When earlier this month analysts sounded the alarm for Europe’s energy security because of the looming shortage of liquefied natural gas, the culprit behind the situation was identified as stronger demand for the superchilled fuel from Asia.
But demand is always just one side of the story.
The supply of liquefied natural gas globally has tightened in recent months amid rising demand because of planned maintenance operations and outages, Reuters’ Clyde Russell noted in a recent column.
Russell points to Australia and the United States as examples of how regular maintenance can perhaps best explain the reduction in exported LNG volumes. But some gas producers have been struggling with pandemic-related maintenance issues, Bloomberg’s Anna Shiryaevskaya reported earlier this month, also pointing out the supply outages at LNG terminals in other parts of the world.
The U.S. Energy Information Administration has also noted supply outages at LNG plants in Australia, Malaysia, Nigeria, Algeria, Norway, and Trinidad and Tobago as one reason for increased U.S. LNG exports. Yet even with this increase, U.S. LNG has not been enough to sate demand for the fuel.
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Meanwhile, Asian demand is seen continuing stronger than usual for this time of year because of a hotter summer that led to greater electricity demand. Europe is desperately trying to fill its gas storage ahead of winter, but there is a big question mark over whether it would succeed as it is competing directly with Asian importers for limited LNG volumes. As for pipeline imports, Europe remains dependent on Russia, which recently reduced export volumes, albeit temporarily, because of a fire at a Gazprom facility.
Globally, LNG importers will likely continue to rely mostly on Qatar. This is because Qatar has been the only significant LNG producer to increase production during the demand surge. According to data from Kpler cited by Reuters’ Russell, global LNG imports totaled 30.96 million tons. This was up from 28.2 million tons for July last year.
This month’s imports, however, are likely to be even higher, at an estimated 31.88 million tons. The question of whether exporters will be able to meet this demand remains open, but in all likelihood, we will see even higher LNG prices on the spot market.
The situation may persist: Bloomberg’s Shiryaevskaya quoted Russian Novatek’s deputy CEO Mark Gyetvay as saying earlier this month that demand for LNG was expected to remain strong in Asia through the rest of the year. Indeed, after a short breather in the autumn, winter normally lifts demand for fuels as heating demand replaces demand for air conditioning.
By the same token, demand for LNG and gas, in general, is likely to remain strong in Europe as well, as the continent tries to prepare for the winter. The situation is very welcome for LNG producers. It should also be gratifying for Gazprom because Europe is now eagerly anticipating the start of the Nord Stream pipeline—a controversial project vocally opposed by the Baltic states and Poland—which would add 55 billion cu m in annual export volumes to the gas-starved continent.
According to the EIA, U.S. LNG exports this year will exceed its pipeline exports for the first time since the country started exporting liquefied natural gas. Both will continue to grow both this year and next, the agency said in its latest Short-Term Energy Outlook, suggesting the current fundamentals in LNG and gas will remain for a while.
One interesting aspect of the current gas market dynamics is that Europe does not appear to insist on low-carbon LNG. While earlier this year the EU ruffled some energy industry feathers by insisting that the LNG it receives has a low carbon footprint, priorities seem to have changed considerably with the security of winter supply trumping emissions footprints.
The dynamics on the LNG market also suggest that forecasters such as Shell and BP were right to expect continued strong demand for LNG that flies in the face of EU officials such as Green New Deal leader Frans Timmermans who earlier this year said that “fossil fuels have no viable future” in Europe as it strives for net-zero emissions.
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Germany’s Chancellor Angela Merkel made an ambitious claim earlier this month when she said during a meeting with Ukraine’s president that Germany will wean itself off Russian gas within twenty-five years. Judging by the current dependence of Europe’s biggest economy on Russian gas and by its plans to close its coal and nuclear power plants, this seems much easier said than done.
What is true for Germany is true for Europe and Asia in terms of dependence on imports, regardless of their origin. While the narrative around natural gas and LNG has shifted from it being a bridge fuel to it being no better than coal and oil basically, the realities of energy security suggest gas will likely continue enjoying strong demand for years more to come.
By Irina Slav for Oilprice.com
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Therefore, the demand for LNG and natural gas will be on an upward trajectory particularly in Asia well into the future.
Qatar as the world’s largest LNG producer and exporter and the cheapest producer will continue to dominate the global LNG market by expanding its production and also exports. Another rising star is Russia’s LNG giant Novateck which hopes to have a production capacity of 100-140 million tons matching if not exceeding Qatar’s capacity by 2035. Moreover, by using the Northern Sea Route (NSR) connecting Russia’s Arctic with markets in Europe and China, Novatek could even have shorter delivery time than Qatar’s.
Nord Stream 2 will add 55 billion cubic metres (bcm) in annual export volumes to the gas-starved European Union (EU) and ensure the EU’s energy security and supplies well into the future and not for the next 25 years as Angela Merkel the German Chancellor suggested during a visit to Ukraine probably to calm down Ukraine’s worries that Russia might stop shipping natural gas to the EU via Ukraine with the completion of Nord Stream 2.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London