Liquefied natural gas from the United States has turned into a lifebelt for struggling Europe as Russia cut supplies via one of the biggest gas conduits into the continent. U.S. LNG will continue to play a crucial role in Europe’s gas supply. But it won’t be enough to avoid a major squeeze over the next three years. A recent study by Rystad Energy and funded by the American Petroleum Institute and the International Association for Oil & Gas Producers found that U.S. producers will remain the biggest LNG suppliers to European countries over the long term. But before the market rebalances, there will be a supply gap lasting until somewhere between 2023 and 2025.
The gap will be prompted by the assumed cutoff of all Russian gas supplies—something that European countries have stated they will aim for—and growth in U.S. LNG export capacity. Meanwhile, export capacity will be growing in Qatar, too.
Although there are non-Russian options for more pipeline gas, such as Norway, Azerbaijan, and Algeria, the Rystad study assumes that LNG will reign supreme as the main source of natural gas for Europe, coming to satisfy half of its demand by 2030.
Over the next 10 years, LNG is seen covering as much as 75 percent of demand in Europe, booking an expansion of 150 percent from 2021. What the report does not seem to dwell on are the costs associated with this increased reliance on liquefied gas and their effect on European industries’ competitiveness.
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Already, the European Union’s gas import bill has swelled to ten times the usual for filling up winter storage sites because of the switch to LNG from pipeline gas. It’s worth noting that all that LNG was bought on the spot market, and Brussels has been a fan of spot markets for years. With the new gas bill, however, it might reconsider.
Indeed, some are already reconsidering: Germany’s Chancellor Olaf Scholz last week went on a tour in three Gulf states looking for hydrocarbon deals, with a focus on LNG, and the only result from the tour was an agreement with Emirati Adnoc for the delivery of one cargo of LNG of 137,000 cubic meters and a non-binding commitment for five more cargos.
Meanwhile, U.S. producers seem to be happy to sell their liquefied gas on the spot market, where it fetches prices that just a couple of years ago would have been unthinkable. Media have even reported about cases of diverting cargos of LNG meant for Asia to Europe because of the European’s willingness to pay a premium to get the gas.
While this year, such behavior is perfectly understandable as European countries scramble to stock up on gas for the winter, over the longer term, it would not exactly make economic sense.
European industries are already struggling to remain profitable amid soaring energy bills. Yet many of them are too busy fighting for survival to bother about profitability, which should sound the alarm to governments and motivate a more comprehensive diversification of gas deliveries.
Based on the Rystad research, Europe is essentially replacing one big supplier—Russia—with another big supplier—the United States—which can hardly pass for diversification.
True, Qatari LNG and LNG from Africa is also an option, but unless Europeans consent to long-term commitments, it seems Qatari gas in sufficient amounts will remain a dream. African projects, on the other hand, have yet to be fully developed, or, in the case of Nigeria, security issues need to be solved.
While all of this is certainly good news for U.S. gas producers, there’s a fly in their honey, too. There is not enough pipeline capacity to carry the gas from the shale plays to the liquefaction trains on the Gulf Coast, and permitting for new LNG capacity is a complex and lengthy process.
On top of these challenges, U.S. gas drillers are already struggling to meet both local and international demand. Although the country has enormous gas reserves, production is another matter, and right now, it’s a difficult matter because of increased gas-fired power generation at home and Europe’s mad dash for gas.
This supports Rystad’s forecast for a gas supply gap in Europe over the three years to the middle of the decade. The gap is estimated at 19 percent for next year if the Groningen gas field in the Netherlands is shut down and 12 percent if it keeps pumping. For 2024, the gap is seen at 16 percent without Groningen and 10 percent with it. Finally, in 2025, the gap will begin shrinking to 14 percent without Groningen and 8 percent with it.
The report continues to point out that after 2025 it would be relatively smooth—though probably costly—sailing for gas supplies in Europe. The question remains, however, what will Europe do over these three years?
The likeliest answer to this question is quite unpleasant because it effectively comes down to the demise of its status as an industrial power. There is not enough money in the world to keep all industries in Europe on life support for three years and keep them profitable.
By Irina Slav for Oilprice.com
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