipitators, baghouse structures and “toxicons”. It may be more energy intensive than the same process for coal (I don’t know) given that the concentrations of the nasty stuff like metals will be lower relative to the volume of the exhaust stream.
For all I know though, biomass plants don’t bother with any of that because the input source is “green”.
Focusing on power generation via Nat Gas is missing the point. Chemical production, particularly ammonia (i.e., fertilizer) is the most valuable use for NG. Germany was the 13th largest producer of ammonia in 2019, so they need the NG to support many downstream uses.
On another note, I think that many things will change in the time it takes to bring gassification facilities on line in Europe, so that discussion may be moot at this point. Also, the LNG vessel capacity worldwide is 93 MM cbm. A drop in the bucket relative to NG demand. Sure, each vessel can make more than one trip per year, but, for example, a round trip to Far East from U.S. is almost two months. Building more vessel capacity is a long term investment decision, so think in terms of years.
NRW is the big consumer of gas in Germany, steel industry, BASF, and glass production – these companies are all having kittens. If the gas is turned off then the damage to production systems will be huge. You can’t just stop producing glass – turn off the heat and thwhole factory is scrap.
German industry is telling Scholz to keep buying Russian gas or risk being the shortest lived Chancellor in history.
Bob Pollin has recommended nationalizing portions of the US energy sector. If the U.N.’s Intergovernmental Panel on Climate Change is correct “…[we are] firmly on tract towards an unlivable world,” and the energy companies will go to the grave sending us there. Prepare the fainting couch. Nice to see that those old URPE guys keeping the faith.
No mention in the article that most of the new production of NG in the US is fracked gas (Marcellus Shale), which has very steep depletion rates. I keep reading how fracked oil and gas producers are now showing “discipline” so as not to overproduce and harm prices. Not convinced. My guess is that all the “sweet spots” have been tapped, and we’re seeing the early stages of peak production.
I’m becoming more and more convinced that US grand strategy was to have Ukraine get full control of the fracking deposits in the north east of the country and bring in our fracking majors to make Europe dependent on Ukrainian/US gas instead of Russian. It might help explain why we keep doubling down. Without that, the whole grand plan falls apart. It might also explain why some of the EU nations (Germany) are willing to cut their own throats: it was supposed to be temporary. When will they realize that it’s not going to be temporary?
“https://www.woodmac.com/news/opinion/asias-lng-pain-is-europes-gain—for-now/”
So European industry will in the future be fueled by high-cost LNG from the US and Chinese industry will in the future be fueled by low-cost pipeline natural gas from Russia, increasing the competitive advantage of Chinese chemicals and manufactured products over European products.
I’m sure the European leaders understand the numbers. This is a public relations fantasy that if enacted will lead to the electoral victories of Le Pens and Orbans and ultimately to the unraveling of either NATO or the EU- or maybe both.
As a friend of mine said: “The only logical explanation is that Biden is a secret agent of the Russians.”
It seems to me that if Russia is pushed into a corner by sanctions it may have little choice but to target energy infrastructure in Europe. Everything could be considered a legitimate target – nuclear plants, LNG terminals, pipelines, solar, hydroelectric, geothermal, coal, the whole kit and caboodle. LNG carriers could be targeted on the open ocean as well. Squeezing Russia to the nth degree is a very dangerous game being played by the West.
In the near future, if a growing number of Americans learn that the exports of natural gas are responsible for some of the rising prices, there could be serious domestic political backlash.
Given the skyrocketing inflation, I could see a politician who promised to stop exporting natural gas winning, especially on a populist ticket.
Europe is going to have to relent on the Russian fossil fuel ban. The brutal reality is that the Europeans have no other sufficient sources of energy that can replace Russian gas. It may cause political change if they do not, as the full extent of the problem becomes apparent.
That is not true. Depletion rates for natural gas are not short they are very long in excess of 25 years in the marcellas. My cousin is CFO of a fracking company outside of Pittsburgh and we have discussed this on numerous occasions.