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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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The EU Has A Major Problem With Securing Non-Russian Gas

  • The EU is determined to wean itself off Russian gas, and its current replacement plan involves building new LNG terminals and importing gas from elsewhere.
  • This replacement plan has one major flaw, the LNG market is currently a seller's market and importers will have to commit to long-term contracts.
  • Germany’s struggle to negotiate deliveries of LNG with Qatar is just one example of this problem, and the EU will have to alter its priorities in order to secure the gas.

Germany has been negotiating deliveries of liquefied natural gas with Qatar as part of plans to wean itself off Russian gas, on which it is heavily dependent. The negotiations, reportedly, ran into a wall this week. And this wall may be what’s standing in the way of other EU gas buyers as well. According to unnamed sources cited by Reuters, Germany and Qatar have serious differences on issues such as the length of the contract and whether or not Germany could re-sell the gas to other European countries once it had been received.

The Qatari side wants a minimum 20-year commitment from Germany. Germany, however, seems reluctant to give it. This is hardly surprising given the fact that the German government is a coalition one featuring a strong presence from the Green party.

Under this government, the EU’s largest economy has doubled down on renewable energy transition plans and 20+ years of gas import commitments are unlikely to sit well with the voters who put that government in power. Also, Germany wants to cut its emissions by 88 percent by 2040, which would hardly be possible with continued gas imports at the current scale.

Qatar, on the other hand, wants the same long-term commitments every large exporter is looking for, including U.S. LNG producers. Because of the difference between the interests of importers and exporters of gas, the EU’s replacement plans may turn out to be more difficult to turn into reality than hoped.

On the face of it, as Brussels and several European governments presented it, replacing Russian gas would be relatively easy. Importers would simply switch from pipeline imports to LNG imports via both existing terminals and new ones, yet to be built, many of them floating terminals because they are quicker to put into operation.

Germany, to continue the example, has already secured four floating LNG terminals to be installed at its ports. Only one of these will be ready by the end of the year, with the capacity to handle 5 billion cubic meters annually, which is not a whole lot for a country the size of Germany, but the authorities seem buoyant about the gas replacement drive.

Next, Germany will need to secure the LNG, and this is where the Qatar negotiations cast the situation in a worrying light. The global gas market, until very recently, was a buyers’ market. It switched to a sellers’ market so quickly it is possible some buyers didn’t notice it happening.

Related: The U.S. Shale Patch Is Facing A Plethora Of Problems

Right now, Qatar, the U.S., and Australia are the ones choosing who to sell their LNG to. This means that unless Germany makes a long-term commitment, Qatar could quite easily refuse to sell it LNG. There are dozens of other customers eager to secure the fuel for next winter season and the next twenty, too.

What makes matters worse for Germany and the EU in their role as LNG buyers is that U.S. producers are quite likely to insist on similar long-term commitments. The reason: U.S. producers need to build additional LNG capacity to be able to supply as much of the superchilled commodity as the EU would need if it is to give up Russian gas.

To build this capacity, these companies need loans. Banks would only provide these loans if there are long-term commitments from buyers ensuring the commercial viability of these projects. No bank would provide the several billion necessary to build a new LNG facility without such guarantees. It really is as simple—and as challenging for the EU—as that.

To say that the European Union has put itself in a difficult position would be a major understatement. The European Union, quite like the Biden administration, is in the difficult position of attempting to reconcile two policy paths: energy security through fossil fuels and a shift to renewable energy at the expense of these same fossil fuels.

On the one hand, the EU wants to cut its carbon emission footprint considerably over the next couple of decades. On the other, it wants to have reliable, affordable power right now—power that doesn’t come from Russia. LNG exporters will be making it clear that it doesn’t work like that. If producers are to commit to capacity expansions—Qatar already has—they would need guarantees for the long-term demand for their product.

Sellers would also need guarantees the buyer won’t sell their product on, as suggested by Qatar’s condition that if Germany buys its LNG, it would be the only one using it. This goes counter to the EU’s idea to mandate that member states with access to gas share it with the less lucky in the union. It looks like Germany and the EU will have to reorder their priorities in order to secure the energy they desperately need.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on May 12 2022 said:
    The EU faces a serious dilemma in securing continued gas supplies. It wants to replace its dependence on Russian gas supplies but it is facing the reality that there is no alternative replacement to Russian gas now or for the foreseeable future. Moreover, the EU will face real logistical problems.

    The combined LNG exports of the United States, Qatar and Australia can’t replace current Russian gas supplies partly because these exports are contracted for years ahead to customers in the Asia-Pacific region and partly because the EU neither has enough LNG-importing terminals and storage spaces nor is prepared to sign long-term contracts of up to 20 years with LNG exporters or refraining from reselling the LNG to other needy members.

    Germany is a case in point. Germany has been negotiating deliveries of LNG with Qatar but these negotiations ran into a wall this week because Qatar insists on a minimum 20-year commitment from Germany. Germany, however, seems reluctant to give it because it aims to cut its emissions by 88% by 2040. Moreover, the commitment Qatar is demanding will be also be demanded by the United States and Australia.

    Furthermore, expanding the EU’s LNG-import terminals and storage spaces will take up to 10 years from now. There is also the important fact that Russian piped gas is far cheaper than LNG.

    Reports recently suggested that the EU plans to ditch Russian gas supplies by 2030 could cost it an additional $214 bn more than originally estimated.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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