"Europe's LNG pipe dream" - Top-grade SubStack article by Irina Slav

[Tom Nolan + 2,443]

Europe's LNG pipe dream

May 4th - Irina Slav

Very much like a dog with a bone, or a cat with a dead mouse, I find it hard to let go of a topic that bothers me. The ambitions of the EU to replace Russian pipeline gas with liquefied natural gas is one of these topics.

I briefly touched on it in my series praising the EU’s gas replacement plan but I wanted to go more deeply into it. So I spoke with some people with professional knowledge of the industry. The question I asked was the simplest possible: Can the EU replace Russian gas with LNG?

Of course, it’s fair to note that the EU does not plan to replace all Russian gas with LNG and one of my sources, Arij Van Berkel, Vice President and Group Director of the Energy Research Team at Lux Research, was quick to point this out. Then it got interesting.

“To completely substitute Russian gas imports, the EU would need to nearly triple its import terminal capacity,” Van Berkel said. “At the same time, exporters of LNG will need to increase the export capacity by 150 bcm or at least 30%. The only country that can expand LNG export capacity is the US, but that would mean increasing the US capacity by 150%. Currently, US export capacity grows at a rate of about 40% per year, which is already a record-breaking pace.”

Jay Young, Founder & President of King Operating Corporation, and fourth generation oil and gas investor, was even more succinct, saying “The natural gas imported from Russia cannot be transitioned to LNG anytime soon— it will take years.”

Young then went on to explain in more detail why it would take years by using a real-life example, the story of the Cyprus LNG terminal, whose construction began in 2009 and is currently expected to be completed in 2023. That story reminded me of the huge Australian offshore LNG projects, their cost overruns and construction delays. What these stories tell us is that building an LNG export or import terminal is not the same as building a wind turbine.

As Young put it, “If projects are started in 2009 and they are now targeting 2023 to complete the project, you have to wonder how fast the LNG import locations can be brought online. While this is way outside the norm, it does give us some ideas for timelines. There is a desire to move away from Russian gas and that is the first step.

Second step is to acquire the funding and locations. The political mood is right, but the world monetary and countries will need to pool resources to ramp the facilities as fast as humanly possible. Conservatively you are 5 years to build a LNG import terminal, if you have the funding, regulatory permitting done and the materials.

Do you see all of these aligning to come together any time sooner that the 5-year estimate? So, if you think the answer is yes, then look at the steel, and other items required, and you will still be limited on building only a handful of these import terminals every year.”

Once again, it is fair to note that the EU is not planning to replace all of its current gas intake from Russia with LNG imports. Why, then, did I frame my question this way? Because LNG is seen as the most direct actual, literal replacement of pipeline gas from Russia. All the other measures considered by the EU to reduce imports of Russian gas involve either other fossil fuels or other, not directly comparable forms of energy such as wind, solar and hydrogen, as well as energy demand reductions.

Indeed, the EU is striving for a diverse mix of energy but it is one that will feature a substantial increase in LNG imports.

“Global LNG imports in 2020 amounted to 487.9 bcm. The EU accounted for 81.4 bcm LNG imports. That means that the ambition to increase the LNG imports by 50 bcm this year is already a 61.4% increase in just one year,” Van Berkel told me, before going on to add that if such or even larger import increase is to be achieved, the EU will need to build a lot more import terminals in just a few months, which, based on the track record of the LNG industry would be tough, to say the least.

But, yet again, the EU does not want to replace all its Russian gas imports with LNG. It only wants to replace some of them with LNG. Well, even this may prove to be difficult.

“It is probably naïve to think the EU can source sufficient LNG to replace Russian pipeline deliveries any time soon; even if the LNG supply market was sufficiently fluid to do this, the cost to suppliers and therefore downstream users would be prohibitive,” Paul Stockley, Head of Oil and Gas at Fieldfisher, told me.

“Then there are infrastructure issues, in terms of LNG terminal and regasification plant capacity. Europe's terminal operators have warned they don't have capacity to absorb significant additional quantities of imported LNG, and those that do – for example in Spain – are in the wrong place/lack sufficient connections to supply the areas of highest demand,” he also said.

These seem to be considerations that do not only relate to a hypothetical and unlikely scenario of the EU trying to replace all its Russian gas imports with LNG. They also relate to any substantial increase in LNG imports and a substantial increase is exactly what the EU is planning.

Now, in order to reduce the risk of being accused of cherry-picking facts that suit my argument, let’s quickly review the other replacement options: pipeline gas from Norway (reliable but limited due to production capacity constraints); pipeline gas from Algeria (risky, see news about Spain and Morocco); pipeline gas from Azerbaijan (limited pipeline capacity); coal (emissions); fuel oil (emissions); hydrogen (uneconomical at the moment); wind and solar (long permit times, rising raw material prices). It seems LNG is the one relatively optimal solution in the short term.

The fastest way to boost imports, according to Jay Young, would be to use 43 floating regasification units. There are plenty of countries in Europe that have such facilities: Belgium, Croatia, Finland, France, Greece, Italy, Lithuania, Netherlands, Poland, Portugal, Turkey, and Spain.

Incidentally, Greek media reported this week that high-ranking government officials from the region will attend the “inauguration” of a new floating regasfiication unit in Alexandroupoli. In this case, inauguration stands for “celebration of the start of construction of the unit”.

Lux Research’s Van Berkel notes that there are six new regasification terminals across the EU in various stages of planning and another nine that are planning to expand their capacity. Personally, I don’t like the sound of that “planning”. It tells me those in charge of these projects have not yet started work on the actual construction of these terminals. But it should be good news that the EU is doing something to enable greater LNG imports.

