Why Biden’s landmark natural gas deal won’t end Europe’s dependence on Russia, but could transform the market in the long run

A US move on Friday to help ease Europe’s reliance on energy from Russia will likely help transform natural gas into a more global market in the long run, but may have little impact on immediate supplies to Europe.

US President Joe Biden and European Commission President Ursula von der Leyen announced on Friday a joint working group to reduce Europe’s dependence on Russian fossil fuels and strengthening European energy security.

Among the goals of the task force, the US will work with international partners and seek to secure additional volumes of liquefied natural gas for the EU market of at least 15 billion cubic meters in 2022, with increases expected in the future. the White House said.

regional market

For what has historically been a highly regional market, the growth of liquefied natural gas, the European energy crisis and the Russian invasion of Ukraine have “highlighted the now more global nature of gas markets and what this dynamic can mean in times of tension,” said Christopher Louney, an analyst at RBC Capital Markets, in a note on Thursday.

Historically, the natural gas market has been more regional, with the commodity being transported by pipeline or converted into liquefied natural gas, or LNG, for shipment abroad. When LNG tankers arrive at their destination, the LNG is stored in cryogenic tanks before being returned to its gaseous state.

Given the regional nature of the market, the US natural gas benchmark price has been largely unaffected by supply concerns facing Europe, but prior month natural gas futures NGJ22,
+2.63%

NG00,
+2.41%
it was still trading nearly 45% higher year-to-date as of Thursday.

The increase is more likely associated with reduced exploration and production and the push for electric vehicles than with the European energy crisis, said Beth Sewell, president and CEO of Quantum Gas & Power Services.

European benchmark Dutch TTF gas futures rallied after the Russian invasion of Ukraine. The April contract was at 103,265 euros per megawatt hour in Friday tradingafter trading up to 227,201 euros this month.

US market prices remain mostly “insulated,” but “in our view, we’re learning the dynamics of a new era for gas,” Louney said. The Russia-driven energy crisis in Europe is “leading to schemes like REPowerEU, Germany securing long-term Qatar LNG contracts, increased US LNG exports, and business leaders calling for a Marshall Plan for US and EU energy security,” he said.

the The Marshall Plan was a multipronged US strategy after World War II. to rebuild Europe, help modernize its economy and prevent communism from taking root on the war-torn continent.

“Politics and geopolitics clearly play a key role along with physical fundamentals in what has historically been a much more regional product,” Louney said.

Contracts and capacity

Still, Quantum Gas & Power’s Sewell doesn’t think the US is in a good position to ship more LNG to Europe.

“LNG terminals require long-term contracts to support their financing and LNG is sold under long-term contracts,” he explained. “This means that most LNG for export is already under contract for a long time, so carriers would face massive breach-of-contract litigation.”

US LNG exports reached a record in the first half of 2021averaging 9.6 cubic feet per day, 42% more than the same period in 2020, according to the Energy Information Administration.

The EIA expects the US LNG export capacity. largest in the world by the end of 2022, with nominal capacity expected to increase to 11.4 bcf per day, and peak capacity expected to increase to 13.9 bcf per day. In 2024, the EIA said the US’s peak LNG capacity will increase further to an estimated 16.33 bcf per day.

“The LNG yield is fully underwritten so there is no capacity to add more and it takes two to three years to build a new one,” Sewell said. In addition, “Europe also does not have the incremental capacity to receive more shipments.”

Still, there is a bright spot for Europe, he said, with a new underwater pipeline it is being built between Norway and Poland and is expected to enter service in October 2022. “There will be additional gas for next winter,” Sewell said.

Long term impact

However, analysts believe the move to ease Europe’s dependence on Russian natural gas could have long-term implications for the market.

“This has important implications for long-term LNG demand in the EU and LNG projects in the US,” Sindre Knutsson, vice president of Rystad Energy, said in a note on Friday.

Knutsson said the United States supplied 25 billion cubic meters to Europe during 2021 and already supplied an additional 8 bcm from January to February this year, compared to the same period last year.

The US can “easily beat” the 15 bcm target, he said, as European price signals on the TTF, the Dutch virtual natural gas trading platform, also known as the Title Transfer Facility, “are likely to beat more than” Asian spot prices.

Knutsson said the 15 bcm target “indicates US intentions to supply more LNG to [the] EU this year, and is likely to inject confidence into Europe’s gas supplies.”

Overall, the move to reduce European reliance on Russian gas marks a “reversal from previous EU purchasing decisions, as many buyers had stopped dealing with US developers for LNG due to [environmental, social, and governance] concerns,” Knutsson said.

For now, it appears that “energy security has outpaced ESG concerns,” he said.

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