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A paradigm shift in European LNG imports

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LNG Industry,

Dr Matthew Chadwick, Lead Research Analysis, and Sam Peek, Senior Analyst, Cornwall Insight, consider the factors affecting the European LNG import market, and how they might be overcome.

The Russian invasion of Ukraine in February 2022 sent shockwaves across the globe, not least within the energy sphere. Prior to the invasion of Ukraine, the EU and its member states had a significant and long-standing dependence on Russian natural gas, with Russian pipelines supplying >40% of Europe’s natural gas, over double the contribution from the second largest source (Norwegian pipelines). However, with the continuing conflict in Ukraine, pipeline natural gas supplies from Russia have dwindled to minimal volumes, with an 85% reduction in 2023 weekly imports compared to the 2015 – 2021 historic average.

To meet this supply deficit, Europe has pursued a joint dual strategy of reducing gas demand and sourcing alternative supplies of gas. The primary balancer from the supply side has been LNG, with a large scale shift to the widespread adoption of LNG to meet gas demand. This has resulted in a significant increase in the volumes of LNG imports to Europe.

European imports

In early 2022, Europe rapidly accelerated the level at which it imports LNG. How-ever, the global supply network and resource of LNG was not positioned to facilitate this significant uptick in European demand. Similarly, there are only small volumes (~8 billion m3) of additional LNG supply due to come online this year. This raises two questions: How was Europe able to secure such unprecedently high levels of LNG during 2022 and 1H23? And, will it be able to continue to do so?

Historically, the UK and EU have had to compete with other major importers of LNG on the global market – primarily the Far-East regions, and China in particular. This has traditionally led to a competitive pricing environment as they sought to secure those volumes, with China typically being prepared to pay a higher premium to secure shipments. However, in 2022, Chinese demand for LNG was 20% lower than in 2021, primarily due to their continuation of strict COVID-19 lockdown restrictions weighing on economic and industrial activity. Nonetheless, overall, natural gas demand in China was only ~1% lower in 2022 than 2021, indicating that it was also substituting LNG imports with other sources of gas during 2022. The reduced Chinese demand for global LNG supplies in 2022, therefore, allowed Europe to procure higher levels of LNG in a less competitive purchasing environment.

Increasing investments

The UK and EU have made consolidated efforts to ensure LNG becomes an integral part of ongoing security of supply measures, with the EU reportedly investing around €10 billion in diversifying gas imports through both LNG and pipeline supplies. At the member state level, Germany has implemented simplified licensing for LNG terminals alongside commissioning its first floating terminals at Wilhelmshaven, Lubmin, and Brunsbüttel, with a further two floating terminals expected at the back end of 2023.

As part of its Energy Security Strategy published in April 2022, the UK highlighted that it intends to act as a key EU entry point for global LNG, leveraging the well-developed existing LNG import infrastructure at deepwater ports throughout the UK. This infrastructure can accommodate higher volumes of LNG coming in from the west which can then either be redistributed domestically or regasified and sent out to mainland Europe via the Interconnector UK (IUK) and Bacton-Balgzand Line (BBL) gas interconnectors. All these developments indicate a clear shift in policy and regulatory support to accelerate the import and transport of higher LNG volumes into, and around, the UK and EU.

Existing partnerships

The UK and EU have built upon strong existing international partnerships with major exporters of LNG, which primarily consists of the US and Qatar, with the overwhelming majority of volume reaching UK terminals in the last year coming from these two countries. Some market reports suggest that by the end of the decade, approximately 80% of new LNG supply will come from the US and Qatar. Therefore, it is important that both EU and UK gas hubs cement long-term deals with these exporters in order to reduce the quantities that need to be sourced from the global LNG spot market, where exposure to price volatility is much greater and the purchasing landscape could be more challenging and competitive. The UK has secured some notable longer-term deals for LNG, one of which was signed in December 2022, which should see the US provide almost double the level of LNG to the UK than in 2021 – expected to equate to approximately 9 – 10 billion m3.

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