Risk of LNG glut in rush to replace Russian gas to Europe
In its haste to replace lost imports of Russian gas to Europe with new LNG buildout, the continent risks major import overcapacity, experts say.
Europe is facing LNG import overcapacity of up to 250 billion cubic meters by 2030 amid a forecast gap between expected demand and the capacity currently being planned and built, in its rush to replace lost imports of Russian gas to Europe, a new report by US-based Institute of Energy Economics and Financial Analysis (IEEFA) has warned.
Europe has as many as 32 LNG terminals planned or under construction, which would add to the existing 31 operational terminals bringing total import capacity to 400 bcm, rising from 270 bcm at the end of 2022, according to IEEFA’s newly launched Europe LNG Tracker.
Demand for LNG is expected to plummet to 150-190 bcm in 2030, based on IEEFA and S&P Global Commodity Insights forecasts, respectively, leading to overcapacity equivalent to around half the EU’s total gas demand in 2021 (413 bcm). Total gas demand is expected to stand at 390 bcm in 2030.
Europe’s new LNG capacity risks becoming “the world’s most expensive and unnecessary insurance policy,” according to Ana Maria Jaller-Makarewicz, author of the analysis and energy analyst for IEEFA Europe.
“Europe must carefully balance its gas and LNG systems, and avoid tipping the scale from reliability to redundancy,” she added.
Several countries have announced new LNG projects or expansion to existing ones in a bid to cut Russian ties, including Germany (3 onshore and 6 floating storage and regasification units), Italy (2 FSRUs), Greece (2 FSRUs), Netherlands (1 FSRU), and France (1 FSRU).
The risk of stranded assets is higher for Spain (50 bcm) followed by Türkiye (44 bcm), France (14 bcm), Italy (10 bcm), and Germany (9 bcm) in 2030, the research said.
The new LNG import capacity is seen by European countries as a necessary investment to ensure security of supply amid the current energy crisis and the need to replace not only Russian pipeline gas but also domestic European gas production, however questions remain as to how much extra capacity is needed and whether Europe will be able to attract volumes as well to address grid constrains.
The research also highlighted the fact that, despite the restrictions on Russian piped gas, existing LNG terminals remain under-utilised.
The utilisation rate of LNG terminals was 62% in 2022, up from 41% in 2021 and is expected to fall in future years due to a consistent decrease in demand for natural gas, down to 36% in 2030, the research noted.
“Europe’s LNG import buildout…is massive in its scale and shortsightedness,” Baird Langenbrunner, a research analyst at U.S.-based non-governmental organisation Global Energy Monitor (GEM) told Gas Outlook.
GEM released earlier in December a report highlighting the risk that long-term LNG import contracts being entered into by European buyers now could jeopardize future energy transition efforts by locking-in gas dependence, as well as provide U.S. producers with the guarantees they need to continue production of fracked gas for export.
“There is a huge amount of LNG import overcapacity planned across European countries” and “the current import capacity is under-utilized and likely sufficient to keep Europe energy-secure as long as it’s burning gas in accordance with its net-zero commitments,” he pointed out.
“Europe is thinking in a very myopic, uncoordinated, and disappointing way with these plans,” he continued.
“Europe doesn’t need to be thinking about new import points, and instead focusing on making better use of the import capacity it already has, but more importantly, improving efficiency measures and increasing demand and availability of renewable energy resources,” he said.
Hydrogen, ammonia plans in doubt
Many of the new terminals being built will rely on floating storage and regasification units (FSRUs) which are, in theory, easier to redeploy compared to onshore regasificaton terminals, allowing some flexibility in terms of future usage should demand drop.
However, doubts regarding costs are rising, Jaller-Makarewicz told Gas Outlook.
“They could be easier to re-deploy but we’ll need to analyze costs and charter contract length,” she said.
“FSRUs will cost half the capital cost and be delivered in half the time of an onshore terminal, but we’ve seen a huge increase in the initial projected price for the FRSUs in Germany that will exceed 9.8 billion euro.”
“Some FSRUs have been chartered for 10 years, such as FSRU Exemplar in Finland, for a cost of €460 million,” she continued.
“At least for the next 10 years there’s going to be an FSRU serving the LNG demand in Finland, regardless if the demand keeps the same or declines,” she argued.
Chartering an FSRU costs between $40-60 million per year, according to Rystad Energy.
Meanwhile, the opportunity of re-purposing LNG terminals for hydrogen and ammonia imports is faced with technical and financial hurdles.
“There are certain technical issues to consider for repurposing LNG terminals for hydrogen, and it could be very expensive” as “hydrogen has different characteristics to gas” she said, pointing at the findings of the IEA’s Global Hydrogen Review 2022.
“It requires replacement or drastic modification of most of the equipment, in particular due to the lower density and boiling temperature of liquefied hydrogen compared with LNG,” she added.
The IEA’s study also concluded that “a newly built liquefied hydrogen storage tank can be 50% more expensive than an LNG tank for a comparable volume, and due to the lower volumetric density, the energy stored would be almost 60% lower,” she said.
Furthermore “repurposing an existing LNG receiving terminal to import ammonia presents several challenges” although “less significant than for liquefied hydrogen” such as the fact “LNG tanks are usually built using 9% nickel steel as inner material for which ammonia could cause problems of stress corrosion cracking,” she explained.
“It has been estimated that converting an existing LNG terminal to receive ammonia can cost 11-20% of the capital expenditure of an LNG regasification facility,” she added.
Russian gas to Europe still shipped
Meanwhile, despite a decline in Russian pipeline imports amid a goal to replace at least 155/bcm year of Russian gas by 2030, Russian LNG imports increased 12% year on year in 2022 to 20.2 bcm, according to the research.
The vast majority of the LNG (19.35 bcm) came from the Yamal LNG export terminal. It is owned by Russia’s Novatek (50.08%), France’s TotalEnergies (20.02%), the China National Petroleum Corporation (20%) and the Silk Road Fund (9.9%).
Russia also has Vysotsk LNG terminal, which supplied 0.88 Bcm to Europe and the Portovaya LNG (0.39 Bcm), as well as the Sakhalin terminal in the Pacific basin.
The biggest importers of Russian LNG in 2022 were France (7.4 bcm), Spain (5.2 bcm), and Belgium (3.0 bcm). Imports of LNG from Russia increased by 58% in France and Belgium, and by 50% in Spain compared to the previous year.
The trend is expected to continue in the near future as “Europe is addicted to LNG and will inevitably soon be racing to increase its surplus for the 2023/24 winter, and it’s difficult to imagine there would be a deliberate ban on such imports at least in the near term,” Baird said.
“Any substantial change to the import volume of Russian LNG is unlikely to happen quickly, I think, unless it’s a decision that Russia makes.”
“Global gas markets are tight, and Europe’s effort in 2022 to fill up its LNG storage was expensive,” he continued.
“We’ve seen Europe locking in gas import contracts recently with non-Russian sources, but most of these don’t begin for a few years.”
“Even the U.S. will need until at least 2024 to increase its export capacity, so there’s no obvious or immediate replacement for Russian LNG,” he said.