Written by 11:00 pm EU Investment

LNG Exporters Face Risk Of Stranded Assets Despite Current Demand Boom

Desperately scrambling for non-Russian gas supply to keep the lights and heating on this winter, Europe is driving a surge in liquefied natural gas (LNG) imports and prices.     The near-term economics of LNG projects are appealing. But if the EU is set to achieve its target to reduce overall gas consumption by 30% by the end of this decade, some LNG infrastructure—both in importing and exporting countries—could become stranded assets. Instead of providing LNG for decades to come, some projects may not be needed anymore, especially if the LNG market turns into a surplus after 2026, as some analysts expect, when several major export facilities currently under construction in top exporters Qatar and the United States come online.  

Gas Demand Reduction

High prices, energy conservation, and industries shutting plants or production lines are all set to drive Europe’s gas demand lower this winter compared to the five-year average. The decline in demand could help prevent European gas storage levels from being totally drained by the end of the coming winter, analysts at Wood Mackenzie said earlier this month. 

Lower gas consumption in Europe, due to demand destruction and energy saving—and the growing possibility of energy rationing—would help gas storage this winter and next, Wood Mackenzie says. 

Still, reduced demand alone cannot ensure adequate supply. European economies, including the largest—Germany—are already reeling from the worsening energy crisis, especially after Russia’s Gazprom shut down the Nord Stream pipeline indefinitely. 

However, gas is still a key part of the EU energy mix, both in heating homes, generating electricity, and fueling industrial processes. That’s why Europe is racing to build LNG import terminals to receive more gas from sources other than Russia. 

Floating LNG Import Facilities

Currently, the faster and cheaper option to have more LNG import facilities is the hiring of floating storage regasification units (FSRUs), Kaushal Ramesh, Senior Gas & LNG Analyst at Rystad Energy, told Financial Times’ Alan Livsey. 

“There are few use cases better suited to FSRUs than Europe’s situation right now,” Ramesh told FT.

Onshore LNG import facilities are much more expensive, take years to build, and ultimately, they could remain stranded assets if (a big ‘if’) Europe reaches its goal to cut gas consumption by 30% by 2030 and greenhouse gas emissions by at least 55% by 2030, as an interim target on the road to net-zero emissions by 2050.  

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So countries in northern Europe are now looking to charter FSRUs for LNG imports to secure gas supply for the next few winters until the EU makes meaningful progress in cutting gas consumption through energy efficiency measures and boosting hydrogen and renewable gas use. 

For example, on the day in May on which Gazprom said it would cut off all gas supply to Finland effective immediately, Finland’s transmission network company Gasgrid Finland Oy and U.S.-based Excelerate Energy signed a ten-year lease agreement for the LNG terminal ship Exemplar to ensure sufficient gas supply in Finland. 

“Leasing an LNG terminal vessel is extremely important, as it ensures security of supply for gas supplies in both Finland and Estonia,” Gasgrid CEO Olli Sipilä said at the time. 

In the Netherlands, gas provider Gasunie is building a floating LNG terminal in the Eemshaven in the Groningen area and this terminal is expected to be operating at full capacity by late November or early December. Gasunie says that in the long term, this terminal can be repurposed for green hydrogen storage.  

Germany, for its part, has already chartered five FSRUs since May, with two of those, at Wilhelmshaven and at Brunsbüttel, expected to begin operations as early as the end of this year. 

For the EU and its members, it looks like it currently makes sense to cater to the short-term needs for gas, while working to reduce gas consumption and rely more on renewable gas, hydrogen, and replacing gas in heating and power generation. Therefore, most are opting for chartering the cheaper FSRU terminals than spending billions of dollars and years on planning, designing, permitting, and constructing the more expensive onshore LNG import terminals. 

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After all, such facilities could become stranded assets in a decade or two. 

The same goes for LNG export terminals, too. The top exporters—the U.S. and Qatar—have announced major capacity expansions that are set to become operational after 2026.

While the energy crisis in Europe has strengthened the case for a rush to build new LNG export infrastructure, the EU’s plan to reduce gas consumption and slash emissions could be a problem for LNG investments that have come too late to the party. 

Investments in new LNG infrastructure are set to surge, reaching $42 billion annually in 2024, Rystad Energy research showed last month. But 2024 would be the peak new LNG infrastructure investment – “project approvals after 2024 are forecast to fall off a cliff as governments transition away from fossil fuels and accelerate investments in low-carbon energy infrastructure,” the energy research firm said.  

If Europe pivots away from LNG to achieve the low-carbon pledges under the EU’s REPowerEU plan, “there is a growing risk of an LNG glut and a price crash after 2026 as new volumes hit the market,” Simon Flowers, Chairman and Chief Analyst at Wood Mackenzie, said at the end of August.

By Tsvetana Paraskova for Oilprice.com

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