More than a decade of underinvestment in the oil and gas extraction industry, along with
the Russian invasion of Ukraine, have created the deep energy crisis that is now hitting many
economies around the world hard. It is a crisis that particularly threatens Europe right now.
However, there are more players in this crisis. And no, on this occasion we are not going to
talk about renewable energies, nor nuclear energy. Not even hydrogen. But about something
perhaps much more important in the short and medium term for ensuring energy supply among
Putin's former customers: I am of course referring
to liquefied natural gas or LNG. This is already one of the major
protagonists of international geo-economic news. The key resource that will determine the global
economy in the coming years. Listen up!
Liquefied natural gas is basically gas in a liquid state. This is achieved through
a process called liquefaction in which the extracted gas is cooled
to about 160 degrees celsius below zero. At this temperature the gas becomes liquid,
thus occupying much less volume. In other words, a given volume of liquefied natural gas would occupy
600 times more in a gaseous state. This means that it can be transported in large LNG tankers.
And, of course, transport by sea allows those countries that do not have pipeline connections
with producers to import large quantities of gas, even from very distant places.
So far it all sounds very positive, doesn't it? And the truth is that it is.
In 1964, the first ship dedicated exclusively to LNG exports entered service.
It was the launching of a technology that in the last 20 years has grown vertiginously.
To date, more than 80,000 LNG transports have been completed around the world and more than
600 vessels are now actively transporting gas from producing countries such as Qatar to consumers'
boilers. From Japan to Spain. Quite a revolution. In 2021 the three largest consumers of LNG were,
in this order: China, Japan and South Korea. See for yourself.
The advantages are clear – just look at Japan and South Korea. Two energy islands that,
thanks to this technology, have been able to access an abundant and relatively
cheap supply of natural gas. However, everything suggests that
the importance of liquefied natural gas will skyrocket over the next few years.
Why? Well, you see, approximately 40% of all gas consumed in Europe came directly through
pipelines from Russia. This gas came in such large quantities and at such low prices that European
countries became hugely dependent... Until now. The war in Ukraine has changed absolutely
everything. And it's not just about the war. Putin's Russia has shown itself to
be an unreliable partner. And that in energy terms changes everything. Whatever happens,
no European country will be willing to become so dependent on Russia again.
The problem is that so far the necessary infrastructure has not been built to replace
this country. Naturally, when you’re getting gas so cheap, why invest in expensive gas
infrastructure such as regasification plants? There were exceptions. There were those who saw
the danger very clearly from the beginning. N1 (Lithuania Becomes First EU Member to Give
Up Russian Gas – Bloomberg) N2 (KN green-lights decision
on FSRU Independence acquisition Lithuanian LNG terminal operator Klaipedos Nafta
(KN) has approved a decision on the acquisition of the FSRU Independence from Hoegh LNG at the end of
its lease agreement in 2024. – Offshore Energy) This small Baltic State of fewer than three
million inhabitants has managed to get rid of Russian gas completely and in record time.
It did so by commissioning the Independence floating regasification plant in 2014. It did
so precisely in order, if necessary, to be able to do without Russia.
In addition, this infrastructure is allowing the
Baltic country to export regasified LNG to Latvia, Estonia and Finland.
[By the way, do you know where most of the gas that is processed in this plant comes
from? Exactly, from the United States. And we will see in a moment that this point is key.
In any case, the question you’re likely wondering is... How on earth is it possible
that a small country like Lithuania bet on having alternatives to Russia way back in 2014
and thus guaranteed its energy security, while others like Germany did absolutely nothing?
Maybe these headlines have something to do with it?
N3 (Russian spies suspected of infiltrating German government, according to report
The domestic intelligence service is said to be investigating 2 officials
who work on energy supply – Politico) Be that as it may, all that has now changed.
The war in Ukraine, the sanctions, the Kremlin's energy blackmail... All this is forcing Europe
to look for alternatives to Russia. And as the neighbors that are able to supply gas
through pipelines, such as Algeria, Azerbaijan or even Israel, are not enough to replace Russia,
now three little letters are being heard in all corners of the old continent: L-N-G
But obviously, for Europe to start using LNG in large quantities, four things are needed:
First, sufficient gas production. Second, liquefying plants at source.
