LNG: the three letters that have forever changed the European energy paradigm

Europe is approaching the sad anniversary of the day it woke up as another. The Russian offensive, even before the first light of dawn illuminated kyiv on February 24, broke into a thousand pieces much more than a diplomatic relationship between powers. With the first bombs falling on Ukrainian soil, decades of European subservience to cheap gas flowing from the East were also blown up.

Through events, Moscow broke with its largest and most loyal customer, perhaps forever: almost 12 months later, although methane tankers from Russia continue to dock, fuel arrivals by tube from that country are minimal today. The Eurasian giant begins to feel the impact of the sanctions, having to look for the beans in Asia. And in high-ranking European offices the thesis is gaining ground that this new status quo — more expensive, logistically much more complex and more harmful to the environment, but also safer from the point of view of security of supply — is here to stay.

The Twenty-seven have been forced to completely turn around their sources of supply in record time. From having a direct supply almost at your doorstep, you have come to have to go looking for it in countries as remote as the United States, Qatar or Nigeria. Three letters —LNG: liquefied natural gas— have made this unprecedented reconfiguration possible: almost 40% of the gas consumed by the EU was of this type —the one that arrives by ship in a frozen state—, 60% more than a year before .

“It is a trend that will continue,” confirms Xi Nan, senior vice president of the specialized consultancy Rystad Energy. “LNG was and remains the only way to replace Gazprom”, completes Emmanuel Dubois-Pelerin, senior director of the risk rating firm S&P. For decades, he emphasizes, the Russian gas company “was not only the largest source of gas for Europe but also the only one with flexibility in the very short term.” For example, from month to month in a cold winter. “The rest of the sources – the pipelines from Norway, Algeria and Azerbaijan – are maxed out, and production from the EU and the UK continues to decline inexorably,” he recounts.

Russia offside

Even if the war ends soon – something that virtually no observers contemplate – Russia’s chances of regaining its hegemonic position as Europe’s number one gas supplier are slim, if not non-existent. The sabotage of the Nord Stream gas pipeline, once the main entry channel for Russian fuel into the EU, has finished complicating things but it is not the biggest problem: although expensive, it is repairable. The diplomatic and commercial ties between the giant and Eurasian, not so much: most analysts consider that, even if the Vladimir Putin regime falls, that Russian pre-eminence is history.

“I don’t think Russia is going to play that role in the future: in the next few years, Europe will depend on LNG and renewable energy,” dismisses Nan, from Rystad Energy. “Our baseline scenario is that pipelines will be marginal in the future, staying close to the current level,” Dubois-Pelerin outlines. Only a sixth of the gas transits through them than in 2019, just before the pandemic and, above all, before the invasion of Ukraine. “Perhaps the dependency has changed camp and Russia is now the one that depends on Europe to maintain the influx of currencies,” adds the S&P analyst.

“The destruction of the Nord Stream and the construction of regasification terminals to compensate for the loss of Russian gas mean that LNG is now fully integrated into the European energy infrastructure,” says Henning Gloystein, Director of Energy at the risk consultancy Eurasia. “At least for the next 20 years.”

Gas, below 50 euros

Faced with the catastrophe feared for months, the winter that is about to end has taken a much calmer path than even the most optimistic observer could imagine. European gas deposits are at two thirds of their capacity, double that of a year ago and 60% more than the average of the last decade. Not even in 2020, when the virus plunged consumption to record lows, did Europe have as much gas stored as it does today. And that has helped to reduce —and a lot— the pressure on prices. The price of gas in the Old Continent closed last week below 50 euros per megawatt hour (MWh), an unprecedented level in a year and a half.

From this point, however, the margin to the downside is slim: LNG is, by definition, much more expensive than that which comes by tube. Because it entails unavoidable costs of liquefaction —going from a gaseous state to a liquid and freezing it—, transportation —in some cases, tens of thousands of kilometers— and regasification —returning it back to a gaseous state so that it can be consumed again. The levels of 20 euros per MWh of a couple of years ago, when most of the gas came by tube from Russia, are unbeatable: now, with luck, the floor will be around 30 or 40 euros.

The return to the fore of China —along with Japan, the world’s largest importer of liquefied gas— also promises strong emotions. “Europe will have to compete with the rest of the world and very particularly with Asia”, glimpses Jean-Baptiste Dubreuil, from the IEA. Like any struggle, this fight between giants will leave third countries in the ditch: the lower-income emerging countries, which are being expelled from a market in which they cannot compete. The best example is Pakistan —a giant usually out of the spotlight despite being, pay attention, the fifth most populous country in the world—, which, faced with the dearth of LNG, is going to quadruple its generation of electricity with coal. A logical movement in the purely economic, but lousy in the environmental.

The opportunity that exporters have before them is as great as the risk of embarking on mammoth investments that could become obsolete in a few years. The forecast of the Institute for Energy Economics and Financial Analysis (IEEFA, for its acronym in English) is that the European appetite for LNG begins to fall, little by little, from 2024. “Demand could continue to be strong in 2023 , but it is about to fall, since the climate policies and energy security of the EU reduce the demand for gas by at least 40% until 2030”, reads his latest monograph, published this week. “Europe’s ambitious energy transition goals mean that much of the new capacity [de regasificación] could be useless.”

Winter over, and the next one?

Two months later, the agency’s head of natural gas analysis lowers the pessimism considerably. Since then, Dubreuil writes by email, the lower demand—particularly due to milder-than-usual weather—has “significantly eased the pressure.” Even so, he says, this evident improvement in the outlook “should not be a distraction” to continue reducing demand. Next year, he insists, “gas supplies will continue to be tight, and the increase in LNG supplies will not be enough to replace” everything that came by tube from Russia. In a stress scenario – a cold winter, limited LNG availability and zero imports from Russia – the EU would have to face a shortfall of just under 10% of demand, according to its updated calculations.

Much more optimistic is Gloystein, from Eurasia, who already considers the Rubicon crossed next winter: “Europe has contracted enough gas to get through this and the next. The risk of fuel shortages has been mitigated.” All, of course, at the cost of a huge amount of money. Not only because replacing the gas that comes through the pipeline with LNG is more expensive: double, in the best of cases, but it can multiply by more than ten, as became clear last summer, when it reached around 350 euros per MWh. “There is nothing wrong with taking a breather, but let us not be surprised when the crisis returns. That it is not a rude awakening”, warned a few days ago, in these pages, the researcher at the Brookings Institution Samantha Gross. A notice to sailors that should not be forgotten.

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