ISSN 2330-717X

LNG: Europe’s Ray Of Hope? – Analysis

By

By Anandita Bhada*

Advertisement

Europe has been reeling under an energy crisis for the last few months. Amidst the war in Ukraine, which has seen both the European Union and Russia seek to wean themselves away from their mutual energy dependencies, the most pressing issue for Europe today appears to stave-off an energy blackout. While measures such as regulating energy consumption can only a short-term measure to overcome the shortages, the key challenge will be in finding viable long-term substitutes.

The lack of excess global oil and gas capacity to compensate for the Russian shortfall is likely to lead Europe to explore energy alternatives in the form of renewable, coal, nuclear and Liquefied Natural Gas (LNG), each with its own set of corresponding challenges. 

While a full transition to renewables is likely to take time, the focus on fossil fuels like coal would push back the continent’s ambitious climate and green targets – an issue close to Europe’s heart. Similarly, nuclear energy has remained unpopular, particularly in the aftermath of the meltdown of Fukushima reactors. LNG can help cushion the blow, as evident in the huge uptick in European LNG imports. Yet, capacity and infrastructure constraints as well as its impact on carbon emissions present their own set of quandaries.

Against the backdrop of these dynamics, the pertinent question is can LNG offer Europe a lifeline amidst an unprecedented energy crisis?   

European Efforts towards Acquiring LNG

European imports of Russian gas have steadily declined either voluntarily or on account of Russia weaponising energy, from 174.3 bcm in 2021 to 20.5 bcm in February 2022, propelling the push towards LNG imports.1 The intrinsic nature of LNG, in terms of storage and transport which enable large quantities to be carried in shipping tankers, makes it an efficient alternative. This has led to a renewed focus on fast-tracking the commissioning of an additional 33 LNG terminals apart from ensuring efficiency of scale in the existing 29 terminals. 

Advertisement

Today, steps are being taken to expand capacities at the Świnoujście terminal in Poland, Adriatic Terminal in Italy, and Gate terminal in the Netherlands. With a gestation period of three to four years, these projects are expected to come online by 2025. Notably, Spain which houses the largest number of operational terminals in Europe, at six, faces structural constraints on account of limited connections with rest of Europe. 

In contrast, Germany which houses a well-connected system of pipeline for gas distribution is the only European country with a sizeable coastline lacking an LNG terminal or even a Floating Storage Regasification Unit (FSRU). To overcome this structural constraint, the Olaf Scholz government has approved the construction of an onshore LNG terminal apart from leasing four FSRUs (at Wilhelmshaven, Brunsbuttel and Stade,) with at least the one at Wilhelmshaven becoming functional by this winter.2 

Europe’s long coastline, which is essential for receiving LNG ships, is a key enabler in attracting imported LNG. This puts countries like Spain, France and Italy, vis-à-vis the landlocked states of Hungary, Slovakia and Austria, at a considerable advantage to build regasification terminals along their shores. These countries can emerge as the fulcrum for redistribution to rest of Europe, aided by existing pipelines at a minimalist cost.  

Similarly, FSRUs which are intrinsically mobile offer the advantage of freeing up vital real estate along the busy European coastline. They can also be readily leased out from other states, unlike the time consuming construction of on shore LNG terminals. Certain old LNG carriers are also being converted to FSRUs in a bid to provide increased alternatives in a short time span. 

This two-pronged LNG strategy is a key step in Europe’s diversification. In fact, LNG should seamlessly blend in with existing European energy infrastructure on account of Europe relying largely on gas to meet its household and commercial consumption.

Challenges 

The biggest challenge, however, for Europe today is the lack of excess global capacity. This is notwithstanding the fact that the US has emerged as the largest exporter of LNG to Europe in the first half of 2022. It has increased its LNG supplies to Europe from 34 bcm in 2021 to 39 bcm till June 2022. 3 Unsurprisingly, US energy firms are finding it more profitable to divert their cargoes towards Europe even at the cost of paying contractual penalties to their earlier export markets.4

Meanwhile, Europe’s attempts to buy additional LNG will reverberate across the world. Given the imbalance between demand and supply, which has pushed gas prices to their historic highs, the demand from EU is likely to create a shortfall elsewhere. This is particularly likely to be acute in Asia and Latin America.  During the period 2016-2021, US LNG supplies to South Korea, Japan, and China accounted for 1.4 trillion, 1 trillion, and 865 billion cubic feet respectively.5 In fact, last year, China surpassed Japan to become the biggest importer of LNG, accounting for 21.3 per cent of global LNG imports.6

Even if these countries were to consider importing the European share of gas from Russia (as LNG due to the absence of gas pipelines), they would face the hurdle of low availability of LNG shipping tankers. The fact remains that a lion’s share of global shipping companies are headquartered in the West.7 And there is unlikely to be an appetite among these companies to trade in Russian energy for fear of western sanctions. They are also unlikely to forego supersized profits arising out of Europe’s pressing need for new sources of energy.

Incidentally, this emphasis on LNG will likely come at the cost of diverting finances from elsewhere. New investments in LNG infrastructure could eat into Europe’s green fund. Previously, European plans to consider natural gas as a bridge for green transition did not require additional investments. 

Conclusion

Today, Europe’s attempts at raising the cost of Russia’s war in Ukraine by weaning itself off Russian energy appears to be backfiring. Energy shortages and astronomical prices have led to an unprecedented domestic turbulence. Not only is Europe scrambling to shore up supplies amidst global scarcity but is also doing so at rates which could undermine its economic and political stability. Quick solutions to Europe’s energy quagmire, however, appear unlikely. Meanwhile, Russia continues to earn an energy windfall despite shipping far lower quantities post the war in Ukraine.  

In its diversification attempts, Europe appears to be banking on US LNG, with American imports making up for 10 per cent of imports from Russia, even if they are priced at a premium. This is likely to lead to a further strengthening of the trans-Atlantic partnership. However, Europe’s long-term energy security would perhaps lie in further diversifying energy sources apart from tapping its own green potential. For the short-term, however, Europe would likely have to brace for an acute energy pain. 

Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrrikar IDSA or of the Government of India.

*About the author: Ms Anandita Bhada is a Research Analyst at MP-IDSA, New Delhi.

Source: This article was published by Manohar Parrrikar IDSA

Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA)

The Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA), is a non-partisan, autonomous body dedicated to objective research and policy relevant studies on all aspects of defence and security. Its mission is to promote national and international security through the generation and dissemination of knowledge on defence and security-related issues. The Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA) was formerly named The Institute for Defence Studies and Analyses (IDSA).

Leave a Reply

Your email address will not be published.