LNG: the three letters that have forever changed the European energy paradigm…

Liquefied natural gas, which arrives frozen by ship, already covers 40% of European needs, a figure that will continue to grow. Russia has practically no chance of becoming the EU's main supplier again.

  EL PAÍS BY IGNACIO FARIZA

  MADRID - 20 FEB 2023

Europe is approaching the sad anniversary of the day it woke up as a different Europe. The Russian offensive, even before the first light of dawn broke over Kiev on 24 February, shattered much more than diplomatic relations between powers. With the first bombs falling on Ukrainian soil, decades of European subservience to cheap gas from the East were also blown apart.

Moscow was breaking with its biggest and most loyal customer, perhaps forever: almost 12 months later, although Russian LNG tankers continue to dock, fuel arrivals by pipeline from Russia are now minimal. The Eurasian giant is beginning to feel the impact of the sanctions, having to look to Asia for its livelihood. And the thesis that this new status quo - more expensive, logistically much more complex and more damaging to the environment, but also more secure from the point of view of security of supply - is here to stay is gaining ground in the European upper echelons.

The EU has been forced to completely turn around its sources of supply in record time. From having a direct supply almost on its doorstep, it has gone from having to fetch it from countries as far away as the United States, Qatar and Nigeria. Three letters - LNG: liquefied natural gas - have made this unprecedented reconfiguration possible: almost 40% of the gas consumed by the EU was of this type - that which arrives by ship in a frozen state - 60% more than a year earlier.

Shipments from the US, which is making a killing and has replaced Russia as the bloc's main supplier, have more than doubled. And those from Norway, Egypt, Trinidad and Tobago and Peru, although starting from a much lower level, have also shot up. This, however, is only an appetizer of what is to come: far from being a one-day phenomenon, these three acronyms, practically unknown to the general public, will become part of the collective imagination for decades to come.

"It is a trend that will continue," confirms Xi Nan, senior vice-president of the specialised consultancy Rystad Energy. "LNG was and still is the only way to replace Gazprom," adds Emmanuel Dubois-Pelerin, senior director at ratings firm S&P. For decades, he emphasises, the Russian gas company "was not only the largest source of gas for Europe but also the only one with very short-term flexibility". For example, from one month to the next in a cold winter. "All other sources - pipelines from Norway, Algeria and Azerbaijan - are maxed out, and EU and UK production continues to shrink inexorably," he says.

Russia out of the picture

Even if the war ends soon - something that virtually no observer envisages - Russia's chances of regaining its hegemonic position as Europe's leading gas supplier are minimal, if not non-existent. The sabotage of the Nord Stream pipeline, once the main channel for Russian fuel into the EU, has further complicated matters, but it is not the biggest problem: although costly, it is repairable. Diplomatic and commercial ties between the Eurasian giant and Russia are less so: all consulted analysts believe that even if Vladimir Putin's regime falls, Russia's pre-eminence is history.

"I don't think Russia will play that role in the future: in the coming years, Europe will rely on LNG and renewables," says Rystad Energy's Nan. "Our baseline scenario is that pipelines will be marginal in the future, staying close to the current level," outlines Dubois-Pelerin. Just one-sixth as much gas transits through them as in 2019, just before the pandemic and, above all, before the invasion of Ukraine. "Perhaps the dependence has shifted and it is now Russia that depends on Europe to maintain the influx of foreign exchange," adds the S&P analyst.

Germany ushers in a new era without Russian gas

"The destruction of Nord Stream and the construction of regasification terminals to compensate for the loss of Russian gas mean that LNG is now fully integrated into Europe's energy infrastructure," notes Henning Gloystein, Energy Director at risk consultancy Eurasia. "At least for the next 20 years.

The capacity of European regasification plants will soar by 25% between 2021 and 2023, according to calculations by the International Energy Agency (IEA). Neither these gigantic investments - each of these regasification plants, of which more than a dozen are planned, both on the Atlantic and Mediterranean sides, cost hundreds of millions of euros - nor the new supply contracts signed with companies and countries outside Moscow, also worth millions, can be easily reversed, even if the war were to end soon. This, in any case, is something that no one foresees.