Third, available LNG carriers.
And four: sufficient regasification plants at the destination.
This is basically the liquefied natural gas supply chain. And as central Europe is in short
supply, we are almost certain to see major investments in the coming months and years.
N5(Ukraine war puts plans for German LNG terminals back on the table – Clean Energy Wire)
N6(Europe's dash for new LNG import infrastructure picks up pace – Energy Bulletin)
For the time being, and despite all the limitations, LNG imports are breaking records.
By the way, can you guess which European country has the most LNG infrastructure? 3,
2 1, exactly, Spain. We have already mentioned this on VisualPolitik.
Look at this map. On it we can see the European network. And as you can see,
Spain is by far the country with the most regasification plants in operation.
Spain alone has no less than 27% of all the regasification capacity in Europe and more
than a third of the current storage capacity. However, in 2021 Spain barely used around 30%
of all this capacity. In other words, the surplus for being able to supply
Europe would be quite large. However, there is a problem: Spain is virtually an energy island.
There is only one gas pipeline crossing France and its capacity is very limited.
And to make matters worse, the French want nothing to do with this option.
N7 (Germany's Olaf Scholz proposes gas pipeline linking Spain and
Portugal with Europe – Euroweekly News) N8 (Spain says gas pipeline to France
possible in 8-9 months – Reuters) N9 (France dashes Germany's biggest
hope to revive its economy
Spanish officials suggest that Paris fears competition for its hydrogen energy exports.
[Paris stresses that Berlin's plan is impractical and stupid. The French ministry complains that
it would take many years to complete just the planning and other documentation. – TFI Global)
You know, the same old story in Europe. Now, wait a minute, because in any case,
just having the infrastructure is not enough. You also need suppliers. And that is not easy at the
moment. The industry is working at almost full capacity, and it will take a few years for new
investments to be able to supply more gas. However, it is hoped that one country can
come to Europe's rescue. Of course, charging the corresponding bill.
Can you guess who we are talking about? Well... Listen up.
T1(UNITED STATES: EUROPE'S LAST HOPE?) In a past video we told you how Qatar has
become one of the great kings of liquefied natural gas exports. Along with Australia and the United
States, it is one of the three major LNG powers in the world.However, the Persian Gulf nation has
a problem. The vast majority of Qatari LNG is already subject to long-term contracts,
in particular with Asian countries. This means that they have hardly any
margin to respond to the sudden increase in demand in Europe.
So imports of Qatari LNG through one-off, ship-by-ship purchases – what is known as the
spot market – may help... But marginally. In the short term it will not be a viable alternative.
At least not until the end of 2025 when the first phases of the huge production
expansion being developed by the Arab country are expected to be complete.
And with Australia, something similar is happening. In addition,
the distances involved favor sales that are mostly destined to nearby
Asian countries. Basically, the shorter distance means that a ship can make more
round trips, which increases gas sales. However, the situation in the United States
is very different. In this case, its spot
market has more margin. Among other reasons because the North American power has huge,
gigantic, enormous quantities of gas... Which, until a few years ago, it did not export. Now,
however, they are getting ready to do so. It promises to be a multi-million dollar business.
Take another look at the graph we were showing a moment ago: have you seen how
exports from the United States are growing? Well, this is where Europe's great hope lies.
The United States has become the key country for Europe being able to replace a large part
of Russian gas within a reasonable period of time. For example, the European Union's current
objective is that by 2027 at the latest, member countries will be able to completely do without
Russian gas. N10
(The US has become the world's top LNG exporter as it funnels supply to European consumers at
the mercy of Russia – Markets Insider) As you can see, the US industry is making
headway at full speed. And Europe has become its preferred customer.
To put this in perspective, while in 2021 the United States exported
on average 29 percent of all its LNG to Europe, in the first three
months of 2022 more than 60 percent of US liquefied natural gas went to Europe.
Now, the question is, does the United States really have that much gas? Well... The truth
is that it does. Look at this graph.
What you are looking at is US natural gas production. As you can see,
production, which is at record highs, has skyrocketed in the last 15 years thanks to
a technology that changed everything: fracking. In fact, shale gas, which is what gas produced
by fracking is known as, accounted for around 79% of all gas produced in the United States in 2021.
