Rystad: LNG supply crisis to hit winter 2022
As European countries deal with energy insecurity in the wake of Russia’s invasion of Ukraine, demand for LNG is set to outstrip supply by yearend. And while demand has spurred a rush of worldwide LNG projects not seen in over a decade, construction timelines mean material relief is unlikely before 2024, according to Rystad Energy research.
Global LNG demand is expected to reach 436 million tonnes in 2022, outpacing the available supply of just 410 million tonnes, Rystad said.
The European Union (EU)’s REPowerEU plan set an ambitious target to reduce dependence on Russian gas by 66% within the year—an ambition that will clash with the EU’s goal of replenishing gas storage to 80% of capacity by Nov. 1.
“By shunning Russian gas, Europe has destabilized the entire global LNG market that began the year with a precarious balance after a tumultuous 2021. The decision to sharply reduce reliance on Russian gas and LNG from current levels of between 30-40% will transform the global LNG market, resulting in a steep increase in energy-security based European LNG demand that current and under-development projects will not be able to supply,” said Kaushal Ramesh, senior analyst for gas and LNG at Rystad Energy.
Russia last year sent 155 billion cubic meters (bcm) of gas to Europe, providing more than 31% of the region’s gas supply. Replacing a significant portion of this will be exceedingly difficult, with far-reaching consequences for Europe’s population, economy, and for the role of gas in the region’s energy transition, Rystad said. It also will likely create a boom for LNG producers elsewhere of a scale and duration not seen in over a decade.
“There simply is not enough LNG around to meet demand. In the short term this will make for a hard winter in Europe. For producers, it suggests the next LNG boom is here, but it will arrive too late to meet the sharp spike in demand. The stage is set for a sustained supply deficit, high prices, extreme volatility, bullish markets, and heightened LNG geopolitics,” Ramesh continued.
A reduction in Russian gas to Europe of 37 bcm is expected in 2022, with a reduction of more than 100 bcm expected by 2030. As a result, Europe’s gas consumption likely peaked in 2019 and will now decline steadily until 2030. Gas and LNG is therefore set to play a reduced role in Europe’s energy mix, providing further impetus for renewables and potentially a greater role for nuclear and coal.
Europe was on course to increase Russian imports of gas and LNG to over 40% of its supply by 2030, if the now-stalled Nord Stream 2 pipeline had been approved. Instead, imports are expected to drop to around 20% by 2030 as current contracts are not renewed. To facilitate additional LNG imports, a slew of regasification terminals has been planned across Europe – some new and some reactivated.
“If Russian flows were to stop tomorrow, the gas currently in storage (about 35% full) would likely run out before the end of the year, leaving Europe exposed to a brutal winter. Under this scenario, in the absence of joint buying arrangements and countries competing for limited molecules, the TTF gas price could climb to more than $100/MMbtu, resulting in industrial curtailments and widespread fuel switching in the power sector. We have already seen curtailments to fertilizer, steel, and paper manufacturers in Europe, underscoring the economic pain that awaits. In an extreme scenario of a severely cold winter, not even the residential sector would be safe,” Ramesh said.
New projects
More than LNG 20 projects with a combined capacity of over 180 million tonnes/year (tpy) have made development progress recently. To be certain of LNG supply in 2030, the market will need more than 150 million tpy of production from the 186 million tpy planned, which means more than 80% of the project pipeline must be realized.
US projects are in a leading position. Projects lying dormant awaiting rising demand are now advancing. Energy Transfer’s Lake Charles and NextDecade’s Rio Grande projects, previously on pause, have reported 9.45 million tpy worth of deals following Russia’s invasion of Ukraine, including a 1.75-million tpy deal with Engie, which had in November 2020 pulled out of negotiations with NextDecade (OGJ Online, May 2, 2022).
The current global project pipeline still cannot rescue the market. One project—the 15-million tpy Rovuma Area 4 LNG project—lies adjacent to TotalEnergies’ Area 1 LNG in the currently at-risk Palma region of Mozambique. Rystad expects little to no progress on the project until TotalEnergies resumes construction.
Mexico is well-positioned for Asian exports due to geographical proximity and non-dependence on transit through the Panama Canal and appears to be gaining momentum among Asian buyers.
At the same time, higher prices will slow Asian LNG demand growth in the medium term, which means the continent will remain dependent on fuel oil and coal. In some scenarios, Asian LNG demand may be permanently dented, and deployment of renewables accelerated.
