Europe’s energy woes are diverting global LNG flows

Against all odds, extreme market forces and political will are already redrawing the global energy supply map as Europe seeks to end its dependence on Russian gas.

On Friday, the US pledged to ship at least 15 billion cubic meters of additional liquefied natural gas to Europe this year – boosting exports to the region by about two-thirds – and at least 50 billion cubic meters more annually through 2030. President Biden met with European leaders in Brussels this week to discuss the war in Ukraine and how the US could help the region wean itself off Russian energy.

The European Union needs to import another 50 billion cubic meters of LNG to implement its plan to cut Russian gas imports by ⅔ next year. American suppliers are the best immediate source of supply as they have the most flexibility in choosing customers. Australia and Qatar, the other big producers, are largely tied to long-term supply contracts.

The global LNG market was about 530 billion cubic meters last year, with 31% traded on the spot market, according to Shell. That means there should be enough spot supply to meet Europe’s needs, but it’s going to be expensive.

While political statements are giving companies additional encouragement, market forces have done most of the work to send more gas to Europe. The region’s buyers have outbid those in Asia, pushing the local gas price to a new record high of €227, or $250 per megawatt-hour, earlier this month, about 14 times the US price. The market was already tight before Russia invaded Ukraine, partly because Moscow last year kept pipeline flows to Europe at a contractually agreed minimum level and dropped inventories.

American producers had an LNG capacity of 115 billion cubic meters last year. Most exports went to Asia, only about 22 billion cubic meters went to Europe. US capacity will increase to 130 billion cubic meters this year, and producers could likely ship more to Europe than they currently do to Asia because voyages are shorter and they can do more runs. According to Rystad Energy analyst Sindre Knutsson, shipping from the Gulf of Mexico to northern Europe takes about 10 to 11 days, compared to 20 to 34 days to Asia.

Europe has facilities to get more LNG. According to Mr. Knutsson, in 2021 there was a spare capacity of about 56 bcm in western Europe and between 10 and 11 bcm in southern Europe. Spain and Portugal also have many but are not well connected to the rest of the bloc. Germany is a challenge: Europe’s largest gas importer has no LNG purchase options. It has revived plans to build two terminals by 2024 but could set up temporary ship-based terminals by the end of this year.

Ultimately, the current global supply system appears to be being rearranged, with the US shipping much more gas across the Atlantic, while Australia and Qatar are shipping more to Asia. With prices this high and political momentum so high in Europe, this long-term shift could happen with surprising speed.

write to Rochelle Toplensky at rochelle.toplensky@wsj.com

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