- As EU member states seek to reduce their dependence on Russian natural gas, we forecast that the EU's consumption of liquefied natural gas (LNG) will increase by 50% in 2022 to 131bn cu metres.
- The global LNG market will face a supply crunch, with additional demand from Europe being met by diverting cargoes bound for other destinations, mainly in Asia.
- The new LNG production capacity necessary to meet rising global demand will not come on stream until at least 2024 in the US and 2025 in Qatar.
- Even if producers could ramp up production immediately, the EU does not have the infrastructure to absorb the LNG necessary to completely wean itself off Russian gas before 2024.
- The EU has announced a EUR210bn (US$225.5bn) programme to end its dependency on Russian fossil fuels, but less than 5% of that total is targeted at new infrastructure for natural gas and LNG.
Russia's invasion of Ukraine has pushed the EU to boost LNG imports as part of its strategy to reduce dependence on Russian supplies of natural gas. In the short term, additional demand from Europe is being met by diverting cargoes bound for other destinations, mainly in Asia. However, a more permanent restructuring of the global gas market will be hard without a significant increase in LNG supply.
The global LNG market faces a supply crunch as Europe boosts demand
Based on current capacity and investments, there is insufficient global supply to compensate for an abrupt decline in Russian gas deliveries to Europe, even if a slump in Chinese imports and high prices were to temper global LNG demand growth in the short term. If demand outpaces supply in Europe, the only means of closing the gap in the short term is to increase utilisation of LNG production capacity in exporting countries, otherwise bottlenecks are likely. In addition, production capacity has become unreliable in some exporting countries owing to a lack of infrastructure or financing, hurting the supply of feed gas.
So far this year the increase in LNG supplies to Europe has been more or less matched by reduced shipments to other markets, including an uncommon quarterly drop in shipments to China. Most of the increase in sales to Europe has come from the US, where operators have more flexibility than other major producers, such as Qatar and Australia, where long-term contracts predominate. We expect rising EU consumption to boost prices of LNG by about 62% in 2022, after they rose by nearly 30% in 2021.
New LNG production capacity is at least two years away
In the medium term, as demand continues to increase, only the construction of new capacity will fill the gap. Major new projects are under way in Qatar and the US, but these are unlikely to come on stream until 2024-25. Australia will also bring new capacity on stream in 2025-26, but this will be offset by ageing fields and infrastructure at existing gas plants, thereby limiting export growth from the country.
In the US new capacity planned years ago started coming on stream in 2021, but is insufficient to keep up with rising global demand. Other than these projects, there is no new US capacity scheduled to come on stream until 2024, when the first of three 7bn cu metres/year trains being developed at Golden Pass in Texas (in which Qatar Energy holds a 30% stake and ExxonMobil 70%) is set to come on stream. US regulatory authorities have approved a further 15 projects, involving almost 273bn cu metres/year of capacity.
Outside the US, the largest planned additions to LNG supply are in Qatar. The first phase of Qatar's expansion programme is under way, involving the construction of four trains with combined capacity of 4bn cu metres/year scheduled to start up in 2025. A further two trains are planned, which would raise Qatar's capacity to 170bn cu metres/year by 2030.
Can Europe import enough LNG?
Import capacity is another major constraint to Europe's pivot away from Russian gas. The EU member states imported about 344bn cu metres of natural gas in 2021, 155bn cu metres of which was from Russia (mainly by pipeline, but also including LNG), accounting for about 40% of supply. About 30% came from within Europe, while the rest was imported from the US, Qatar, Nigeria and Egypt. Imports of LNG by EU member states were subdued in 2021, totalling an estimated 63m tonnes (equivalent to 86bn cu metres)-down by 12.5% from 2019.
Total LNG import capacity in EU member states is currently just over 170bn cu metres/year, meaning that there is room to boost imports significantly. Germany is working to add capacity of 32bn cu metres/year, including the installation of four floating regasification and storage units (FSRUs), the first of which is expected to be operational by the fourth quarter of this year, according to the German government. Combined with other projects, we expect total EU capacity to reach about 208bn cu metres/year by 2026. Outside the EU, the UK and Turkey are potential sources of gas through their own imports of LNG, but here too interconnecting infrastructure is a limiting factor.
We expect EU member states to increase LNG imports by 50% in 2022, to 133bn cu metres, but this is not nearly enough to end dependence on Russia. Even this import target may turn out to be unrealistic, as pipeline links for transporting gas from Spain and Portugal to the rest of Europe are limited to a single pipeline with only 5.5bn cu metres/year capacity, meaning that much of the LNG capacity in those countries is useless to the wider network. The limited availability of storage at LNG import terminals is another constraint on Europe's ability to meet its gas needs through LNG imports.
Independence from Russian gas by 2025
Overall, we expect high prices to boost investments in LNG export capacity in the medium to long term. If the US and Qatar build the additional capacity as planned, the transition from Russian LNG exports will be more than achievable in the longer term, and we expect LNG prices to fall by about 26% from their current highs by the end of 2025.
For the remainder of 2022 at least, the EU will remain reliant on Russia to cover its gas needs. However, if the Ukraine conflict drags on and sanctions on Russia are tightened, Europe could face chronic gas shortages until at least 2025 and further increases in energy prices, although higher coal use and rising output from renewables could provide some respite. The risk is that producers in the US and Qatar take into account the potential demand destruction that is in prospect in the EU as various industrial sectors cut output owing to high prices or supply disruptions.