Rystad Energy’s  gas and LNG market note from vice president Sindre Knutsson

The market is reacting to the European Union and United States joint statement yesterday, as new goals has been settled to reduce the energy dependence on Russian gas. This has major implications for long-term LNG demand in the EU and LNG projects in the US.

Extract: The United States will strive to ensure, including working with international partners, additional liquified natural gas (LNG) volumes for the EU market of at least 15 bcm in 2022 with expected increases going forward.

Rystad Energy’s view:

The baseline in unclear but the US has supplied 25 bcm (billion cubic meters) to Europe during 2021 and has already supplied an extra 8 bcm from Jan to Feb 2022 vs Jan to Feb 2021.

The US can easily exceed this 15 bcm target, as European price signals on the TTF are likely to far exceed Asian spot prices.

As such the 15bcm target is unlikely to have little short-term impact but indicates US intentions to supply more LNG to EU this year and is likely to inject confidence in Europe gas supplies.

Extract: The United States and European Commission will undertake efforts to reduce the greenhouse gas intensity of all new LNG infrastructure and associated pipelines, including through the use of clean energy to power onsite operations, the reduction of methane leakage, and the construction of clean and renewable hydrogen ready infrastructure.

Rystad Energy’s view:

This is a u-turn from previous EU purchasing decisions as many buyers had stopped negotiating with US developers for LNG due to ESG (environmental, social and governance) concerns.

Now however it appears that energy security has trumped ESG concerns at least temporarily. In the medium term, this has incentivized US producers to improve their emission footprint.

Europe’s new role as a significant LNG importer has therefore resulted in the unexpected consequence accelerating emissions reduction in US LNG.   

Extract: The European Commission will work with EU Member States and market operators to pool demand through a newly established EU Energy platform for additional volumes between April and October 2022. The European Commission will also support long-term contracting mechanisms and partner with the U.S. to encourage relevant contracting to support final investment decisions on both LNG export and import infrastructure.

Rystad Energy’s view:

The exact mechanism for pooling demand is unknown, but this should increase the buying power of the EU and mitigate risks of EU members competing for the same molecules.

Supporting long-term contracts is also a u-turn from previous positions, where the EU has actively supported short-term contracts trading and flexibility.

For US projects, the new market in the Atlantic may bring back projects that were put on ice.

Extract: The European Commission will work with EU Member States toward ensuring stable demand for additional U.S. LNG until at least 2030 of approximately 50 bcm/annum, on the understanding that the price formula of LNG supplies to the EU should reflect long-term market fundamentals, and stability of the cooperation of the demand and supply side, and that this growth be consistent with our shared net zero goals. In particular, price formula should include consideration of Henry Hub Natural Gas Spot Price and other stabilizing factors.

Rystad Energy’s view:

We understand this to mean that the majority of this 50 bcm is likely to be from long-term contracts.

This will underpin at least 35 MMtpa of new US liquefaction capacity equivalent to 7 trains at Sabine pass and require up to 35 billion dollars of investment.

It is likely that US developers may seek to increase the tolling fee on US contracts given the bullish sentiment.

The currently isolated Henry Hub may exhibit greater exposure to events over-seas. 

Extract: The EU is preparing an upgraded regulatory framework for energy security of supply and storage. This will enhance certainty and predictability regarding security of supply and storage needs and ensure closer cooperation within the EU and its neighboring partner nations. The European Commission has proposed regulation on energy storage to ensure that the existing storage infrastructure is filled up to 90% of its capacity by 1 November each year, with specific phase-in provisions for 2022. The European Commission will coordinate with the Member States and provide transparency with respect to available LNG capacity in EU terminals.

Rystad Energy’s view:

Interestingly there is no statement about reducing Russian gas purchases this year.

This may be why the goal to fill 90% of European storage is back on after being reduced to 80% earlier in the week.

The return of the 90% target indicates confidence from both the EU and US in their ability to provide sufficient LNG to meet demand.