Meanwhile, across the Atlantic, the most reliable energy partner of the EU, the partner that promised to supply a lot more LNG this year and in the coming years is having problems.

U.S. LNG exports rose by 16% to a record high in March, Reuters reported at the start of April. Europe, unsurprisingly, was the top destination, swallowing 65% of the total 7.43 million tonnes that U.S. LNG producers exported.

In April, Europe took in some 64% of U.S. LNG imports, which, however, slipped by 8 % from March due mostly to scheduled maintenance. Yet Europe will need a lot more than this to fill up its storage caverns ahead of the next heating season and fulfill its target of a 65-percent reduction in dependence on Russian gas.

These dependence reduction plans have de-shelved several LNG projects in the United States, another Reuters report noted recently. Lake Charles LNG and Driftwood LNG were back on the table. But going from the table to launch of production would take a while and it will cost quite a bit. Why? Because of raw material inflation and labour cost inflation.

“Materials prices have shot up 20% in the past two years while gas compressors are 30% costlier, construction and energy experts said. Metals required for LNG projects are in short supply due to Russia's invasion of Ukraine and could add another 10% to costs, they added,” per the Reuters report.

Meanwhile, record LNG exports are driving a rise in U.S. natural gas prices: since the start of the year, natural gas prices have gained as much as 96% to trade above $7 per million British thermal units, even briefly touching $8 at the end of April.

Would anyone like to guess how long it would be before certain legislators take aim at the gas industry for making their product unaffordable to the local population? I’ll tell you: not long. Especially since opposition to new LNG terminals is already live and growing in Congress. And that started even before Russia invaded the Ukraine.

Yet even current export figures cast doubts about whether the EU could hit its actual gas import replacement plans.

According to Lux Research’s Van Berkel, “The US has been growing LNG export capacity aggressively from nearly 0 in 2012 to nearly 100 bcm in 2021. The US exported 96.5 bcm of LNG in 2021 and 23% of that export went to the EU. The US has been growing its export with a CAGR of 40% over the past four years and increased its export by even 50% between 2020 and 2021. Adding another 150 bcm to its export means to grow the export by 150% this year, which is a tremendous acceleration of course.”

Leaving aside the second, hypothetical, part of this paragraph, let’s look at the first one and specifically the figures for total exports and the EU portion. At 23%, that portion came in at less than 30 billion cu m. In fact, according to the Google calculator, it came in at 22.195 billion cu m. This year, U.S. LNG exports are running at record rates and most of the gas is going to Europe. President Biden promised to supply an additional 15 billion cu m. That would be a 68% increase from last year’s total.

Such an increase is probably not impossible to shoulder — at the expense of other buyers of U.S. LNG. Yet diverting cargos from Asia to Europe may not be the wisest move for U.S. LNG exporters.

“It would not be prudent for the US to invest in too much export capacity since the EU regards natural gas as a bridging solution on the way to a hydrogen economy. Therefore, the terminals will become stranded assets at some point in the future (2035 – 2040),” said Van Berkel.

Asia, meanwhile, is shaping up as a long-term customer of these same U.S. LNG producers so they would probably like to stay on Asia’s good side, meaning diverting cargos for Europe may not be a sustainable option. This means the EU will probably have to continue buying U.S. LNG on the spot market. Or it can go all in on long-term gas supply and commit to fund new export terminals. Yes, the EU is think about it.

What this means is higher prices for end consumers that include heavy industries and fertiliser producers. And what this means is that the EU’s desperate and extremely belated attempt to get rid of Russian gas is setting the stage for an extended period of economic doom and gloom for Europeans and European businesses.

Because everyone seems to have forgotten that if it weren’t for the excessive gas prices that shook Europe last autumn, U.S. LNG would still be more of a spice than a main-course ingredient because of the difference in price. Well, not exactly everyone but pretty much everyone in a decision-making position.

https://irinaslav.substack.com/p/europes-lng-pipe-dream?s=r

https://irinaslav.substack.com/

We live in the most interesting times yet to befall the world. How it will all end is hard to say now but it will not go according to plan. You can also find me on Twitter: @slavenergy and Telegram: https://t.me/irinaslavonenergy

https://substack.com/profile/31253959-irina-slav

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#18 Irina Slav | A Curious Worldview | Expert On Oil, Energy & Geopolitics

Irina Slav is a freelance writer for many organisations and an expert on oil, energy, geopolitics and more.

She joined me for an interview recently to discuss the overwhelmingly positive green narrative and poked some holes into the consensus for renewables. Irina is a Bulgarian and truly a magnificent writer.

She has extensive knowledge of the different oil and energy markets around the world and this research has informed her current worldview which we are lucky she decided to share with us.

Time Stamps With Irina Slav

• 00:00 – Introduction
• 03:05 – Do We Still Need The Oil Exploration Business?
• 08:54 – What Are The Oil Byproducts?
• 13:58 – Irina’s Worldview
• 34:35 – How Does The Renewable Transition Effect Geopolitics?
• 44:36 – What Country Are You Most Bullish On?
• 48:06 – Conversation Between Any Two People Of History.

Listen To My Interview With Irina Slav Via Any Podcast App

https://atlasgeographica.com/irina-slav/

 

[Ron Wagner + 714]

Irina is a smart lady but I think she needs to consider the potential of FLNG (Floating Liquified Natural Gas Terminals) and the numerous countries that can increase and speed up the production and delivery of LNG. It might take awhile, but they could be built far more quickly and transported wherever the demand is most needed. I am sure that plenty of money will flow to areas that can increase LNG production. The USA is only one of many possible sources.