Over the last decade, LNG has become a favoured method of transporting energy, circumventing the need for long, expensive pipelines and enabling energy transport even between distant nations.
With the Ukrainian crisis yet to
be resolved, preparation for a worst-case scenario is a critical issue when
considering energy security in Europe. Russia supplies just under 40% of
Europe’s natural gas, with the vast share of the remainder coming via pipelines
from Norway and Algeria or supplied by LNG.
Geopolitical tensions and the
outbreak of war, on top of one of Europe’s major pipelines, have led to serious
concerns about security of supply. The top Russian importers—Germany, Turkey,
and Italy—are right to be concerned about where replacement supply could come
from. Germany imports roughly a third of Europe’s gas, and a massive fraction
of German gas is Russian (32% as of December 2021, 49% overall in 2019). The
nation’s closure of nuclear power facilities in favour of gas may leave it in a
position that feels compromised in order to protect its citizens.

The fundamental problem is the
size of the import market. Despite the highly variable distribution of national
energy markets, the overall EU primary energy consumption saw natural gas
making up over 22% of total energy needs in 2019, leaving Russia alone
supplying nearly 9% of European energy as gas. A sudden loss of the gas supply
would be a terrible and devastating blow to nations that rely heavily on gas to
supply power and heating.

There are five major pipeline
networks into Europe from Russia. In order of increasing concern, these are the
Blue Stream line, TurkStream, the Yamal pipeline, and the two Nord Stream
pipelines, and the Ukrainian pipeline networks. The Blue Stream line, supplying
16bcmpa, almost exclusively feeds Turkey and is of minimal concern to the wider
EU. TurkStream crosses the Black Sea and supplies 31.5bcmpa to the Balkan
states.
The Yamal pipeline, supplying
33bcmpa, runs via Belarus into Poland and Germany, and is not likely to suffer
significantly due to strong ties between Belarus and Russia.
The two Nord Stream pipelines, at
55bcmpa each, are where current geopolitics starts to get spicy. Nord Stream 1
is well out of the way and, barring a move to cease exports from Russia
entirely, will likely remain in operation. Nord Stream 2, however, has been
undergoing approvals with the German energy regulator after finishing
construction in September 2021.
German regulations state that the
operating body must be a German company or subsidiary, which Gazprom, the
Russian operator, had hoped to circumvent. Originally slated for roughly the
end of the March quarter of 2022, then the second half of 2022, the entire process is now on hold, pending a resolution to the Ukraine crisis, and is not likely to proceed any time soon.
Finally, the Ukrainian pipeline
networks, supplying 40bcmpa, are obviously the most at-risk at this time.
Russian military action has seen a pipeline damaged near Kharkiv, though gas
continues to flow through the area.
Excluding Blue Stream, currently
operating Russian gas supplies 159.5bcmpa into Europe, the equivalent of over 115Mt
of LNG. For clarity, Australia, the world’s largest producer of LNG in 2021, exported 83Mt
of LNG that year. Qatar, the world’s second-largest supplier, sold 75Mt, and
rapid up-and-comer the US came in third at just under 66Mt.
Russia supplies one and a half
times as much gas as the world’s largest LNG producer exports annually. LNG is also
a market that is usually under contract – over 65% of global LNG is contracted,
and thus not available once the spot market is filled. The US has been making
overtures to allies and neutral parties to encourage supply, but without enough
success to swing opinion. Some agreements were made, with Australia, Qatar and
even Japan agreeing to divert some shipments.
The US has also increased its own
exports to the EU and the UK, growing from 0.1bcm in November 2021 to 0.18bcm
in January 2022, but even from looking at the numbers it seems absurd to say it
can fully supply Europe alone.
All of this is before considering
the transportability of gas. It is not oil or coal, which in the worst case can
theoretically be transported in a barrel. Gas requires complex, expensive
infrastructure – whether that’s pipelines or oceangoing transport terminals –
that is known for being some of the most capital-intensive in the world.
Venture Global’s recently started
LNG facility, Calcasieu Pass, aims to export 10Mt of LNG every year, one-tenth
of Europe’s needs. It also cost US$4.5bn, a significant expense for what
amounts to only a fraction of the continent’s prospective LNG requirements.
The import side is also crucial –
regasification terminals, while not as expensive as liquefaction and export
terminals, are certainly not cheap. Grecian operator Gastrade’s proposed
Alexandroupolis LNG is targeting start-up in 2023 and is expected to cost roughly
US$330m for 4.5Mtpa capacity.
The economic considerations are
what ultimately drove Germany to invest in Nord Stream 2 over significant LNG
investment. The cost of not just construction but ongoing supply of LNG was deemed
too expensive when compared to Russian pipeline gas, an equation that may now
be changing. The first German LNG terminal, Brunsbüttel LNG, is expected to be
constructed and operational in 2024-2025 for 5Mtpa capacity.
While European LNG import
terminals averaged 25% utilisation in 2017, this has grown to reach roughly 36%
over the 12 months to September 2021, and is expected to rise further as data
from the high-demand last months of 2021 comes in. To construct the capacity to
import 100Mt of LNG would cost roughly US$7.3bn, a cost that is expensive, but
affordable. The next concern is the time it will take to design, finance and
build such a large array of plants across the continent, assuming supply
availability.

Construction projects of this
scale are not instantaneous, and even with a high drive for approvals, drafting
design, finding investment and contracting building materials and engineering
firms takes years. A typical ‘accelerated’ timeline can manage a three- to four-year
build from first proposal, but the kind of glut caused by such a spike in
demand cannot be accommodated easily.
Beyond liquefaction and
regasification terminals, there are also issues with transport fleets and shipyard
capacity, as well as alternate demand pressure coming from Asia as China
attempts to stabilise and develop its own energy market.
Qatar’s planned growth will expand
its LNG exports by 30Mt by 2028, and the US market’s rapid growth over the
short to medium term will potentially see an extra 75Mt of supply in the same
period. Over that period, a significant shift away from pipeline gas and towards
LNG may yield benefits in geopolitical independence, but direct competition
with increasing demand from Asia may be too expensive for European wallets.
Ultimately, while LNG will be a
key part of the energy independence movement in Europe, it cannot simply snap
into place. The potential market is simply too large, and LNG is not
oversupplied enough as a global commodity to absorb the kind of shock that an
abrupt end to pipeline gas out of Russia would cause.
In the long term, geopolitics and a desire for
national and regional energy security will see an increased drive for gas
diversification, even at the higher overall prices demanded by LNG over
pipeline gas.