Europe’s scramble for gas could spark next power shortage

(CNN Business) — Europe’s struggle to find alternatives to Russia’s natural gas is pushing the world to the brink of a winter power shortage, with the worst effects likely to be felt in Asia’s poorest economies.

Since Russia invaded Ukraine, the European Union has tried to reduce its dependence on Moscow for energy. EU countries rushed to buy more liquefied natural gas (LNG), an attractive alternative to Russian gas because it can be transported by tanker rather than by pipeline. It is also a cleaner fuel than coal or oil.

But if the bloc manages to “dramatically reduce” its dependence on Russian gas – it plans to cut its consumption by two-thirds by the end of this year – global demand for LNG will exceed supply by 26 million tons by the end of 2022, according to a recent analysis by consultancy firm Rystad Energy.

Russia could cut off natural gas to Denmark and the Netherlands 1:12

This equates to nearly 7% of global LNG demand last year, or about 25 days of supply.

“By avoiding Russian gas, Europe destabilized the entire global LNG market which started the year in a precarious balance after a tumultuous 2021,” the report said.

Europe monopolizes LNG

In recent months, Europe has been supplied with LNG at breakneck speed.

The region, including the UK, imported 28.2m tonnes between February and April, according to data from the Independent Commodity Intelligence Services (ICIS), an increase of 29% on the same period last year. France and Spain were the biggest buyers.

Kaushal Ramesh, principal gas and LNG analyst at Rystad Energy, told CNN Business that the looming shortage became apparent in March, when “the EU announced that it was going to increase LNG imports by 50 bcm (bcm). regarding 2021”.

“The stage is set for sustained supply shortfalls, high prices, extreme volatility, bull markets and exacerbated LNG geopolitics,” Ramesh said in the report.

On Thursday, spot LNG prices in East Asia rose 114% from the same day last year to $22 per million British thermal units (mmbtu), according to ICIS data. Global LNG trade grew 6% in 2021, driven by a strong rebound in demand from Asia after the pandemic, according to data from the International Energy Agency.

Construction of LNG storage tanks on the Isle of Grain, in the southeast of England. (Photo: DANIEL LEAL/AFP via Getty Images)

Buyers could suffer further price increases as European demand soars.

LNG prices are closely linked to prices for European natural gas supplied by pipelines. Benchmark gas futures prices in Europe are currently near $30 per mmbtu – from a record high of $67 in March – but could soar above $100 per mmbtu if Russia were to suddenly cut deliveries. of gas completely, as it already did with Poland, Bulgaria and Finland.

Asia loses out

Asia has been the largest importer of LNG since at least 2010, Ruth Liao, editor of LNG Americas, told CNN Business. But some buyers in the region will find it difficult to compete with Europe’s richest economies and could be left out of the market, whether or not Russia abruptly turns off the taps.

“Next winter remains a major risk in terms of how LNG supply can balance competitive demand between Europe and Asia,” he said.

Rystad’s Ramesh said countries like India, Pakistan and Bangladesh are the most likely to take a hit when LNG is diverted to Europe. Buyers should start signing long-term supply deals, Eric Heymann, a senior economist at Deutsche Bank, told CNN Business.

“A larger part of the demand and supply of LNG … is based on short-term or flexible contracts or the spot market,” he said. “The price will decide where the LNG goes,” he added.

Since November, India and Pakistan have already reduced their LNG imports by 15%, according to data from analysis company Vortexa, a trend driven above all by rising prices. As a result, demand in Asia could be “permanently curtailed,” with some countries having to increase their use of coal and oil, Rystad Energy predicts.

Others could accelerate their transition to renewable energy. LNG is considered one of the cleanest fossil fuels and a key component of the energy transition. But the evidence is contradictory. Some studies have found that LNG produces far fewer greenhouse gas emissions throughout its life cycle, while others have found high leakage rates of methane – the main component of LNG – at various points in its production.

Methane contributes up to 34 times more to global warming over a 100-year period than carbon dioxide, according to the United Nations.

Ukraine cuts Russian gas flow to Europe 1:12

Boom for exporters

The price increase is a joy for major LNG exporters such as the United States, Qatar and Australia.

Europe has imported about 45% of its LNG from the United States in the last two months, according to Vortexa. Qatar has supplied the bloc with just over a fifth.

“More controversially, 13.5% of European LNG still comes from Russia’s Arctic LNG project,” Felix Booth, head of LNG at Vortexa, told CNN Business.

A spate of new or revived LNG projects are attempting to tap into Europe’s urgent need for this energy source, including in Germany, which still gets 35% of its imported gas from Russia.

Europe’s largest economy has announced plans to build two LNG receiving terminals, and RWE, one of its main energy companies, is about to sign a 15-year supply agreement with US LNG producer Sempra.

But growers are not able to act fast enough to avoid a global shortage this winter.

“Although rising demand has spurred the largest rush of new LNG projects around the world in more than a decade, construction timelines mean material relief is only likely after 2024,” Rystad Energy said.

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