Can US natural gas relieve Europe from Russian supply dependency?

WASHINGTON • The US and EU last week announced a breakthrough deal to wean Europe off Russian natural gas. The "groundbreaking" pact, said US President Joe Biden, would strip Russia President Vladimir Putin of the ability to "coerce and manipulate" the continent's energy consumers.

The "joint game plan" involves three steps. First, the United States will help the European Union secure short-term liquefied natural gas supplies to begin displacing Russian gas. Second, Europe will work "towards the goal of ensuring" a bigger market for US gas by 2030. Third, the US would help Europe accelerate its transition to clean energy, eventually reducing its gas demand.

The US said it would strive to add 15 billion cubic metres of liquefied natural gas to the EU this year, with more in years to come. It did not specify the origins of the gas, noting it would "work with international partners". By comparison, Russia exports 155 billion cubic metres a year of gas to the EU.

The baseline for the pledged 15 billion is not clear. But the US shipped about 22 billion cubic metres of gas to Europe last year and has already sent 10 billion in the first quarter of this year, according to Refinitiv. All of it is in the form of LNG, gas that has been condensed so it can be carried on a ship.

Some extra US supplies will come from a recently opened export project in Louisiana, the Calcasieu Pass plant. But these volumes were already expected in the market, and plants elsewhere along the coastline are operating at maximum capacity. So for now, any extra LNG will have to be coaxed to Europe via higher prices, diverting ships originally bound elsewhere. That could prove painful for consumers.

"Any incremental LNG cargoes sent from the US to Europe are more likely a redirection of existing US LNG cargoes - and hence will do little in terms of material 'price relief'," said Bank of America.

Most US LNG contracts are not necessarily restricted to a specific destination. So if prices stay high enough in Europe, shippers may keep redirecting cargoes there.

And if the EU succeeds in replacing the roughly 15 billion cubic metres of LNG that it currently imports from Russia - a much smaller amount than is imported through pipelines - those seaborne Russian cargoes could, in turn, flow to other places.

"A big reshuffling is about to happen," said one industry executive, referring to this possibility.

This is part of the Biden plan. The president's national security adviser Jake Sullivan said the administration would rely on a "cargo diversion strategy".

But commercial terms still make this plan tricky.

"I think in the shorter term, it's going to be fairly tough," said Ms Inosi Nyatta, a partner at law firm Sullivan & Cromwell. "Maybe they'll have some sort of incentive regime where they incentivise the sellers to renegotiate."

The US tack to date has been to lean on governments - in big importing countries like Japan or South Korea, but also in Qatar, which sits with the US and Australia in the top tier of LNG exporters. Freeing up more cargoes will "involve a lot of diplomacy", said an administration official.

Yes, but not in the right place. Eastern Europe and Germany are most dependent on Russian gas. But most of the available LNG regasification infrastructure is in southern Europe.

Germany has proposed building terminals to receive LNG, or renting regasification vessels that can float offshore. Either way, the shift to LNG dependency will be expensive and take time.

Investors in costly new import terminals - whether taxpayers or capital markets - will need assurances that a transition to cleaner energy won't simply render fossil fuel assets worthless in a decade.

The White House's promotion of LNG has been welcomed by US fossil fuel producers, which even before Russia's invasion of Ukraine were touting the exports as a "green initiative" that would allow Asian importers to burn natural gas instead of coal for electricity.

It is also a huge shift for the EU, which was growing more hostile to gas even before the invasion.

"This is a U-turn from previous EU purchasing decisions as many buyers had stopped negotiating with US developers for LNG due to ESG environmental, social and governance] concerns," said Rystad Energy's Sindre Knutsson.

Environmentalists were scathing. Sierra Club's Kelly Sheehan said: "Allowing for the expansion of new and expanded gas export facilities would lock in decades of reliance on risky, volatile fossil fuels and spell disaster for our climate."

Mr Biden and European Commission (EC) chief Ursula von der Leyen discussed a plan for the US to ship 50 billion cubic metres a year or more LNG to Europe by 2030.

This is feasible on paper. According to the investment bank Cowen, the US government has approved a dozen export projects with a total capacity of 206 billion cubic metres a year - about twice the current US capacity. But LNG plants cost billions of dollars and take years to build, and no one expects all 12 of the projects to go ahead. Developers and their financial backers typically want contracts with purchasers - some lasting 20 years or more - before they start ploughing cash into projects.

In its statement with the White House, the EC said it would work "towards the goal of ensuring" demand for 50 billion cubic metres of US gas - an apparent concession to the LNG sector's anxieties about future demand. At the same time, US officials were clear the longer-term aim was still to stop using fossil fuels, including LNG.

"The true path to energy security runs through clean energy," said a senior administration official. "The first part is getting Europe off Russian gas. The second part is getting Europe off gas altogether."

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