Enormous growth in gas production has led to production far exceeding consumption, which now
allows them to export gas in large quantities. As we have told you in the past here on
VisualPolitik, fracking technology has been a real turning point.
Now the potential oil and gas reserves have multiplied. This is a reality that
the United States is taking extreme advantage of.
By the end of this decade, the United States is expected to export to Europe
at least a third of all the gas that the old continent used to buy from Russia.
But the opportunity is not exclusively theirs... Among other factors, because as you can see it
is not enough. Even taking into account the new capabilities of Qatar and many other countries,
to completely replace purchases from Russia seems an impossible mission....
Except perhaps for one possibility that for the moment Europe continues to rule out:
What do I mean? Well... Pay close attention to the following map. On it you can see the
results of a 2011 study by the US Energy Information Agency,
which sought to compile much of the world's estimated shale gas reserves.
In addition, a report by the European Commission itself in 2017 assessed 49 of
the 81 estimated shale formations on the old continent. According to this report,
Europe could have at least 90 trillion, yes, I did say trillion, cubic meters of shale gas.
This would be enough to cover almost two centuries of Europe's current consumption. It is evident
that given this data it is quite possible that if Europe could get its act together,
new economically viable gas exploitations could cover a good part of its consumption.
In other words, the difference between the United States and Europe is basically that
the North American power has taken a gamble on doing business with this industry.
But let's not get sidetracked. Because, in spite of everything, this possibility does
not seem to be in Brussels' plans. As you can see, the United States is
becoming a major player in the international gas market. It’s a new business that will bring in
tens and tens of billions of dollars every year. However, Europe has another problem: it is not the
only customer competing for this type of gas. Have you ever wondered why the price of gas has
suddenly increased so much? Well... Listen up.
T2(THE GAS WAR) The war in Ukraine and
the European sanctions on Russian gas have not only sent gas prices soaring, they have
also shaken the very foundations of the market. You see, countries such as South Korea and Japan,
that have been betting the most on liquefied natural gas for years have done so because,
until now, it was a relatively stable and not very volatile source of supply.
A reliable and predictable market, with few jumps in prices,
which ensured a secure and constant supply. However, all of that has now gone out the
window. It no longer exists. At the time of making this video, the LNG market is
as close to a bazaar as you can imagine. We are talking about a market in which the
highest bidder takes all. And given the scarcity that exists, it’s fair to say that every now and
then we see real slaps in the face. You see, although long-term contracts
are respected, there is a part of the demand that is covered by the spot market, that is,
buying shipload by shipload. And right now this particular market is totally out of control.
In fact, there are low-income countries that run the risk of running out of gas basically
because they cannot afford to pay for it. N11(South Asia Buyers Again Sidelined by High
LNG Spot Prices – Natural Gas Intelligence) To give you an example of what this means,
there are many cases of ships already loaded with LNG and sailing to Asia that
suddenly change course for Europe simply because a buyer is offering to pay more.
This happens especially with cargoes coming from the United States and Australia,
which are governed by the so-called free-on-board system.
In this case, the middleman who buys the gas is the owner of this resource from the very
moment the ships are loaded. So during the time it takes to reach port they continue to
negotiate in search of a higher bidder. The fact is that this has unleashed a
huge bidding war between Europe and Asia. Which naturally has contributed to skyrocketing prices.
While US LNG sold for between $4 and $8 per million British thermal units
in 2021 on average, now the futures price has soared to $60 and even $70.
Not only that, in total, LNG exported to Europe during the
first three months of 2022 was priced at an average of more than $30 dollars,
that is about seven times more expensive than a year earlier.
And, obviously, European countries, especially those with colder winters or more gas-intensive
industries, are trying at all costs and at any price to replenish their reserves for the winter.
And that's caused the market to explode. But okay, now that we know what role the
US could play and also why gas prices have gone crazy, here’s a few questions for you:
Do you really think that the United States could be a clear alternative to Russian gas?
Will European countries manage to withstand the cold winter and gas shortages until the
LNG infrastructure is fully ready? What other alternatives are there?
You can leave us your answers in the comments. And now, if you found this video interesting,
don't forget to like and subscribe to VisualPolitik if you haven't already done so.
Thank you very much for being there, All the best and see you next time.