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Replacing Russian Gas Would Be Tough

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If Russian gas stopped flowing to Europe, could it be replaced? The short answer: Possible, but that would depend how long any disruption lasted and how much gas was affected.

US and EU officials have been talking to key suppliers across the globe about making up any Russian shortfalls, with US President Joe Biden and European Commission President Ursula von der Leyen saying last week they were calling on "all major energy producer countries to join us in ensuring world energy markets are stable and well-supplied."

US officials envisage two main scenarios. One is a cutoff in Russian transit flows via Ukraine, which averaged 50 million cubic meters (1.8 billion cubic feet) per day for most of January. The more extreme — and less likely — is a complete halt in gas supply to Europe. This totaled around 148 billion cubic meters (14.3 Bcf/d) last year, equivalent to roughly 108 million tons of LNG.

Russia accounts for about a third of European demand, and a short-term disruption could be covered by draws from European storage. A lengthy halt would make it difficult to replace even the Ukrainian volumes.

Market sources are adamant a complete cut is out of the question. "A 100% cut of Russian pipelines will just not happen,” says an analyst with a European major. “Russia wants to sell the gas and Europe cannot replace this with LNG."

Any LNG to Spare?

Europe has room for more LNG. The region imported 83 million tons last year, when import terminals ran at 45% of capacity. The utilization rate has since shot up to 72%, but that still leaves space.

But how much LNG might be available?

Analysts at JPMorgan reckon global LNG production reached 398 million tons on an annualized basis in December, 9% up on year-earlier levels, with overall capacity utilization of 88%: 108% in the Middle East, 100% in Europe, close to 90% in the Americas and about 85% in Asia-Pacific. “Spare capacity in the first half of 2022 is limited or nonexistent,” says Leslie Palti-Guzman, CEO of New York-based Gas Vista.

Maxed Out

Europe’s top two LNG suppliers in 2021, the US and Qatar, both seem maxed out.

Destination-flexible US LNG has already been heading trans-Atlantic to take advantage of gas-short Europe’s unusual price premium to Asia. As recently as October, 47% of US cargoes went to Asia and 33% to Europe. Last month, 70% went to Europe and 15% to Asia.

Right now, US liquefaction capacity is 92.5 million tons per year, or roughly 13.2 Bcf/d, according to the Energy Information Administration (EIA). Refinitiv calculates that feed gas deliveries to LNG plants averaged 12.5 Bcf/d for much of January, hitting 13.265 Bcf/d on Jan. 20. This suggests limited capacity for further ramp-ups in the near term.

Longer term, the EIA reckons capacity could peak at 97 million tons/yr by the end of 2022 and 114 million tons/yr by 2026 after Golden Pass starts up.

Little Spare in Qatar

Qatar has also embarked on an expansion designed to hoist annual capacity from 77 million tons to 110 million tons in a first phase, but the new production won't start coming on line until 2025.

For now, there seems little room for a ramp-up. Much of QatarEnergy's LNG is tied up in Asian term contracts and — unlike most term deals — these either lack the downward quantity tolerance clauses that give sellers leeway to reduce contracted deliveries or allow only limited flexibility.

The Mideast exporter’s flexible uncontracted supplies have meanwhile shrunk. Qatargas-1 contracts with Japanese buyers totaling more than 7 million tons/yr lapsed at the end of last year, but Qatar has signed new term deals over the past 12-18 months as it pursues the expansion.

Palti-Guzman reckons the US has supplied 39% of Europe’s LNG imports this winter and Qatar 15%, which “confirms our view that Doha has not come yet to the European rescue.” Qatar sent 1.05 million tons to Europe in December and preliminary data shows flows rose 160,000 tons in January, according to analytics firm Kpler, suggesting QatarEnergy has little room to increase spot sales.

Swaps Possible

Qatar might be able to divert some term cargoes to Europe if Asian customers agreed, sources say . US officials could try to convince state-run buyers — possibly in government-to-government talks — to defer cargoes and free up near-term supply. Palti-Guzman says US and European efforts to persuade state-owned producers to boost output and allocate the extra to Europe might only result in a “few extra million tons here and there, but every molecule may end up counting in the event of total disruptions.”

According to Palti-Guzman, “Qatar-US LNG geopolitical swaps are on the table and could guarantee minimum flows of supply to Europe.” LNG giant Australia also says it “stands ready to assist with any request for further supplies.” Given the distances involved, its LNG would be unlikely to head to Europe, but Australia could send more gas to Asia, allowing Qatar to divert cargoes.

Regas Problems in Europe

Even if major exporters rode to the rescue, a massive influx of cargoes would likely create problems at European terminals. “There are bottlenecks in terms of slot availability in Europe,” an analyst at a commodity trading house says. “You would probably reach a point where you get a backlog of cargoes on the water.”

Around a quarter of the continent’s regasification capacity is in the Iberian Peninsula, which has limited connections to the rest of Europe. The UK has three LNG import terminals, but it gets no direct supply from Russia, while Germany — Russia's largest European buyer — has none.

Top LNG Suppliers to Europe
(million tons)USQatarAlgeriaNigeriaOtherTotal Imports
20171.917.910.69.25.545.2
20183.117.19.69.36.645.7
201913.824.211.711.38.769.7
202018.321.89.810.36.166.4
202124.116.811.59.66.368.4

Topics:
LNG Supply, Gas Pipelines, Gas Demand, LNG Demand, LNG Prices, LNG Trade, LNG Spot Trade
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