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Europe’s rush for natural gas could cause energy crisis, analysts warn
Liquified Natural Gas

Russian oil embargoes have boosted demand for liquefied natural gas, a source of energy primarily imported by Asia since 2010.

Europe’s struggle to find alternatives to Russia’s natural gas is pushing the world to the brink of a winter power shortage, with the worst effects likely to be felt in Asia’s poorest economies.

Since Russia invaded Ukraine, the European Union has tried to reduce its dependence on Moscow for energy.

EU countries are racing to buy more liquefied natural gas (LNG), an attractive alternative to Russian gas because it can be shipped by tanker rather than delivered via pipeline. It is also a cleaner fuel than coal or oil.

But if the bloc manages to “dramatically reduce” its dependence on Russian gas — the plan is to reduce its consumption by two-thirds by the end of this year — global demand for LNG will exceed supply by 26 million tonnes by the end of 2022, from according to a recent analysis by consultancy Rystad Energy.

This equates to nearly 7% of global LNG demand last year or about 25 days of supply.

“By avoiding Russian gas, Europe has destabilized the entire global LNG market that started the year off-balance after a tumultuous 2021,” the report said.

Europe buys LNG

Europe has snapped up LNG supplies at breakneck speed in recent months.

The region, including the UK, imported 28.2 million tonnes between February and April, according to data from the Independent Commodity Intelligence Services — a 29% increase over the same period last year. France and Spain were the biggest buyers.

Kaushal Ramesh, senior gas and LNG analyst at Rystad Energy, told CNN Business that an impending shortage became apparent in March, when “the EU announced it would increase LNG imports by 50 bcm (billion cubic meters) relative to 2021”.

“The stage is set for a sustained supply deficit, high prices, extreme volatility, bull markets, and heightened LNG geopolitics,” Ramesh said in the report.

On Thursday, spot prices for LNG in East Asia were up 114% from the same day last year to $22 per million British thermal units (mmbtu), according to ICIS data.

Global LNG trade grew by 6% in 2021, driven by a strong post-pandemic recovery in demand from Asia, data from the International Energy Agency show.

Buyers could be hit by further price increases as European demand soars.

LNG prices are strongly linked to the prices of natural gas from Europe supplied by pipelines. Benchmark prices for European gas futures are currently hovering near $30 mmbtu — down from a record $67 in March — but could rise by more than $100 mmbtu if Russia completely cuts its gas deliveries suddenly, as it has already done for Poland, Bulgaria, and Finland.

Asia loses

Asia has been the biggest importer of LNG since at least 2010, Ruth Liao, editor of LNG Americas, told CNN Business. But some buyers in the region will find it difficult to compete with Europe’s richer economies and could be pushed out of the market whether or not Russia abruptly shuts the taps.

“The coming winter remains a big risk in terms of how LNG supplies can balance competing demand between Europe and Asia,” she said.

Rystad’s Ramesh said countries like India, Pakistan, and Bangladesh are more likely to take the brunt as LNG is diverted to Europe.

Buyers should start signing long-term supply contracts, Eric Heymann, a senior economist at Deutsche Bank, told CNN Business.

“A larger share of LNG demand and supply is based on flexible, short-term, or spot market contracts,” he said. “The price will decide where the LNG goes.”

Since November, India, and Pakistan have already reduced LNG imports by 15%, according to data from analytics firm Vortexa, a trend mainly driven by rising prices.

As a result, demand in Asia could be “permanently hampered”, with some countries having to increase their use of coal and oil, predicts Rystad Energy.

Others could step up their transition to renewable energy. LNG is widely seen as one of the cleanest fossil fuels and a key component of the energy transition. But the evidence is mixed.

Some studies have found that LNG produces significantly less greenhouse gas emissions over its life cycle, while others have detected high leakage rates of methane — the main component of LNG — at various points during its production.

Methane contributes up to 34 times more to global warming over a 100-year period than carbon dioxide, according to the United Nations.

Boom for exporters

Higher prices are a boon for major LNG exporters including the US, Qatar and Australia.

Europe has imported about 45% of its LNG from the United States in the past two months, according to Vortexa. Qatar supplied the bloc with just over a fifth.

“More controversially, 13.5% of European LNG still comes from Russia’s Arctic LNG project,” Felix Booth, Vortexa’s head of LNG, told CNN Business.

A flurry of new or revived LNG projects is trying to capitalize on Europe’s urgent need for the energy source, including in Germany, which still receives 35% of its imported gas from Russia.

Europe’s largest economy has announced plans to build two LNG receiving terminals and RWE (RWEOY), one of its major energy companies, is on the verge of signing a 15-year supply agreement with US LNG producer Sempra.

But producers are not able to move fast enough to avoid a global shortage this winter.

“While rising demand has spurred the biggest rush of new LNG projects worldwide in more than a decade, construction deadlines mean material relief is unlikely only after 2024,” Rystad Energy said.

Source: With Agencies

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