Emergency rush into gas prompts question of stranded energy assets
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In July, the European Parliament made a remarkable decision: it approved a law designating natural gas as a sustainable energy source.
Until a couple of years ago, the EU wanted to remove gas from the energy mix as soon as possible. The European Investment Bank had sought to cut off financing of natural gas infrastructure projects — from pipelines to liquefied natural gas terminals.
But Russia’s invasion of Ukraine has changed perceptions entirely. Instead of potentially stranding natural gas assets in the decade ahead, policymakers have shifted their attention to how they can keep the lights on and homes warm this winter. Tens of billions of euros of investment in gas projects will follow.
It is part of scramble throughout Europe — especially in Germany, Austria and Italy — to find ways to reduce dependence on Russia’s natural gas, which accounts for roughly a third of the continent’s supply.
Conserving demand is one way. Following this year’s REPowerEU scheme, the EU has agreed plans to cut energy use by 15 per cent. For example, Germany has dimmed its street lighting, and Spain has put limits on heating and air conditioning use in most buildings. Ideally, the overall plan will phase out Russian imports by 2030.
Yet even the greenest politicians in Europe recognise that the political necessity of replacing lost Russian gas will not come just from energy conservation. Up to last year, natural gas fuelled nearly a fifth of EU electricity generation.
Expect, therefore, more spending on LNG import terminals to regasify the fuel, which is brought to Europe on specialised tankers, especially to Germany.
German dependence on Russian piped gas will have to end soon. Flows from Nord Stream 1, a direct pipe from Russia importing 113mn tonnes annually, have slowed to a trickle. Its newer sibling, Nord Stream 2, never even opened for business this year, infuriating Russia’s leader Vladimir Putin.
Nord Stream has become a stranded asset itself. Non-Russian corporate shareholders have written down the worth of the pipeline on their respective balance sheets. Nord Stream 1, piping gas since November 2011, had a combined stated value on the balance sheets of energy groups of up to €8bn until last year. Since then, minority shareholders, German utility Eon, France’s Engie and Gasunie of the Netherlands have announced combined impairments of more than €1.2bn.
As Europe rushes to build new LNG import terminals, will these become stranded in years ahead? Probably not in Europe, assuming all goes to plan.
LNG exporters such as the US are also building new terminals. These can have an expected service life of up to half a century, well into the forecast period for the transition from fossil fuels.
Natural gas imports — Europe does not produce enough for its needs — arrive on the continent by pipeline or LNG tankers. Then, to enter countries’ pipeline systems, this liquefied (essentially deep chilled) gas must revert to its gaseous state.
Regasification terminals built onshore are costly, though, easily more than $160mn for every tonne of LNG capacity, says analyst Kaushal Ramesh at consultants Rystad Energy. He foresees a sudden change in Europe’s LNG demand, from about 72mn tonnes a year in 2021 to more than 110mn tonnes a year from now until 2030.
So a different and more flexible solution has come into vogue. Floating storage and regasification units offer a faster and nearly 40 per cent cheaper alternative. Usually, these are refitted LNG transport tankers which can quickly put the LNG into the local pipeline system. “There are few use cases better suited to FSRUs than Europe’s situation right now,” believes Ramesh.
At least a few billion euros of investment on FSRUs are expected, with Europe having ordered 14 so far. If available, they may only need a year or less to connect to local pipeline systems. Other sustainable energy choices to replace gas — like wind and solar renewables, hydrogen and battery storage — need many more years of development.
Most gas for Europe’s needs will probably come from the US, though some may come from Asia and the Middle East. Turning gas into supercooled LNG in countries such as the US and Qatar requires much more energy and is usually performed onshore.
By replacing Russia as a supplier to Europe, the US could leapfrog other leading exporters, Australia and Qatar, by 2025 and become the world’s largest, with capacity of more than 100mn tonnes a year, says Neil Beveridge at Bernstein Research. That figure could double by 2030.
However, US LNG export terminals, built onshore, are much more costly propositions given that they liquefy the gas. Building these would cost at least four times as much per tonne of capacity than FSRUs.
And those US LNG export units already planned will require up to $81bn alone by 2030, suggests Rystad.
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At least some of these projects may therefore be stranded should Europe and the other large consumer of LNG — Asia — move from fossil fuel use in future decades.
A soaring cost of gas has knock-on effects, too, in stranded asset terms.
Global gas prices have rocketed so high — tripling in Europe this year to more than €230 per MW hour — that they have extended the economic usefulness of coal as a substitute (and thus coal mines), notes Trevor Sikorski of consultants Energy Aspects.
He anticipates tight gas supply to 2025 and that gas will play an EU role until 2040.
Few industry experts see a decline in natural gas demand soon. Europe and the US are investing heavily in it.