Sunday, February 27, 2022

LNG: Germany preparing for LNG imports

 With Russia as designated gas provider falling out due to the russian invasion of Ukraine and president Putin's unpredictable behaviour, Germany is carrying out a change in gas import, more precisely turning to US LNG (WELT):

On the high seas, in the middle of the Indian Ocean, the "Minerva Chios" suddenly changed course. The ship came from the USA and was almost there, but then it turned 180 degrees, turning from south-east to north-west. The captain had been assigned a new port. He should no longer head for Asia, as originally planned, but for Rotterdam. Apparently someone in Europe was offering more money for their cargo.

The "Minerva Chios" was loaded with liquid gas or "Liquefied Natural Gas", as it is called in the industry, LNG for short. These three letters have been at the center of world politics since the beginning of the Ukraine crisis. It's about the question of where millions of Europeans should get the raw material with which they heat and operate many of their power plants.

Because Russia, the most important gas supplier for Germany and the entire continent, has made itself an outsider by attacking Ukraine. An unpredictable aggressor who can no longer be trusted. Germany must look for alternatives to Russian natural gas, says Federal Minister of Economics Robert Habeck (Greens), otherwise you will become "a pawn".

Is liquid gas from America, like it was on board the "Minerva Chios", the better solution for Germany? Or is it too expensive? After all, Asia also wants LNG, so there is a risk of a price war. Europeans are already paying a lot of money to import liquid gas. 27 cubic meters or one million BTU – the raw material is traded in this unit – currently costs around 28 dollars. That's four times what it was in early 2021 and 17 percent higher than the price in Asia. It is therefore worthwhile for suppliers to divert LNG tankers to the EU.

Robert Habeck would of course like to make Germany self-sufficient with wind and solar power. But that takes too long. After 20 years of energy transition, renewable energies only cover 16 percent of the demand, the rest is still fossil and is mostly supplied from Russia. Of the 21 million heating systems in Germany, 14 million run on natural gas. To believe that green electricity can quickly replace this gas is illusory.

On Sunday, Chancellor Olaf Scholz (SPD) reacted to the dependence on Russian natural gas: he announced the construction of two terminals for liquefied natural gas in Germany. Scholz named Brunsbüttel and Wilhelmshaven as locations in the Bundestag.

Quick fixes are also needed now. Because nobody knows what Vladimir Putin will do next. "Russia has not only mobilized its army," says Samantha Gross of the Washington think tank Brookings, "the state is also turning its raw materials into weapons." Putin is reducing supplies for political reasons. The gas from its pipelines covers only 17 percent of European demand, about half as much as a year ago. "Moscow meets the minimum contractual delivery obligations," explains Gross, "no more."

If Putin stops deliveries completely, the consequences for Europe would be devastating. "In the event of a prolonged disruption in Russian supplies, the stores could not be replenished over the summer," warns Kateryna Filippenko, an analyst at consulting firm Wood Mackenzie. And then a catastrophic situation threatens next winter. Prices would skyrocket, industrial companies would have to close. An inflationary spiral is possible. "The European energy crisis," believes Filippenko, "could definitely trigger a global recession."

Only the import of large quantities of liquid gas could prevent such a scenario. The abrupt change of course of the "Minerva Chios" on the high seas shows how flexibly the LNG market can react to changes in supply and demand. The only problem is that a global struggle for the raw material is emerging. And that threatens to make securing Germany's energy supply an extremely expensive affair.

It is a global zero-sum game: what Europe buys, Asia lacks. Japan in particular has hardly any energy resources of its own. The country relies on nuclear power and LNG imports. According to the International Trade Administration, the Japanese are the world's largest buyers of the frozen gas. They spend more than $30 billion a year on it. 21 percent of global LNG production ends up in tankers in Yokohama and other Japanese terminals.

Earlier this month, Japan promised to send aid to the EU. The government has agreed to voluntarily divert some LNG shipments as long as this does not endanger its own security of supply. But things won't stay that peaceful for long.

Consumers have to adjust to higher prices

According to Julien Hoarau of EnergyScan, the analysis platform of the French energy giant Engie, Europe will only be able to attract gas tankers in larger quantities in the future – unless the importers put in even more money. What that would mean for consumers is clear: prices will continue to rise.

Transport with ships like the "Minerva Chios" is expensive, since the gas has to be cooled down to minus 162 degrees Celsius in the ports of departure so that it can be liquefied and loaded. The beneficiary of all this is America. In the Ukraine crisis, the country has risen to become the world's most important LNG supplier. For the first time, the US now exports more than Qatar and Australia.

Russia and Saudi Arabia, the leaders of the powerful Opec oil cartel, are considered by the public to be energy superpowers. Now that includes the United States. They only started selling their gas in 2016 – and already cover a fifth of global demand. "The Ukraine crisis and Europe's energy crisis," says Daniel Yergin, something of America's energy pope, "are putting the spotlight on the geopolitical importance of American oil and gas production."

Meanwhile, says Yergin, who works at the consulting firm IHS Markit, US LNG is even “the critical factor” when it comes to preventing gas shortages in Europe and around the world. In fact, US LNG exports to the EU surpassed Russia's pipeline shipments for the first time last month. And the trend is likely to continue, after all, Germany stopped the Nord Stream 2 Baltic Sea pipeline, which was supposed to bring gas from Russia to Mecklenburg-Western Pomerania.

For America, it's a win-win situation. For one, the country can free its European allies from dependence on Russian gas. “Freedom Gas” – that was the keyword that ex-President Donald Trump often used. On the other hand, the export is lucrative.

During Trump's tenure, the gas industry boomed, and new liquefaction plants were built in rows on the Gulf of Mexico. Now they are being used to ship gas around the world from Texas, Pennsylvania and Louisiana. It could also give the US the “energy dominance” that Trump once aspired to. Putin of all people is helping America to achieve an important foreign policy goal: control of liquid gas.

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