Viewpoint: The Impossible Dream

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Dmitry Lovetsky/AP

The European Commission has outlined plans to use all means at its disposal to wean the EU off Russian gas, galvanized by the Russian invasion of Ukraine. Brussels says it wants to bring in an additional 60 billion cubic meters of gas this year to help replace two-thirds of its Russian volumes — of which 50 Bcm would be LNG, equivalent to 37 million tons of the superchilled fuel. Underscoring the scale of the challenge, the EU and the UK together imported 67.55 million tons last year and 73.5 million tons in 2020.

The goal looks out of reach. The market is already tight. Even if it were possible to produce the extra LNG, purchases would be astronomically expensive as European importers would have to pay top-dollar to wrest whatever cargoes they could away from Asian rivals. On top of that will be the cost of meeting the commission's plan to fill EU gas storage to 90% of capacity by Oct. 1. Inventories are now less than 30% full, meaning another 60 Bcm would have to go into storage by then. So whatever happens in the Russia-Ukraine war, European gas prices will remain high. Brussels says public financing for the plans will be assessed on countries' needs, but Jonathan Stern with the Oxford Institute for Energy Studies points out that the commission fails to provide any cost estimates — which he reckons will likely be in the hundreds of billions of euros.

The commission also remained silent on where it will get the extra LNG, basing the numbers on its own internal estimates. It says it has spoken to current suppliers and buyers in Japan, South Korea and India about lending Europe a hand. But it has not said how the bloc intends to source the volumes — Cargo swaps? New long-term agreements? All of the above? Brussels has also remained mum on how active a role it intends to play. Commercially, the first hints of a sea change may have emerged: France’s Engie has extended an existing deal with US developer Cheniere for 900,000 tons per year to 20 years.

Based on existing plans, just 25 million tons/yr of incremental liquefaction capacity is due on line globally in 2022. Most of this will be in the US, with additional volumes due from Mozambique and Indonesia. But actual output will be less as some of this capacity won’t start up until later this year. At the same time, planned and unplanned outages could well reduce export potential — as they are at the moment.

The challenges are clear. Vincent Demoury with the GIIGNL LNG importers' group describes the commission’s estimates as “very bold assumptions." But ultimately, political ambition is different from market realities. “As gas people we could analyze each element and say this all looks very difficult and is not going to happen quickly," Stern says. "But the spirit of this has got to be 'in Europe we are going to try and reduce our dependence on Russian gas — what looks possible within a reasonable length of time?'"

Gas Supply, Gas Prices, Gas Demand, Gas Inventories, LNG Supply
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