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| LNG from the US also helps European countries build up abundant gas reserves, preparing for the winter of 2023. (source: WSJ) |
The Russia-Ukraine conflict has highlighted the reality of Europe's dependence on Moscow's gas. Before the military campaign, Russian gas flows to the European Union (EU) accounted for about 45% of total imports.
Last year, the Kremlin cut gas exports to the EU by 75% as the region entered the winter, when it needed gas to heat homes. Market uncertainty pushed gas prices to unprecedented highs and increased energy costs, putting pressure on European economies and consumers.
Russia has said it will not resume full gas supplies to Europe until the West lifts sanctions against Moscow.
At the time, the EU was facing significant challenges in its divorce from Russian gas. However, what no one expected was that the situation would suddenly change, largely due to unusually warm winter weather in Europe and a rapid increase in LNG imports, mainly from the United States.
Europe is the main destination for US LNG exports in 2022, accounting for 64% of total exports. Last year, France, the UK, Spain and the Netherlands were the main customers, according to the US Department of Energy.
Ms. Adila McHich, Director of Research and Product Development at CME Group, commented on Forbes : " The Russia-Ukraine conflict has brought the energy policies of the US and Europe closer together."
Carry out the rescue mission
According to Ms. Adila McHich, US LNG has partly helped Europe get through the winter of 2022 and strengthened the region's role in ensuring energy security for Western allies.
Shortly after the Russia-Ukraine conflict broke out last year, US President Joe Biden and European Commission (EC) President Ursula von der Leyen announced a strategic pact under which EU companies would increase LNG imports from the US.
Experts estimate that recent LNG shipments of up to 40 million tons have helped Europe ease supply shortages. LNG from the US has also helped countries in the region build up abundant gas reserves, preparing for the winter of 2023.
The LNG industry in the world’s largest economy is competitive, privately funded, and driven by entrepreneurship. LNG trade is often driven by the laws of supply and demand. Unlike in many producing countries, the US government’s role is limited to defining the regulatory/policy framework and conducting energy diplomacy.
US LNG prices play a key role in anchoring gas prices and representing a price point for competing projects abroad. The world’s largest economy has contracted about 75% of global LNG capacity by 2022, according to S&P Global Commodity Insights.
“The energy crisis in Europe has helped the United States achieve some important milestones,” Adila McHich stressed.
First , position the United States as a strategic and reliable energy ally. Second, loosen Russia's grip on European gas. Third , enhance America's ability to assert global energy leadership."
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| Liquefied natural gas tanks at a terminal in southeastern England. (Source: CNN) |
China is also rushing to buy LNG from the US.
China is competing with Europe to sign long-term supply agreements with US LNG developers and exporters. Recently, US LNG exporter Cheniere signed a more than 20-year contract with China's ENN.
Bloomberg also cited a source familiar with the matter as saying that the Chinese government is backing efforts by state-owned companies to sign long-term gas purchase contracts, along with investment in gas export facilities, as part of Beijing’s strategy to strengthen energy security by mid-century.
“Energy security has always been a top priority for China,” said Toby Copson, global head of trading and consulting at Trident LNG in Shanghai. “Having ample supplies in advance allows them to manage future energy market volatility. I think the world’s second-largest economy will continue to move in this direction.”
Efforts to secure gas deals by the world's second-largest economy would bolster gas export projects globally, boosting the role of the seaborne fuel in the world's energy mix.
As suppliers move to attract Chinese importers, Beijing's influence in the market will grow.
A shortage of coal - the country's main fuel for electricity generation - caused widespread power cuts at domestic plants briefly in 2021, while a drop in hydropower output has led to a shortage in 2022, slowing economic growth.
In response, China has vowed to increase coal mining capacity and coal output has risen to record levels, keeping storage facilities full and helping to reduce coal imports last year.
Now Beijing policymakers want to do the same with gas. Beijing is pushing major domestic energy companies to increase domestic gas production and cut drilling costs to increase self-sufficiency, according to people familiar with the matter.
"This is a long-term view for China to avoid repeating energy shortages in the process of promoting economic growth," Bloomberg said.
'Dethroning' oil USD?
China made its first renminbi-denominated LNG purchase from French multinational oil and gas company TotalEnergies in March 2023. Adila McHich said the transaction was part of Beijing's plan to challenge the dominance of the Petrodollar system that has existed since the 1970s.
Using currencies other than the US dollar in LNG transactions is not easy. Refusing the greenback in oil transactions would incur additional costs for both parties due to exchange rate risks and currency mismatches, as most exporters transact in this currency.
“It remains to be seen how this will play out over the long term, as China grows its influence as the world’s largest LNG buyer,” said Adila McHich.
However, the current geopolitical tensions over Ukraine have also accelerated the resumption of cooperation between China and Russia in the energy sector, including LNG.
While the US appears to be in a strong position when it comes to trade with Europe, the resumption of cooperation between Russia and China and the impact on LNG trade will be interesting to watch in the near future.”
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