The situation in Russia and Ukraine continues to heat up, and the EU wants to diversify its natural gas sources
Author: Kang Kai
After the US and Russia failed to make great progress in high-level security talks, the EU has more urgently sought to diversify its natural gas supply.
Following a recent meeting with EU ministers, the European Commissioner for energy, Kadri Simson, said the bloc was considering whether to buy gas from other trading partners amid limited supplies of Russian gas and rising geopolitical risks. (including the United States) to obtain more natural gas supplies.
At the same time, the United States is also negotiating with major gas exporters such as Qatar, hoping to help the EU buy additional seaborne liquefied natural gas (LNG). White House National Economic Council Director Brian Deese said the U.S. government is working with partners to increase energy supplies to Europe.
Lin Boqiang, dean of the China Energy Policy Research Institute of Xiamen University, told Yicai.com that the rising geopolitical risks in Russia and Ukraine have intensified the urgency of the EU to seek other natural gas supplies. With the current surge in European gas prices, LNG exporters are also willing to supply gas to the region. However, whether the EU’s wishes can be realized depends on factors such as whether European companies and consumers can withstand certain price pressures, whether countries have sufficient LNG reserves and whether other gas importing countries are willing to change their routes.
EU wants to diversify gas supply sources
Lin Boqiang believes that the reason why the EU wants to diversify its natural gas supply sources is that if the situation in Russia and Ukraine further escalates, Russia may threaten to stop exporting natural gas to the EU. In the context of low inventories, EU countries may face the danger of “breathing”.
According to Eurostat, more than 40% of the EU’s natural gas supply currently comes from Russia, while about one-third of Russian gas flowing to Europe passes through Ukraine. Data from the European Total Natural Gas Inventory (AGSI+) shows that as of the 11th, the total European natural gas inventory was about 481.26 MWh, and the total inventory has fallen to 43%, which is the lowest level in history. A report by the German economy ministry said the region’s energy needs could only be met when 60 percent of Europe’s natural gas reserves are in storage.
Although the construction of Beixi Line 2, which has been controversial until now, has been completed, if it is officially put into operation, in theory, 55 billion cubic meters of natural gas will be exported to Germany every year. But for a variety of intricate political reasons, its certification process has been suspended, and there is no telling when it will open. The U.S. wants to use Nord Stream 2 as leverage against Russia amid escalating tensions over Ukraine. Moscow has repeatedly urged not to politicize the pipeline situation, stressing that it is a purely commercial project that benefits not only Moscow but the EU as well.
The head of the International Energy Agency (IEA), Fatih Birol, said last week that Russia has effectively limited gas supplies to Europe amid heightened geopolitical tensions.
Lin Boqiang also said that since natural gas prices in Europe and Asia are currently at historically high levels, global LNG exporters actually have high export intentions.
In December, LNG ships from the United States have been heading to Europe since the price of natural gas in Europe soared. According to data from ICIS, a global commodity market information service provider, in December last year, U.S. LNG exports hit a record high of 7.7 million tons.
At the same time, major LNG projects around the world are also expanding capacity. According to Reuters, a new production line at the U.S. LNG project Sabine Pass and the LNG Calcasieu Pass export terminal are about to start production. The U.S. Energy Information Administration (EIA) said peak U.S. natural gas production capacity will reach 13.9 billion cubic feet per day by the end of 2022. The Qatar North Field gas field expansion project will also be put into use.
Lin Boqiang believes that Europe and Asia are the main demand countries for LNG in the world, and because prices in Europe are higher than those in Asia, exporters may be more inclined to look for European buyers.
According to data from Platts, the forward prices of the TTF benchmark Dutch natural gas, known as the “wind vane” of European natural gas prices, were US$57.35, US$54.69 and US$44.24 per million British thermal units in February, March and April, respectively. The benchmark LNG price in Japan and South Korea (JKM) forward prices in February, March and April 2022 are US$48.92, US$47.27 and US$42.67/million British thermal respectively. During the period from October to November last year, the average price of JKM was also higher than the average price of TTF by US$5/MMBtu.
If factors such as shipping costs are deducted, the price of natural gas in Europe is also higher than that in Asia. According to Platts data, the net return value of European natural gas in February and March was US$52.53 and US$50.04/MMBtu respectively. The net return value of natural gas in Asia in February and March was US$43.80 and US$42.31/MMBtu respectively.
Will the EU’s wishes come true?
Lin Boqiang said that the EU wants to diversify its natural gas supply sources to ensure its energy security, but this may face greater challenges. One reason behind this is that this is from a security perspective rather than an economic one. Global LNG prices are relatively high, coupled with the current high freight costs, if LNG accounts for too much natural gas consumption, it will increase the burden on energy-using companies and consumers in the EU.
As of now, the Baltic Dry Index (BDI) is at 1415, a record high. According to Russian media reports, the current price of natural gas exported from Russia to Europe is between 295 and 330 US dollars per thousand cubic meters, which is still relatively cost-effective. “In the short term, we cannot escape our dependence on Russian gas,” said Markus Krebber, chief executive of RWE AG, one of Germany’s largest utilities.
Lin Boqiang also said that although sellers are more willing to export global LNG, the price of natural gas in the United States is also rising day by day, and there was a shackle in natural gas trade between Qatar and the European Union, which may affect the cooperation of the above parties.
Recently, U.S. natural gas near-month futures have risen sharply for several consecutive days. As of the 23rd, U.S. natural gas near-month futures closed at $3.750/million British thermal, the highest point since November last year.
In 2018, Qatar’s LNG exports to the EU accounted for more than 40% of the EU’s total consumption, making it the EU’s largest source of LNG imports. But that year, the European Commission launched an antitrust investigation into the terms of Qatar Petroleum’s long-term LNG supply contracts with EU countries. The investigation has affected Qatari investment and LNG supplies to Europe, leading the Gulf state to halt projects in France and Belgium.
Lin Boqiang said that since the global LNG market tends to sign long-term agreements, if exporters increase their exports to European countries, it may affect exports to other countries. It depends on how the sellers compensate the original buyers and whether these buyers will agree.
Currently, about three-quarters of Qatar’s LNG is sold to Asian countries such as Japan and South Korea, while Europe accounts for only about 5% of its market share, according to Bloomberg data.
At present, the natural gas inventory in Europe is low. If the Russian-Ukrainian problem further escalates and the European region does not buy enough LNG, Lin Boqiang believes that the natural gas supply in Europe will be tight in the short term, and the price may continue to rise.
Other factors will also provide some support for European gas prices. Lin Boqiang said that the recent shutdown of several nuclear reactors of EDF due to pipeline defects and Germany’s “close nuclear shutdown and abandonment of coal” have also tightened the energy supply of many European countries. On the demand side, forecaster Maxar Technologies Inc. said January was colder than usual in Europe. The Refinitiv report also said that a cold snap in Europe cannot be ruled out in February, which means that European energy demand will also increase in the future.
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Responsible editor: Li Tong