What LNG Can and Can’t Do to Replace Europe’s Imports of Russian Gas

(Bloomberg) -- The European Union says it intends to wean itself off Russian natural gas supplies entirely within a few years, ending a relationship that’s been vital for both parties for decades. The sudden shift in policy is caused by Russia’s threat to cut off supplies and a reluctance by western leaders to keep sending many billions every year to Moscow after the invasion of Ukraine. It’s a tall order, as imports from the top supplier cover more than a third of the continent’s consumption. A crucial part of the plan is to greatly increase purchases of liquefied natural gas from non-Russian producers, including the U.S.

1. What is LNG? 

The places where natural gas is found are often hundreds or thousands of miles away from where it’s used in power plants, factories, refineries and homes. It can be moved relatively cheaply by land through pipelines, but only to fixed points. Over the past six decades, a multi-billion dollar industry has developed to freeze the gas to minus 260 degrees Fahrenheit (minus 162 degrees Celsius), at which point it changes into a liquid that can be loaded aboard refrigerated ships and sent across the globe. 

2. Why can’t LNG supply easily expand? 

Although a new natural gas well can be brought into production within weeks, it takes several years to obtain the permits, land contracts, and billions of dollars in financing necessary to construct a new plant to liquefy natural gas or an import terminal to receive it and convert LNG back to gas. Building the required, specialized tankers also takes time and a huge investment. So, for the immediate future, the world is limited to the existing LNG infrastructure. For now, that consists of about four dozen LNG plants and 150 import terminals scattered around the globe, with some 600 tankers that can ferry cargoes in between, according to the International Gas Union. 

3. What’s available for Europe to buy?

Global LNG production -- led by the U.S., Qatar, and Australia -- is expected to total 452.8 million tons in 2022, figures from Bloomberg Intelligence show. Based on weekly traffic, roughly 70% of cargoes on the water are reserved for customers holding long-term contracts while the remaining 30% is being sold on the global spot market. That means roughly 136 million tons of LNG this year will go to the highest bidder. In theory, that’s enough to cover Europe’s imports from Russia, which are the equivalent of 118 million tons of LNG.

4. Does Europe have sufficient infrastructure to receive that much LNG?

At the moment, European nations are importing about 80 million tons of LNG per year. At maximum capacity, figures from Bloomberg Intelligence show, they can import a combined 145 million tons, which means there’s spare capacity for about 65 million additional tons. So, even at maximum capacity, LNG imports would only cover half of Russian pipeline gas. Also, European nations would need to reconfigure pipeline routes and build interconnections to move the gas from coastal import terminals to demand centers in the interior of the continent. 

5. What about Germany, the biggest consumer? 

While Europe has more than two dozen LNG import terminals from Northwest Europe to the eastern Mediterranean, none are located in the region’s biggest energy consumer. German Chancellor Olaf Scholz has pledged to become independent from Russian energy “as soon as possible,” and that would require many billions invested in new infrastructure. After being largely discarded, there are now several plans by some of Europe’s biggest utilities to build receiving facilities, both onshore and offshore that could be operational in just a few years.

6. How fast might Europe ramp up?  

In a bid to starve Russia of the money it needs to fund the war in Ukraine, the U.S. and the EU are working with international partners to accelerate the huge task of delivering more LNG to Europe. Under an aspirational pact unveiled March 25, Europe will get at least 11 million tons of additional LNG supplies by the end of 2022, though it’s not clear where it will come from. Member states of the EU will also work to ensure demand for 37 million tons of American fuel until at least 2030. A significant boost to global LNG supplies will only come from 2025, when new projects are schedule to come online. 

7. How much is the U.S. able to provide? 

The U.S. has six LNG export terminals with another under construction. Once that plant is fully operational, the U.S. will be able to produce more than 100 million tons of LNG per year. Most of that production is locked in long-term contracts with buyers in Asia and Europe, but some is available to highest bidder on the global spot market. Construction of U.S. LNG facilities takes roughly three to five years, and that is after the initial time of securing financing and landing contracts. Golden Pass LNG, a joint venture between Qatar Energy and Exxon Mobil Corp., is under construction but will not produce its first drops until 2024.

8. How might that affect other importers?

In the immediate aftermath of the Ukraine invasion, a confluence of factors eased demand among typically big LNG importers, freeing cargoes to head to Europe. North Asia had a mild winter and rains in Brazil improved the supply of hydroelectric power. In the second quarter, however, a tug-of-war over cargoes was expected to heat up, forcing Europe to outbid competitors to secure supplies. Already the war in Ukraine has sent LNG spot prices soaring, and the trend is expected to continue. Poorer countries, such as India and Pakistan, that are less able to pay lofty prices could face energy shortages that strain their economies. Higher prices and potential shortages mean utilities in countries such as Japan, South Korea and Pakistan -- which rely on imported gas to generate a large chunk of electricity -- could shift to more carbon-intensive alternatives like coal and fuel oil, intensifying pollution and compromising efforts to contain global warming. 

The Reference Shelf

• A story on the U.S.-EU pact to increase LNG supplies to Europe.
• QuickTakes on Europe’s dependence on Russian gas, the shunning of Russian oil and the evolution of LNG.
• The European think tank Bruegel explores Europe’s prospects for weaning off Russian gas.
• Bloomberg columnist Javier Blas examines the Russian threat to cut off gas to Europe.

©2022 Bloomberg L.P.