Germany and other European countries are rapidly replacing Russian gas with liquid gas – which other countries have previously imported. Energy-hungry industrialized countries are driving up prices so much that developing and emerging countries are at a disadvantage. Because LNG has become a scarce commodity. This leads to an expansion of capacity up to overcapacity – the beginning of a so-called pig cycle, including a fall in prices. But that would not last long, as Sebastian Gulbis, partner at the energy consulting company Enervis, explains in an interview with ntv.de. He doesn’t see an alternative to gas, at least not for the moment.
ntv.de: Infrastructure for the import of liquid gas is being created at a record pace by German standards. Are other countries now missing the LNG we import?
Sebastian Gulbis: Even before the current energy crisis, there was intensified competition for LNG because, among other things, there was an increased demand for natural gas due to the economic upswing in Asia and a drought in South America. Now Europe also wants to import more liquid gas to replace Russian pipeline gas quantities and is massively expanding its regasification capacities. LNG is liquefied for transport by ship and then regasified at the destination, i.e. converted into gas. As Europe is willing to pay high prices for LPG, it continues to become more expensive and scarcer. Certain countries are therefore no longer supplied with the same quantities of LNG, yes.
Which countries are particularly suffering from our surge in demand?
Mainly developing and emerging countries. Reports come from Pakistan, Bangladesh and Thailand, for example. We don’t “steal” their gas. But because the energy-hungry industrialized countries are willing to pay more, companies are no longer supplying these countries, or only in reduced quantities. An addition of higher liquefaction capacities could compensate for the higher LNG demand, which would have a price-reducing effect. It is therefore a combination of price and quantity. If we continue to expand our regasification capacities in Europe, i.e. import even more LNG than before, but the LNG supply does not increase, the current imbalance between supply and demand would widen further. We assume that liquefaction capacities will not catch up until 2025/26, so the situation may get even worse by then.
Also the price? The gas price is already recovering.
The price will only calm down in the long term when sufficient LNG is available on the world market again, i.e. when supply and demand are in line again. In addition to additional liquefaction terminals, gas fields must also be developed for this, for example the USA must expand fracking; in addition, the global tanker fleet must be increased accordingly. Then the market will settle down again, even if it becomes more expensive for Europe than it was in the days of pipeline gas before the current crisis.
What is the price determined by at the moment?
Currently, the price in Europe is determined less by LNG production costs and LNG supply than by the expectation that industry will have to further reduce production and household consumption in order to bring supply and demand in Europe into line. In Germany we still have latent uncertainty as to whether there will be enough gas. The price keeps rising until industrial customers are no longer willing to pay it and instead reduce production. Then gas will be free for other customers. That is why the price is currently well above the production costs.
Where can Germany import LNG from in the future?
The companies that import it decide that. The USA tends to come into question, but also countries in the Middle East that are building up the relevant capacities. However, there are still many question marks: Do countries like Qatar want to invest and even deliver to Europe when the economies of Europe are supposed to be decarbonized in about 20 years and there will no longer be a need for LNG? Europe needs to sign long-term LNG contracts, guarantee offtake and see how this aligns with our climate goals.
Where do the other European countries shop?
Eastern Europe, Germany, but also Austria and Italy have to replace the lost Russian quantities. In the past, the large gas flows flowed from the east and Norway to the west, LNG was particularly relevant for Spain, France and Italy. Now the gas flows reverse from west to east. At the German border with the Netherlands, Belgium and France, for example, the transport capacities in the pipelines are no longer used from Germany towards these countries, but the gas flows in the opposite direction, as these countries in particular are currently importing LNG and to markets further east deliver.
Are developing and emerging countries losing out only on the spot market, or are gas producers even terminating existing contracts with previous customers?
Large quantities will certainly be withdrawn from other target countries in the short-term market. Here it is comparatively easy to divert LNG tankers and arrange new short-term contracts with delivery to high-priced markets. Long-term contracts are usually difficult to break during the term, although there may be such cases. However, there are provisions in some long-term contracts that allow LNG volumes to be brought into different markets or other ways to reduce or increase volumes within certain limits. This flexibility can certainly be used to ship LNG to developed country markets.
Will emerging and developing countries at least continue to be awarded long-term LNG supply contracts that will be newly concluded in the future?
I assume so. There are good reasons for LNG exporters to sign up emerging markets as customers. The future increase in demand for gas and the thirst for energy in these countries make it possible to open up a comparatively secure market and win a long-term partner for acceptance. In addition, the current distortions in the market are mainly due to the lack of Russian gas supply volumes. The market is expected to recover, which means that the current high-price phase has only a comparatively small impact on price agreements for long-term supply contracts.
Will these countries also buy their gas in Russia in the future?
Jein: That is possible, but only in a few years. The necessary infrastructure for the gas fields from which Russia has so far supplied Europe is still lacking. LNG export opportunities from these fields are limited. Russia would first have to connect the gas fields to the coast by pipeline and significantly expand the liquefaction capacities there. The existing Russian pipeline to China is currently not connected to the fields originally responsible for the European supply. We do not expect such a pipeline until the late 1920s.
How long does it take to build additional LNG production capacity?
In the low price phase in the first half of 2021 – i.e. before the price increase in the second half of 2021, which is then massively intensified by the Ukraine war – many terminal projects were put on hold because they were not worthwhile at the time. Many of these projects are now resuming and could be completed in 2025/26. Projects that are only just beginning will not be finished until the second half of the 2020s.
How useful is that anyway? According to a study, LNG overcapacities are currently being built up worldwide.
LNG trading currently accounts for a good half of international, i.e. cross-border, gas trading, so it is already of great importance. In the future, a so-called pig cycle could arise: due to corresponding market signals, so many projects are set up that overcapacities arise. The price would then drop sharply, leading to consolidations in the market until the market settled down again. This can be followed by a phase of a brief undersupply with corresponding price signals to increase capacity. An overcapacity of global liquefaction capacities may occur in the short term, but probably not in the long term. Even if Europe pursues a decarbonization strategy, natural gas and thus also LNG will play a decisive role in the global energy market.
Wouldn’t the money be better invested elsewhere, for example in renewable energies or building insulation?
If we build up overcapacities in regasification capacity in Germany, the main reason is that we want to get through the next four or five winters without Russian gas. In my opinion, we could not reduce consumption that much in that time, for the building insulation alone there is a lack of craftsmen. This is an economic problem that cannot be solved so easily and, above all, quickly. With renewables, bureaucracy and correspondingly long planning phases are a major obstacle. Even if this is to be accelerated, in the current gas market we are talking about an order of magnitude that cannot be replaced by renewables so quickly. In addition, the infrastructure of transport and distribution as well as the devices in buildings and industrial customers would have to be rebuilt. If you heat with gas, electricity is of little use at first.
When will we stop using gas for heating?
I am assuming that gaseous fuels will also be needed within the heating market for a very long time to come. A specific building infrastructure such as sufficient insulation and large heating surfaces is required for heat pumps, which is not available across the board in existing buildings. Therefore, gaseous fuels will continue to play a role in the future. In the future, however, we will no longer feed these customers with natural gas but with hydrogen. In the future, our LNG regasification terminals will also be used for hydrogen imports.
Christina Lohner spoke to Sebastian Gulbis