Several years ago, the leaders of the European Union sat back contentedly and watched the spot market for the natural gas they had put so much effort into working like a well-oiled machine. Gas was cheap and there was plenty of it to go around. Then, all of a sudden, things changed dramatically. The spot gas market was one of the European Union's great points of pride as it sought to wrest control of its own energy supply from Russia. The EU had snubbed Gazprom's long-term deals, not wanting to get saddled with the obligation to buy Russian gas at a certain locked-in price as it was moving towards a renewable energy future. It didn't need so much gas, the EU thought.
Yet the EU was not the only one taking advantage of flexible prices on the LNG spot market. Everyone was. Gas was abundant, and prices were low—it was a buyers' market all around, at least for a while. Some serious consumers, those who had long-term plans for gas consumption, still opted for long-term contracts, whose biggest advantage over spot deals is also its biggest drawback: the price. It now turns out these serious consumers were right.
A decline in investments in new gas production, long lead times on liquefaction facilities, and growing pressure on emission reduction collided to result in tight gas supply as demand continued to grow globally. Europe, the poster child of the energy transition, was horrified to learn it did not have enough wind and solar generation capacity to replace gas consumption—especially amid low wind speeds and during the less sunny seasons.
And then Russia invaded Ukraine.
The convergence of factors resembles a plot for an apocalyptic movie. Indeed, developments in the European gas market have been in many ways apocalyptic: prices have been breaking record after record, energy bills for consumers are rising inexorably as the cost of producing electricity rises with gas prices, and developing nations are being forced into blackouts because Europe is taking every drop of LNG that is available on the spot market.
Long-term contracts are quietly reclaiming territory from the spot market as the world's newest LNG growth market realizes it will need to secure long-term gas supplies.
French Engie earlier this year sealed a long-term LNG supply deal with U.S. NextDecade months after it walked out on the contract because the French government had concerns about the emissions footprint of the company's LNG production facility.
German utility EnBW signed a similarly long-term LNG supply deal with Venture Global, as Europe's biggest economy urgently seeks to wean itself off Russian gas even if it means doing a U-turn on all its climate priorities.
This is a trend across the whole of the EU. Australia is experiencing a shortage of floating regasification units because they are being sent to Germany, which has zero stationary LNG import terminals. But it is building some, and fast. Poland's LNG terminal is operating at full capacity. Spain, the UK, and the Netherlands are importing LNG at record rates.
Calls for more LNG import infrastructure, meanwhile, are intensifying as the bloc inches closer to what may turn into one of its hardest winters yet. In this context, is it any wonder that Qatar has insisted that European buyers eager to get their hands on some Qatari LNG must make long-term commitments?
Qatar is currently in the middle of an ambitious capacity boost project that should allow it to export 110 million tons of superchilled liquefied gas annually, up from a current capacity of some 70 million tons.
Projects like this require billions in investments. Indeed, the North Field expansion has a price tag of close to $29 billion. This kind of investment needs guarantees it will not go to waste, and long-term offtake deals are just that kind of guarantee.
The energy transition is another reason long-term LNG contracts are back in fashion. After years of warnings from climate-focused think tanks that the oil and gas industry risks getting saddled with billions in stranded assets as the world moves on from oil and gas, that same oil and gas industry has become mistrustful and careful with its investment decisions. Long-term commitments are the way to convince companies investing in new gas production is worth it.
Not everyone likes it. Indeed, environmentalists very much dislike this current state of affairs. Warnings about stranded assets have not disappeared. The reality, however, is that even the most ambitious transition governments, such as Germany's current coalition, appear to have realized that energy security is more important than emission reduction.
Even those most determined to effect a transition to renewables have had to heed warnings from industrial groups saying that without gas, companies will have to shut down, and the economy will eventually collapse. And they have started working on boosting their countries' energy security through long-term LNG supply contracts that they shunned until just a while ago.
By Irina Slav for Oilprice.com
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