Europe’s Energy Woes Are Rerouting Global Gas Flows
Against the odds, extreme market forces and political will are already redrawing the global energy-supply map as Europe looks to end its dependence on Russian gas.
On Friday, the U.S. committed to ship at least an additional 15 billion cubic meters of liquefied natural gas to Europe this year—implying a roughly two-thirds increase in exports to the region—and beyond that at least 50 bcm more annually until 2030. President Biden met European leaders in Brussels this week to discuss the war in Ukraine and how the U.S. could help the region wean itself off Russian energy.
The European Union needs to import an additional 50 bcm of LNG to realize its plan to cut Russian gas imports by ⅔ for next year. American suppliers are the best immediate source as they have the most flexibility in choosing customers. Australia and Qatar, the other big producers, are largely locked into long-term supply contracts.
The global LNG market stretched to about 530 bcm last year, with 31% traded on the spot market, according to Shell. That means there should be sufficient spot supply to meet Europe’s demands, but it will be expensive.
While political statements give companies extra encouragement, market forces have done most of the work in sending more gas to Europe. The region’s buyers have outbid Asian ones, driving the local benchmark gas price to a new record of €227, or $250, a megawatt hour earlier this month, about 14 times the U.S. price. The market was tight even before Russia’s invasion of Ukraine, partly because Moscow kept pipeline flows to Europe at minimum contractual levels last year and let inventories fall.
American producers had 115 bcm of LNG capacity last year. Most exports went to Asia, with only about 22 bcm heading to Europe. U.S. capacity will increase to 130 bcm this year, and producers could probably deliver more to Europe than they currently do to Asia because the trips are shorter, allowing them to do more runs. It takes about 10 to 11 days to ship from the Gulf of Mexico to Northern Europe, versus between 20 and 34 days to Asia, according to Sindre Knutsson, analyst at Rystad Energy.
Europe has facilities to receive more LNG. In 2021 there was spare capacity of about 56 bcm in Western Europe and between 10 and 11 bcm in Southern Europe, according to Mr. Knutsson. Spain and Portugal have lots, too, but aren’t well-connected to the rest of the bloc. Germany is a challenge: Europe’s largest gas importer has no LNG offtake facilities. It has revived plans to build two terminals by 2024 but could get temporary ship-based ones in place by the end of this year.
Eventually, the current global supply system seems likely to be reordered so that the U.S. ships much more gas across the Atlantic while Australia and Qatar supply more to Asia. With such high prices and so much political momentum in Europe, this long-term shift could happen with surprising speed.
Write to Rochelle Toplensky at rochelle.toplensky@wsj.com
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