US LNG Shifting to Europe Amid Threats of Russian Cutoff

Destination-flexible US LNG has moved decisively to European destinations amid the looming threat of a Russian gas cutoff to the continent. But that shift is already facing limits due to maxed-out capacity at US terminals.

In January, about 70% of US LNG went to Europe while 15% went to Asia (see table). As recently as October of last year, 47% of US LNG went to Asia and 33% to Europe, according to Kpler data.

The dramatic shift corresponds in part to global pricing trends; in five out of the last seven weeks, Energy Intelligence spot LNG price assessments for Europe have exceeded Energy Intelligence’s spot LNG price assessment for Northeast Asia.

“This winter most of European LNG is coming from the US (39%), way ahead of Qatar (15%)," said Leslie Palti-Guzman, CEO of New York-based Gas Vista. "This confirms our long-held view that Doha has not come yet to the European rescue.”

But the ability for the US to continue filing the gap is questionable. Current US liquefaction capacity is 92.5 million tons, according to the US Energy Information Administration, which equals 13.2 billion cubic feet per day.

Refinitiv calculates that in January, US LNG feed gas averaged 12.5 Bcf/d, hitting 13.2 Bcf/d on Jan. 22, clearly suggesting that the US can’t ramp up very much in the short run.

Government Intervention?

European gas supplies are in question because of age-old Russia-Ukraine tensions that could now turn into a real war at any moment. Russian piped gas supplies could end up restricted either by Russia itself or by Western sanctions, raising the pressure on LNG from elsewhere in the world to fill the gap.

US government officials continue to talk up the prospect of the US playing a significant role there, but they can’t direct cargoes to politically preferred destinations without stepping on a minefield of contractual agreements. What they could do is engage in an effort to persuade buyers to defer cargoes to free up near-term supplies.

“The US and Europe are trying to convince natural gas producers (with state-owned companies) to boost output and allocate such extra volumes to European buyers,” Palti-Guzman told Energy Intelligence in an email. “The Biden administration has avoided politicization of LNG trade flows, without success. Politically driven LNG trade flows will resurface in the event of full-fledged Russian aggressions.”

However, “success will be marginal (a few extra million tons here and there), but every molecule may end up counting in the event of total disruptions (which is not my base case),” she said.

But it could be argued that extraordinarily high European gas pricing is already doing the job. In fact, China is already selling cargoes back into the market.

“The companies that are offtaking the LNG at the liquefaction plants have their own contracts with buyers (or are serving primarily their own markets such as players in Japan, Taiwan, China and South Korea), or maybe they are arbitraging between destinations,” said Anne-Sophie Corbeau, a global research scholar at the Center on Global Energy Policy at Columbia University. “Bottom line, they will send this LNG depending on their economic interests. Obviously, if gas prices in Europe are at very high levels, we'll see the flexible LNG moving toward Europe.”

The US LNG industry is not surprised by any of this. "We're fortunate that we do have that flexibility," Charlie Riedl, director of the Washington-based Center for LNG, told Energy Intelligence. "The reason that we wanted to have the flexibility in the first place was tied to energy security and now we're seeing that play out in real time."

The Ukraine crisis, and a series of other market shocks such as 2020's Covid-19-related cargo cancellations "raise the level of attractiveness of US LNG,” Riedl said.

Change the Rules?

So what happens if Russia invades Ukraine and the US is searching for sanctions options? Congressional discussions are already under way, according to Fred Hutchison, president and CEO of LNG Allies, which lobbies for US exports.

Congress could consider several measures the US LNG industry has sought in the past, such as changing the US Department of Energy process for granting LNG export licenses to remove the distinction between Free Trade Agreement countries and non-Free Trade Agreement countries —making the latter automatic like the former.

“Even if actual supply response wouldn’t be for three to four years out, it would facilitate supplies,” he said, allowing projects to reconfigure more easily, accelerate construction, and pave the way for approvals for more capacity at existing projects.

Hutchison attended a meeting recently with the director-general for energy at the European Commission, Ditte Juul Jorgensen. “She was circumspect that not much can be done in the short term, but in the longer term EU-US cooperation remains an important priority on both sides of the Atlantic,” Hutchinson said. “They really understand, more than they have, how bumpy the transition is going to be,” especially as certain countries try to phase out nuclear and coal. “They understand that, we understand that, we will see additional cooperation.”