Winter is coming, and liquified natural gas may run into a supply shock
If you are inclined to internationalist leanings, then you might want to raise a glass of epic Thai whiskey to the capitalist hedge that saved Europe and the energy markets from the panic that never quite materialized after Vladimir Putin’s invasion of Ukraine. Granted, this was partially due to blind luck: Europe had two very mild winters allowing them to top up supplies of liquified natural gas – 40% of which had been supplied by Russia. The cut-off was never complete, like the nuclear option, Moscow does seem to understand that the threat of cutting off all the gas is more effective than actually doing it.
Russian gas still flows to Europe via pipelines running through Ukraine, although at about half the pre-war levels. Europe still buys the stuff from Russia, which still pays Ukraine a royalty on the pipeline. That contract expires in December. It’s one thing to maintain an existing contract during war, it’s another to negotiate a new one. Europe’s luck may run out: if the weather people are right is going to be a cold one. The major pipeline shutting down on 1 January is going to be a problem.
At the height of the 2022 gas panic the world’s liquified natural gas (LNG) suppliers reckoned that they had two years to find a work around Russia’s stranglehold. A plan for Egypt to supply LNG to Europe has fallen apart. More pressing, a joint venture, of QatarEnergy and ExxonMobile, called Golden Pass, was projected to keep supplies plentiful and prices down. It has been thrown badly off schedule as its lead contractor filed of bankruptcy after a dispute of $2.4bn in cost overruns. The project has since been awarded to another contractor and is moving ahead but the delays are stacking up.
This is a blow to the green energy realists (there is no talking to the true believers) - LNG is currently the quickest, cheapest and cleanest ramp to a green transition. While Europe has plenty of nuclear power, it has shuttered it coal-powered plants. The latter will reopen if LNG prices get high enough. Currently, they are hovering around $13 per million British thermal units (mBtu) - the highest since the panic in 2022.
Projections are that a nasty winter will increase demand by 4-8% as Europe has maxed out its pipeline capacity (which may decrease when the Ukraine pipeline contract lapses) those supplies have to come overseas. The shortest route is from the Persian gulf, but the uncertainty of a wider Middle Eastern war is affecting more than oil prices: the Houthis are still dicking around at the mouth of the Red Sea, the quickest route to European ports.
That leaves US LNG projects: Joe Biden didn’t help prices when he threw a bone to the true believers with that moratorium on permits for new LNG export terminals, but practically the move didn’t much harm either. The existing export permits already outstrip domestic production and since the moratorium was an executive order, it can quietly lapse when needed. The real problem is construction delays mean that actual US new LNG export capacity will be little better than half forecast levels.
Why Should You Care:
Anne-Sophie Corbeau of Columbia University reckons that prices will climb even higher over the next year before things look like they’ll get any better. The energy market is global, and while US supplies are solid, prices will likely go up. Europe’s economic recovery is coming along in its geriatric way after the double blows of the pandemic and the Russian War. An energy panic might crippled its largest economy - manufacturing heavy Germany. A gas crisis will this will knock whatever progress its made off course.
A hobbled EU not only encourages Russia, but China as well, and to a lesser extent Iran. More to the point, the entire Eurasian landmass and Africa - and all its resources - move out of US markets.