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U.S. LNG Exporters Stand To Benefit From EU Energy Crisis

  • A combination of weather-related and geopolitical factors have led to an energy crisis in Europe
  • Gas flows on one of the major gas pipelines from Russia to Europe have reversed flows
  • LNG exporters are re-routing cargoes to Europe as prices continue to break records

A severe shortage of natural gas, declining wind power output, nuclear outages, and cold weather have conspired to hand Europe one of its worst energy crises on record. Yet, Europe's energy woes keep getting worse at every turn. European natural gas prices hit a new record high on Tuesday after a pipeline that brings Russian gas to Germany switched flows to the east while  U.S. ships carrying liquefied natural gas (LNG) destined for the European market are diverting to Asia where prices are even higher.

Westward gas flows through the 2,607-mile-long Yamal-Europe pipeline, one of the major routes for Russian gas to Europe, have been gradually falling since Saturday but have now reversed direction, a move the Kremlin says has no political implications.

Some western politicians contend that Russia is using its natural gas as a weapon in the political tussle tied to Ukraine, as well as delays in the certification of another controversial pipeline, Nord Stream 2. Russia, of course, has denied any connection.

"There is absolutely no connection (to Nord Stream 2), this is a purely commercial situation," Kremlin spokesman Dmitry Peskov told a conference call on Tuesday.

The litmus test of Gazprom's capacity to act as a swing supplier was its ability to drop production dramatically in 2020 and then to bring it back up again quickly in 2021. Yet, Gazprom has failed to bring any more spare production capacity online when needed most for one reason: it has none left.

Related: Russia Puts The Blame On Europe As Energy Crisis Worsens According to Vitaly Yermakov, expert with the Centre for Comprehensive European and International Studies, National Research University Higher School of Economics, Gazprom has really been "firing on all cylinders", pushing its gas output to maximum levels at all of its key fields for most of 2021 so far. In fact, there was no sharp cyclical decline in output over the summer months.

Yermakov points to several reasons why Gazprom has been unable to cover the call for increased gas production or to fully refill gas storage in Russia and in Europe. First off, very low gas prices in 2020 forced extremely high withdrawals of gas from storage by producers in a bid to minimize transportation costs and reduce losses. Second, the combined effects of robust gas demand, extreme weather patterns, and limited LNG availability in Europe have resulted in extreme market tightness and high prices. Gazprom has actually done well by managing to meet all its contractual obligations and increased deliveries to Europe, but could not single-handedly address Europe's energy insecurity.

The latest reverse flows have only added to bullish factors for the gas markets, but there's one big winner: the United States.

Indeed, Alex Froley, an analyst at analysis consultancy ICIS, has told the Financial Times that a U.S. LNG tanker that was heading east close to India on December 15 has done an about-turn and is now heading into the Suez Canal, suggesting a supply to Europe.

On Tuesday, front-month wholesale Dutch gas price, the European benchmark, climbed more than 16% to a record high of 171.40 euros ($193.46) per megawatt-hour, while the equivalent British gas contract also hit a new peak at 4.29 pounds ($5.68) per therm.

U.S. LNG Wins

From a position of relative obscurity just five years ago, the U.S. LNG sector has rapidly risen through the ranks to challenge the heavyweights. U.S. liquefied natural gas (LNG) export capacity has expanded rapidly since the Lower 48 states first began exporting LNG in 2016. In 2020, the United States became the world's third-largest LNG exporter, behind Australia and Qatar. 

And now the United States is set to become the world's biggest liquefied natural gas (LNG) exporter in 2022, surpassing Qatar and Australia over the course of the year once the new LNG liquefaction units, called trains, at Sabine Pass and Calcasieu Pass in Louisiana are placed in service by the end of the year.

Related: The World’s Top Automakers Are Doubling Down On Electric Vehicles

Global LNG demand has hit record highs each year since 2015, thanks in large part to surging demand in China and the rest of Asia. Much of that global appetite has been steadily met by rising U.S. LNG exports, which have reached new records every year since 2016, a trend that appears set to continue.

Source: EIA

The U.S. Energy Information Administration (IEA) projects that U.S. LNG exports will hit 11.5 billion cubic feet per day (bcfd) in 2022, good for a 22% slice of the expected world LNG demand of 53.3 bcfd.

The U.S. expects to make key LNG export capacity additions next year:

  • Train 6 at the Sabine Pass LNG export facility

Train 6 will add up to 0.76 billion cubic feet per day (Bcf/d) of peak export capacity. The terminal began producing LNG in late November, with the first export cargo from this train expected to be shipped before the end of 2021.

  • Calcasieu Pass LNG

This new export facility has 18 liquefaction trains with a combined peak capacity of 12 million metric tons per annum (1.6 Bcf/d). Commissioning activities at Calcasieu Pass LNG started in November 2021, with the first LNG production expected before the end of this year. 

All liquefaction trains are expected to be operational by the end of 2022.

By Alex Kimani for Oilprice.com

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  • Leo Kobrinsky on December 22 2021 said:
    Am I the only one who thinks "US shale oil" reading that forecast?

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