Plans announced on 9 March to reduce EU demand for Russian gas by importing an additional 50 billion cubic metres of liquefied natural gas by the end of the year as a package of measures to contain Vladimir Putin’s assault on Ukraine are likely to result in depleted gas stocks and rising energy prices for customers in northwest Europe, say the analysts.
The additional 50 billion cubic metres of liquefied natural gas in 2022 “isn’t realistic,” said Ed Cox, editor of global LNG at energy markets intelligence service ICIS.
“Europe needs more import infrastructure, better pipe gas connection (especially from Spain to France) and more term LNG supply to achieve such an increase,” Cox added.
Europe imported 155 billion cubic metres of Russian natural gas in 2021, around 45% of Europe’s total gas imports, according to the European commission REPowerEU plan.
However, replacing this with 50 billion cubic metres of LNG sourced elsewhere is problematic. Firstly, it depends on continued high prices in Europe. In January 2022, Europe imported 10 billion cubic metres of LNG – a record volume, thanks to high prices in Europe. However, much of these deliveries can switch to Asia if price signals change, notes Cox.
Europe’s other main gas suppliers are Norway (23%), Algeria (12%), the United States (6%) and Qatar (5%), according to the European commission data.
Securing extra supply from the US is possible, says Cox. “Potential US LNG developers can bring new volume to the market relatively quickly.” However, US exporters will require long-term contracts with Europe in order to secure that supply. “Will the EU consider changing its position to advocate more term LNG contracts?” he questions.
The key, according to fellow ICIS gas analyst Rob Songer, is Germany. “Germany is a huge gas market and now it is looking to build an LNG terminal in two years. This isn’t possible without securing a floating storage and regasification terminal.” An FSRU is a converted LNG tanker that can act as an LNG terminal by regasifying LNG and put it into terrestrial pipelines. “The standard size for a FSRU is 170 billion cubic metres. There aren’t many of them floating about and it would depend what Germany was able to pay.”
“New terminals and expansions would help in the longer term if Europe is ready to commit to more LNG,” said Cox.
However, “In the short term, LNG's share in the gas mix can rise as seasonal gas demand falls but it can't replace Russian pipeline gas - and this is before factoring in Russian LNG which is Europe's third largest LNG supply source.”
The European commission this week outlined a series of measures to respond to rising energy prices in Europe and to replenish gas stocks for next winter, with the intention of reducing EU demand for Russian gas by two thirds before the end of the year.
These include requiring underground gas storage facilities in the EU to be filled to at least 90% capacity by 1 October each year. It will also look at emergency measures to address skyrocketing energy prices, including temporary price limits.
“Diversifying gas supplies, via higher LNG and pipeline imports from non-Russian suppliers, and larger volumes of biomethane and renewable hydrogen production and imports; and, reducing faster the use of fossil fuels in our homes, buildings, industry, and power system, by boosting energy efficiency, increasing renewables and electrification, and addressing infrastructure bottlenecks,” the commission said.
The effect of recent events on wholesale gas prices has been extreme. Just before the invasion of Ukraine, wholesale gas prices were around 200% higher than February 2022. Wholesale electricity prices had followed a similar pattern and the outlook for the medium term indicates that energy prices will remain higher than the recent average for some time, said the commission in a Q&A on its REPowerEU programme.