With tariff threat, LNG becoming a source of increasing energy insecurity for Europe

The global gas industry is getting caught up in the trade war, and gas may be increasingly viewed as a source of risk rather than a solution to energy security, according to industry experts.

Several years after Russia’s invasion of Ukraine, which saw global gas prices spike and a rush of new investment in LNG export terminals, LNG is now the subject of cost uncertainty and increasing trade risk, raising doubts about future deals.

That is particularly true since the leader of the world’s largest LNG exporter launched a global trade war. President Trump has leaned on many countries, including those who were up until recently close allies, to buy more U.S. LNG if they want relief from tariffs.

Trump has demanded that the European Union, for instance, buy $350 billion worth of energy from the U.S., a figure that is wildly unrealistic. The EU does need to replenish gas storage levels in the coming months, which will result in incremental increases in LNG imports. But it is not conceivable that the EU can purchase anything remotely close to what Trump is demanding.

Indeed, the demands are a source of tension in an increasingly damaged relationship. The combined effect of tariffs, Trump’s trashing of NATO, his support for Russia in its war against Ukraine, and his imperialist demands to seize Greenland, have all but shattered the U.S.-European alliance.

“The transatlantic alliance is over,” one EU official told the FT.

The EU has approached Trump with offers to buy more U.S. LNG, but his administration has not expressed interest in making a deal.

The volatile American president, whose approach to trade and tariffs changes with each passing day, has made trade policy uncertainty soar to unprecedented levels.

Some analysts see the EU’s dependence on gas imports from the U.S. as a strategic risk.

“We are going from one problematic dependency — on Russian pipeline gas — to another, on US LNG,” Arne Lohmann Rasmussen, chief analyst and head of research at Global Risk Management, a Danish investment and risk management firm, told Gas Outlook.

“We have to think the unthinkable: that the US is no longer the ally we in Europe believed it to be.”

He warned that the U.S. could even cut off gas supplies to Europe in the future if domestic prices were to rise too high.

“If the US decides to keep cheap gas at home by restricting LNG exports, it could seriously harm European industry,” he said.

But he added that Europe still has leverage.

“The US will have a lot of LNG to sell in the coming years. And with the trade war on China, they’ll need Europe as a buyer.”

Security on the agenda at IEA summit

These issues will be front and center at an energy security forum hosted by the UK and the International Energy Agency in London on April 24 and 25. Both U.K. Energy Secretary Ed Miliband and IEA Secretary-General Fatih Birol have made the case that a faster transition to clean energy would address the climate crisis and enhance energy security.

However, Trump may be after more than just narrowing out the U.S.-EU trade deficit via LNG sales. The U.S. is sending a delegation to the energy security summit in an effort to slow the global energy transition. Trump has also talked about non-tariff barriers, which suggest he’s waging a broader pressure campaign to change a suite of European laws impacting digital services and climate change.

Italian climate change think tank Ecco argues that Trump wants the EU to weaken or dismantle the European Green Deal, lock Europe into consuming pricey U.S. LNG, and severely limit trade with China, which would impose economic, climate, and geopolitical risks on European countries.

“Through the Green Deal, Europe is building its independence, energy security and competitiveness by progressively replacing its dependence on fossil fuels,” Ecco wrote in an analysis.

“The objective, therefore, is not only to ‘buy gas to reduce the trade imbalance’ but to force long-term purchases that would prevent Europe from building its own energy independence and competitiveness, including through new suppliers in global markets.”

The vulnerability of gas

This isn’t just a European problem. Part of the security risk attached to the LNG business is that it is traded over long distances, exposing it to trade war-related interruptions. Up until recently, that was viewed as advantageous, offering trade flexibility.

But times are changing. Some analysts believe that fossil fuels more broadly could fall increasingly out of favour because of heightened risks to trade.

The energy transition is “on the cusp of reaccelerating,” according to Carlyle, a global investment firm. Instead of climate change driving the transformation, it will be concerns about energy security. “Security is now paramount,” Jeff Currie, chief strategy officer of Energy Pathways at Carlyle, wrote in a March report.

Currie says that one of the features of fossil fuels is that they can be traded, whereas renewable power is more local. The tariff war puts global trade flows under threat, which could intensify the drive towards renewable energy as a way of insulating countries from risk and volatility.

“[I]f trade is under threat, then so are fossil fuels,” he wrote.

“If consumers are able, they will try to reduce their imports of fossil fuels, which in most cases will mean increasing their supply of nuclear and renewable energy,” Currie wrote. “The green premium has already faded and the market is in search of a security premium.”

One of the big uncertainties looming over the conversation in Europe is what will happen with Russian gas if and when there is a ceasefire in Ukraine. For now, the EU is moving to end gas deals with Russia. In the short run, the EU will need to replace that gas with some combination of energy efficiency, renewables, and imported LNG, most of which will come from the United States.

Beyond this year, however, U.S. LNG as a solution to Europe’s energy security problems is less clear. To be sure, Europe’s need for LNG won’t disappear overnight. But demand is in structural decline. There are not a lot of companies scrambling to sign 20-year deals with U.S. LNG companies, despite the pressure from Trump.

“I think it’s difficult for them. Especially if buyers are looking to sign long-term contracts. It’s a tough one.” Melanie Lovatt, a financial advisor at Poten & Partners, an LNG brokerage and consulting firm, said on a webinar. She was referring to the enormous uncertainty facing European companies regarding both Russian gas and the U.S. trade war.

“Some players may just want to ride out the four years that Trump is in office if they can because there may be too much uncertainty for them,” she said.

Jason Feer, head of business intelligence at Poten, noted that many countries simply cannot purchase U.S. LNG in large volumes. And if they only buy small amounts, it isn’t clear if that will be enough to assuage Trump.

“I guess the question is another few million tonnes here and there…a little bit more into Thailand, a little bit more into Japan, into Korea…does that really solve the problem? I guess we’ll have to see,” he said, referring to U.S. tariffs and Trump’s demands. Feer added that Japan, one of the countries high on the list that the U.S. wants to make a deal with, has LNG demand that is in decline. There is little, if any, scope for Europe and Asia to buy more than they are already purchasing, and tariff impacts are likely to diminish global LNG demand.

“I think it does raise this larger issue of how U.S. trading partners view the U.S,” Feer said. “Is the U.S. a reliable trading partner?”