The US will work with international partners to supply Europe with at least 15 billion cu m (bcm) of liquified natural gas (LNG) in 2022 to wean off the European Union (EU)’s reliance on Russian energy supplies, according to a joint statement released by the EU and the US on Mar. 25. Increased LNG shipments will be delivered in the future.
The EU aims to cut its reliance on Russian gas by two-thirds this year and end all Russian fossil fuel imports by 2027, because of Russia's invasion of Ukraine. Russia supplies about 40% of Europe's natural gas needs. Supply security concerns intensified this week as Russia will force Europe to start paying for its gas supplies in rubles.
US President Joe Biden described the joint agreement as a “groundbreaking” new initiative designed to “increase energy security, economic security and national security.”
The new goals of reducing the energy dependence on Russian gas would have major implications for long-term LNG demand in the EU and LNG projects in the US.
“The baseline in unclear but the US has supplied 25 bcm to Europe during 2021 and has already supplied an extra 8 bcm from January to February 2022 vs January to February 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 15 bcm 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,” said Sindre Knutsson, vice-president at Rystad Energy.
Other goals
According to the joint statement, the US and the European Commission will undertake efforts to reduce the greenhouse gas intensity of all new LNG infrastructure and associated pipelines, including using clean energy to power onsite operations, the reduction of methane leakage, and the construction of clean and renewable hydrogen ready infrastructure.
“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,” said Knutsson.
Meantime, 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 US to encourage relevant contracting to support final investment decisions on both LNG export and import infrastructure.
The European Commission will also work with EU member states toward ensuring stable demand for additional US LNG until at least 2030 of about 50 bcm/y, 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.
“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,” Knutsson said.
The EU is also 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 Nov. 1 each year, with specific phase-in provisions for 2022. The European Commission will coordinate with member states and provide transparency with respect to available LNG capacity in EU terminals.