“Russia," Gloystein says, "has lost all its reputation".

Gas under 50 euros

In contrast to the hecatomb that has been feared for months, the winter that is about to end has been much calmer than even the most optimistic observer could have imagined. Europe's gas reservoirs are at two-thirds of capacity, double the level of a year ago and 60% higher than the average of the last decade. Not even in 2020, when the virus plunged consumption to historic lows, did Europe have as much gas in storage as today. And that has helped to reduce - and a lot - the pressure on prices. Gas prices in the Old Continent closed last week below 50 euros per megawatt hour (MWh), an unprecedented level in a year and a half.

From this point, however, the downward margin is slim: LNG is, by definition, much more expensive than the one that arrives by pipe. This is because it entails unavoidable liquefaction costs - to change from a gaseous to a liquid state and freeze it -, transport costs - in some cases, tens of thousands of kilometres - and regasification costs - to return it to a gaseous state so that it can be consumed again. The levels of 20 euros per MWh of a couple of years ago, when most of the gas was piped from Russia, are unbeatable: now, with luck, the floor will be in the region of 30 or 40 euros.

The return of China - along with Japan, the world's largest importer of liquefied gas - also promises strong emotions. "Europe will have to compete with the rest of the world and particularly with Asia," predicts Jean-Baptiste Dubreuil of the IEA. As with any struggle, this fight between giants will leave third countries in the lurch: the lower-income emerging countries, which are being pushed out of a market in which they cannot compete. The best example is Pakistan - a giant usually out of the spotlight despite being, mind you, the fifth most populous country in the world - which, given the high cost of LNG, is going to quadruple its electricity generation with coal. A logical move in purely economic terms, but a disastrous one in environmental terms.

If a few months ago it was thought that the big bottleneck would be the regasification plants, now all eyes are on the opposite side: the liquefaction trains. "The global market will remain tense until 2025 due to the lack of investment in this type of project during the pandemic″, predicts Nan. Knowing that natural gas - now dominant in industry, heating and even in the electricity matrix of many Western countries - will eventually be eclipsed by renewables, green hydrogen and biomethane, no one wants to make a false move.

The opportunity for exporters is as great as the risk of embarking on pharaonic investments that may become obsolete in a few years. The Institute for Energy Economics and Financial Analysis (IEEFA) forecasts that Europe's appetite for LNG will start to fall, little by little, from 2024 onwards. Demand could still be strong in 2023, but is set to fall as EU climate and energy security policies reduce gas demand by at least 40% by 2030," reads its latest monograph, published this week. "Europe's ambitious energy transition targets mean that much of the new [regasification] capacity could go unused."

Winter over, what about the next one?

While this winter is not yet over, the spotlight is already on the next one. In the coming months, Europe will have to deal with an added problem: unlike last spring - the season when the Old Continent takes advantage of the opportunity to refill its tanks - this year the task will have to be done on its own, without the wild card of piped imports from Russia. And even with the LNG boom, in December the IEA was forecasting a shortfall of around 15% of demand by 2023.

Two months later, the agency's head of natural gas analysis is downplaying the pessimism considerably. Since then, Dubreuil writes by email, lower demand - mainly due to milder-than-usual weather - has "significantly moderated the pressure". Still, he says, this apparent improvement in the outlook "should not be a distraction" from further reducing demand. Next year, he insists, "gas supply will remain tight, and the increase in LNG supply will not be sufficient to replace" all that was piped in from Russia. In a stress scenario - a cold winter, limited LNG availability and zero imports from Russia - the EU would face a shortfall of just under 10% of demand, according to his updated calculations.

Even more optimistic is Eurasia's Gloystein, who already sees the Rubicon of next winter as crossed: "Europe has contracted enough gas to get through this and next winter. The risk of fuel shortages has been mitigated". All, of course, at the cost of a huge amount of money. Not only because replacing piped gas with LNG is more expensive: double at best, but it can be more than tenfold, as was evident last summer, when it reached around 350 euros per MWh. "There is nothing wrong with taking a breather, but let's not be surprised when the crisis returns. Let it not be a rude awakening", warned Brookings Institution researcher Samantha Gross a few days ago. A warning to the navigators that should not be forgotten.