Meet Europe, the newest and most unlikely star on the LNG scene. Europe recently had to reconsider its emission reduction ambitions in light of the danger of an unprecedented energy crunch. American natural gas producers are only too happy to help. Cue worries about a domestic shortage.
EU governments have been discussing for weeks ways to reduce their dependence on Russian oil and gas.
Which has been claims that the EU can cope through the summer, even if gas imports from Russia are cut because there is enough gas in stock. Still, Brussels has stopped imposing an embargo on Russian gas, and Germany admits it can not afford one.
Which has been plans to reduce the overwhelming dependence on Russian gas by finding alternative suppliers as soon as possible, including pipeline gas from North Africa and Central Asia, and liquefied natural gas from Qatar and the United States. And the United States has been eager to help.
President Biden promised another 15 billion cubic meters of natural gas exports to the EU this year in the form of LNG, while the EU promised to create the demand for 50 billion cubic meters of annual US LNG “until at least 2030”.
Before the mutual promises, Europe had already become the largest buyer of US LNG by the beginning of this year, which took a record 12.5 billion cubic meters in the form of the supercooled fuel. But there is a problem. Demand, especially from Europe, is expected to rise sharply this year: Wood Mac expects European LNG to add 25 tonnes by the end of 2022. Global supply on the other hand is seen to add 17 million tonnes.
The signs of this imbalance are already visible in the United States. Last week, natural gas prices hit the highest level at 13 years, and while some analysts blamed it on the rise in coal prices, record LNG exports certainly contributed to the trend.
Natural gas prices are “sensitive to any concerns about short-term supplies created by events such as a ban on Russia’s coal exports, abnormally cold weather,” Tortoise portfolio manager Rob Thummel told MarketWatch last week. But perhaps more importantly, U.S. natural gas inventories have fallen.
For the week ending April 1, the Energy Information Administration reported that national natural gas stocks were 17 percent below the five-year season average. The agency noted that working gas inventories were within the five-year average, yet prices continued to rise.
Related: Chinese refineries are cutting output at an alarming rate
Reuters’ John Kemp remarked in a recent column that U.S. natural gas stocks ended the winter of 2021-2022 at a three-year low of 1,382 trillion cubic feet. Working stocks, he also reported, were 19 percent below the pre-pandemic five-year average in early April. And all that was due to higher exports.
Summer is usually a season of lower demand, so prices can stabilize at more tangible levels, while US exports to Europe remain high, provided that Europe has free space for the incoming gas. But then exports are likely to remain strong as the northern hemisphere enters the winter of 2022-2023.
Sanctions against Russia will still be in place; The EU and the US have made this clear, regardless of how the war in Ukraine develops over the next six months. If anything, by that time there will be more sanctions, possibly those aimed directly at the country’s hydrocarbon industry in addition to coal. And this suggests that the supply and demand situation with natural gas in the United States may become tighter.
Earlier this month, U.S. shale gas and LNG producers met with delegations from several EU member states eager to increase their purchases of US liquefied gas. This zeal may be crucial for final investment decisions on new LNG export capacity. But in addition to the zeal, gas producers would need significant long-term commitments for these projects to make economic sense.
Most of the avid LNG importers are quite small gas consumers, such as Latvia and Bulgaria. Others who attended the meetings, such as Germany and France, on the other hand, are worthy future customers, despite renewable energy plans that could compromise their value in the long run.
In fact, the industry itself said so much: “The capacity challenges of 2022 are huge, but the opportunities in a few years’ time are truly amazing,” said Fred Hutchinson, chief executive of LNG Allies, on the sidelines of the meetings.
These opportunities do not only exist in Europe either. Asia is eager to reduce its pollution levels and they are investing billions in gas import infrastructure, Tortoise senior portfolio manager Matt Sallee said this week during a regular podcast.
“The projects aim to use primarily U.S. gas to reduce Asia’s dependence on coal, which reduces CO2 by more than 50%, a critical tool for achieving global emissions targets,” Sallee said, noting, “As you can imagine, the majority “of the investments in China, where more than 30 LNG import terminals are under construction. The bottom line is between reducing Russia’s dependence on Europe and coal dependence on Asia, and there is an absolutely massive call for US gas over the next many years.”
In all likelihood, we will therefore see more LNG export capacity come into operation in the US over the next few years. The problem is that the prices of the raw material in these years may remain higher than comfortable at home, as the demand from abroad is high and the production is trying to catch up. In other words, we may well see a repetition of the higher-in-longer scenario we already see in crude oil.
By Irina Slav for Oilprice.com
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