- As Europe looks to diversify away from its dependence on Russian gas, the U.S. is on track to start exporting liquefied natural gas by as early as next year.
- Russia remains the largest exporter of natural gas in the world and accounts for approximately 30% of Europe’s gas demand, half of which is transported through Ukraine.
- While the risk of winter supply disruptions will likely further push Europe to seek a more diversified and permanent source of supply, the U.S. is not in a position to help right now.
With no resolution to the Russia-Ukraine conflict in sight, additional sanctions against Russia, including those targeting its energy sector, appear inevitable. The most recent financial sanctions imposed by the U.S. targeted Rosneft, Russia’s largest oil producer, and Novatek, the second largest natural gas producer, but stopped short of including Gazprom, the largest supplier of natural gas to Europe. Given Europe’s dependence on Russian supplies, it appears unlikely that any further sanctions would directly target Russian gas exports. Gazprom recently cut off shipments to Ukraine, and it is possible that Russia could respond to Western sanctions by further limiting natural gas exports into Europe.
As Europe looks to diversify away from its dependence on Russian natural gas supplies, the United States—the world’s largest natural gas producer—is on track to start exporting liquefied natural gas (LNG) by as early as next year.
High dependency on Russian gas imports
Russia remains the largest exporter of natural gas in the world and accounts for approximately 30% of Europe’s gas demand, half of which is transported through Ukraine. While Europe’s dependence on Russian gas via Ukraine is more manageable today than in the past, many countries including Greece, Hungary, Bulgaria and Slovakia remain extremely vulnerable to any disruption in Russian exports.
Russian gas continues to flow to other European countries through Ukraine, but supplies for Ukraine’s own domestic use were cut off in June. Europe’s mild winter last year left natural gas storage levels at historically high levels, and as a result European prices remain at four-year lows. Should Gazprom continue to restrict supplies through the upcoming winter or if temperatures turn out to be colder than normal, European gas prices could move materially higher over the next few months.
The challenge of supply diversification
Europe’s long-term domestic solutions for diversifying away from Russian natural gas imports are somewhat limited, as domestic production remains in decline and shale gas exploration faces significant regulatory and commercial hurdles. European utilities have some optionality to rely more heavily on renewables, coal or LNG imports. Europe has enough spare capacity at its LNG terminals to source supply from Asia which could mitigate the issue temporarily, but this would not be an ideal long-term solution as they would be forced to compete with Japan and other Asian buyers who have traditionally been willing to pay higher prices linked to the price of oil.
Can the U.S. mitigate a gas shortage in Europe?
Since the conflict began earlier this year, there have been calls for the U.S. to assist its European allies who are heavily reliant on Russia for its energy needs. In March, John Boehner, Speaker of the U.S. House of Representatives called for Obama administration to expedite the process for exporting LNG. Other lawmakers in both the U.S. and Europe have called for similar actions.
In late May, the Department of Energy (DOE) proposed a major overhaul of its approval process for non-FTA LNG exports aimed at streamlining the process of granting export licenses. The change would give the DOE a 30-day deadline to approve or deny a project following FERC clearance and would suspend a “conditional” authorization step. The legislation passed in the House of Representatives in June and the public comment period closed on July 21. While projects that already have conditional approval would still need to receive final approval, the rule would accelerate approvals for projects still in queue.
Even with an expedited process, the most optimistic projections for U.S. LNG export volumes call for 8-10 billion cubic feet per day by 2020, which would equate to less than 3% of current global gas demand or about 20% of Europe’s consumption. However, very few LNG export cargoes approved so far are contracted to go to Europe as Asian buyers are generally willing to pay higher prices. Unfortunately, even with the administration making efforts to accelerate the approval process, the U.S. cannot offer a quick fix given that most LNG exports are not slated to begin until 2017-2019 and many of those volumes are already contracted.
While it is unlikely that sanctions will target Russian natural gas exports to Europe, the risk of winter supply disruptions will likely further push Europe to seek a more diversified and permanent source of supply, even at the risk of increasing energy costs for consumers. Unfortunately, the United States is not in a position to help, at least for several years.