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Europe's Shift from Russian Gas to Pricey LNG

Europe's Shift from Russian Gas to Pricey LNG

Europe's switch from Russian pipeline…

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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Europe's Gas Storage Hits Record High But Winter Worries Persist

  • Europe’s gas storage is nearly full, yet this may not be sufficient for winter needs, leading to continuous LNG imports and additional storage strategies including utilizing Ukraine's facilities.
  • Germany and other EU members have inked long-term LNG supply contracts, stretching beyond the 2050 net-zero target, indicating a realistic approach to energy needs versus idealistic energy transition goals.
  • Think-tank IEEFA warns that the EU could be over-investing in LNG import capacity as demand is projected to decline, pointing to potential mismatches between infrastructure and actual gas requirements.
Natural Gas

Earlier this week, reports emerged that Chevron was negotiating LNG deliveries for the European Union, looking at contract terms of 15 years.

The news followed three other long-term deals that European energy companies closed with Qatar, one of the world’s largest exporters of LNG, in the past month.

Germany has installed three floating LNG import terminals over the past year or so and is now working on three more. The EU, which has emerged as the biggest importer of U.S. LNG this year, recently boasted that gas storage is almost 100% full.

Despite all this, the bloc is nowhere near ready for winter. Also, it does not seem to be prepared for an energy transition.

Media reported this month that European countries were starting to store gas in Ukraine as their own storage caverns filled up with regasified LNG bought earlier this year. Close to 30 LNG tankers are now on their way to European ports and are due to arrive by the end of the month. Those include three Russian vessels carrying liquefied gas, despite declarations the EU had given up Russian hydrocarbons.

All this suggests that the European Union’s efforts to reduce its members’ dependence on hydrocarbons have yet to start paying off. After all, EU countries have been investing robustly in new wind and solar generation capacity. And for all those investments, they are now gobbling up as much LNG as they physically can to secure electricity and heating supply for the winter. Even though storage is full.

The issue of the EU’s gas storage is an interesting one. Right now, gas in storage is at a record high. This is good news for the EU, of course, but here’s the twist: even 100% full storage capacity would not ensure supply over the winter, hence all those LNG tankers arriving this month and probably next month as well.

The problem—which is one of those problems that cannot be easily solved—is that no EU member has storage capacity equal to 100% of its demand for any meaningful period of time. This is why imports continue to be strong despite the full caverns.

This is also why the EU is storing gas in Ukraine despite the threat of war-related disruptions or storage loss. This is also why Shell, Eni, and TotalEnergies all closed long-term LNG supply deals with Qatar Energy in the past month.

Limited storage capacity and lack of local production is also the reason why, despite the assurances that there is enough gas for the winter, Germany’s electricity market regulator recently said consumption needs to remain curbed to ensure adequate supply during the winter. 

Consumption is likely to remain curbed, whatever the amount of gas in storage or new shipments of LNG. The reason: a tight global LNG market. This tightness itself is the result of Europe embracing the liquefied fuel to replace more than 100 billion cu m of Russian pipeline gas that is no longer available. Perhaps last year’s declarations that the EU can do perfectly well without any Russian gas were a bit premature. What was even more premature were arguments that the EU could do without any gas at all and rely only on wind, solar, nuclear, and hydro, possibly with some hydrogen in the mix.

The clearest signal that this is quite unlikely are those deals for Qatar LNG imports, each of which has a term of 27 years. This brings them beyond the EU’s net-zero target year, 2050. The companies that closed the deals, however, know that there is a big difference between what can be hoped for and what can realistically be achieved, and total gas independence appears to not be among the latter.

At the same time, the EU may be overstretching itself in light of its own ambitions. Pro-transition think-tank the Institute for Energy Economics and Financial Analysis said in a recent report that the EU is overbuilding LNG import capacity.

In a recent report, the IEEFA cited new LNG import capacity additions of 36.5 billion cu m since the start of 2022, adding that LNG consumption in the region had only added 4.8 billion cu m since the start of 2023 after soaring by 46.2 billion cu m last year.

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The NGO also said that import capacity is set to continue expanding until it reaches 406 billion cu m in 2030, but demand for gas over the same period is set to decline to 400 billion cu m.

It’s worth bearing in mind that forecasts are not set in stone, especially when it comes to energy demand by different sources, yet it is quite reasonable to expect that high LNG prices will put a natural cap on demand in Europe. Alas, these prices would also cap economic growth, whose dependence on affordable, reliable energy Europe was reminded of over the past two years.

By Irina Slav for Oilprice.com

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  • George Doolittle on November 05 2023 said:
    The USA plus Great Britain have more than adequate supplies for all of Europe as does #irony Ukraine. Long $kmi kinder morgan energy strong buy

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