European LNG demand could peak in 2025 – new report

European LNG demand could peak as soon as 2025, and the continent is vastly overbuilding LNG import capacity, according to a new report. By 2030, European LNG import capacity could be three times larger than expected demand, leading to over-investment and under-utilisation.

On the second anniversary of Russia’s attack on Ukraine, gas consumption in Europe has declined by 20 percent due to energy efficiency measures, the growth of renewable energy, and the curtailment of gas use in heavy industry.

In the wake of the energy crisis brought on by the war, Europe turned to LNG in dramatic fashion. But growth in LNG demand may be short-lived. While imported LNG cargoes have replaced lost pipelined gas from Russia, overall gas demand in Europe is in decline. As a result, LNG demand in Europe could hit a peak as soon as next year, according to a report from the Institute for Energy Economics and Financial Analysis (IEEFA).

“Two years on from Russia’s invasion of Ukraine, Europe’s energy system is more diversified and resilient. The crisis has been controlled to an extent, efficiency measures have been scaled up and renewables and heat pump installations have accelerated,” said Ana Maria Jaller-Makarewicz, lead energy analyst, Europe, at IEEFA. “This has set up the continent to continue reducing gas demand.”

That message has not exactly sunk in with European policymakers and companies, who continue to support more LNG import terminals. Eight LNG import terminals have started operations since February 2022, and another 13 are expected to be completed by the end of the decade, according to IEEFA.

Such a large expansion far exceeds what is required to meet demand, which is expected to decline.

“There is consensus among several studies (the new IEEFA study is one of them) that Europe does not need large amounts of LNG in the long run. Already today, LNG import terminals are used under capacity, gas demand in Europe decreases in the near future and also LNG demand will decline,” Niklas Höhne, a professor of climate mitigation at the Netherlands-based Wageningen University and a founding partner at the NewClimate Institute, told Gas Outlook in an email.

Prices for gas and LNG in northwest Europe have collapsed in recent months, spurred by increasing efficiency and a bout of mild weather. Experts widely see the energy crisis stemming from the war in Ukraine as having come to an end, with conditions easing further in the coming years.

“The current infrastructure in the EU is sufficient to secure the energy supply – even under extreme scenarios,” Höhne said.

Declining demand

Europe’s gas consumption dropped to 452 billion cubic meters (bcm) in 2023, the lowest level in ten years, IEEFA data shows.

Already, existing LNG import terminals are being under-utilised. In 2023, four LNG terminals in Spain had utilisation rates at less than 50 percent, and one each in Italy, Greece, Finland, and Germany also operated less than half the time.

That dynamic could become increasingly common as Europe brings new import terminals online at a time of waning demand. By 2030, IEEFA expects EU gas demand to stand at 400 bcm, down from 452 bcm in 2023. At that point, the continent will only need to import 132 bcm of LNG to meet the region’s needs, down from 167 bcm in 2023. However, with new import terminals under construction, import capacity is expected to soar to over 400 bcm, raising serious questions about how often those terminals will be in use.

“Expanding LNG infrastructure in the EU is a high economic risk, as new infrastructure will very likely end up as stranded assets,” Höhne told Gas Outlook.

A separate report from DIW Berlin, a German economic think tank, came to the same conclusion. “The oversized LNG infrastructure expansion is not necessary to avoid a potential gas deficiency situation and should therefore not be pursued,” researchers from DIW Berlin wrote in a recent report.

Meanwhile, gas industry analysts are noticing a significant gap between the interests of potential European customers of new LNG on the one hand, and the needs of LNG developers along the U.S. Gulf Coast on the other.

Gas brokerage firm Poten & Partners, which has offices in the U.S. and around the world, held a webinar in January looking at trends in the LNG industry. Speaking about declining gas demand in Europe, Poten analysts noted that European companies have been reluctant to sign up to 20-year contracts with American LNG companies — the typical length of contract that allows LNG projects to secure financing and to move forward — because there is an expectation in Europe that gas demand will decline in the next decade.

There has been “a huge increase in plans for renewables,” Piers de Wilde, a senior LNG analyst at Poten & Partners, said on the webinar, referring to the European market. “So, what will that do to [LNG] demand? A lot of [European companies] are still trying to work that out internally,” he said. 

That hesitation is creating “uncertainty” for a long list of U.S. LNG projects, the analysts noted. It is still possible that some European buyers might be willing to pay a premium for shorter 10-year contracts, but activity has been muted as of late.

Germany is planning on reaching net zero emissions by 2045, which would likely require the dramatic reduction or even near-elimination of gas from the energy system over the next twenty years, calling into question the commercial logic of so many LNG import terminals.

IEEFA analysts invoked the hazards of Europe being hooked on Russian gas to warn about the risks of investing so much in U.S. LNG.

“Having experienced the dangers of risking security of energy supply by depending too much on one source, Europe must learn from its past mistakes and avoid becoming over-reliant on the U.S., which provided nearly half of its LNG imports last year,” Jaller-Makarewicz said.