When was the last time you made a great decision in the middle of a panic?
In February 2022, Russia invaded Ukraine. Sanctions passed against Russia by European governments included a ban on Russian liquefied natural gas (LNG) imports. Russian pipeline gas, which had cheaply fed 40 percent of European energy demand before the invasion, stopped. The goal was to deprive Russia of foreign exchange so as to hinder its war effort against Kiev.
But this also meant that Europe suddenly found itself burning through gas reserves. With little replenishment in sight, the concern was that industry would shut down and the next winter would see citizens freezing and dealing with scheduled blackouts.
From Spain to Poland, one after another, governments built new LNG terminals. By 2030, Europe will have added 19 new LNG regasification terminals. Europe's capacity to import LNG will grow from 160 billion cubic meters (bcm) to 350 bcm.
There's just one little problem: That's more bcm of gas than all of Europe uses. Even if Europe imported 100 percent of its LNG through these terminals, they couldn't be fully used.
"FIT FOR 55"
The E.U. and its Member States have been pushing renewable green fuels, most notably in the recent "Fit for 55" package. The "55" refers to a 55 percent reduction in greenhouse gas emissions and economic decarbonization.
On its website, the E.U. presents 14 clickable infographics detailing the various fields of endeavor that will be affected by "Fit for 55," from agriculture to real estate to taxation. One infographic implicates "aviation and maritime" with ships over 5,000 gross tons required to progressively curtail their emissions by up to 80 percent by 2050 – a topic for another day.
Right now, it's difficult to judge whether legislation, as above, or a slow economy (Q3 2024 growth was only 0.7 percent across the E.U.) are why gas demand is falling. Rystad Energy estimates that, by 2030, Europe will need only 340 bcm of gas per year.
Since Europe's drive to use less gas shows no signs of abating, it stands to reason that 2030 is only the beginning of the problem. As "Fit for 55" moves along, the demand for gas, and LNG terminals, will shrink. Even if all gas imported into Europe came by sea in 2030, these many new LNG terminals would still have significant remaining unused capacity. That leaves aside the fact that LNG pipelines from North Africa, Norway and Azerbaijan will continue to supply a major portion of Europe's LNG demands.
So, is this another classic example of European governments competitively overbuilding subsidized infrastructure – or is something else going on?
Counterbalancing
As I wrote in these pages a couple of years ago, from 2012-2019 an LNG regasification terminal's typical utilization rate was less than 25 percent. By comparison, the 47.2 percent utilization rate for the first part of 2024, and the 62.8 percent utilization rate in 2023, seem like a Golden Age.
The warning from the Institute for Energy Economics and Financial Analysis (IEEFA) that "up to three-quarters of the continent's LNG import capacity" could potentially go unused by 2030 looks more like a return to the pre-2022 status quo than anything sinister.
"Since the beginning of 2023, new terminals or expansions have been shelved in Albania, Cyprus, Ireland, Latvia, Lithuania and Poland, while it is unclear whether three planned terminals in Greece will go ahead," said IEEFA analysist Jaller-Makarewicz. Why abandon these projects if they could still potentially be twice as heavily utilized as before 2022?
On second glance, though, this counterbalancing may make sense. Older LNG terminals have a different cost basis. A report by the Oxford Institute for Energy Studies found that the dollar cost of tons per annum ($/tpa) for an LNG facility had risen from around $450 in the 1980s to over $1,800 in 2014. That cost has only continued to spiral.
The Hanseatic Energy Hub LNG terminal in Stade, Germany, is going to cost 1.3 billion euros. It's likely that the newer terminals must rely on a higher anticipated utilization, allowing higher revenues and profits, which will permit servicing more debt. If these assumptions do not play out, the lender banks may end up in trouble.
Newer LNG terminals suffer from more expensive labor and materials, and they broke ground during a period of peak demand. The sheer number of new LNG terminals being built, and the relatively small number of companies capable of carrying out such complex construction projects, have bid up prices.
The other contributor to cost, namely ever-growing bureaucracy, was addressed in 2023 by German Chancellor Olaf Scholz, who promised that the new LNG terminals would be built at what he termed "Germany speed" – a descriptor that very soon became a newspaper punch line.
The good news is that with so much skin in the game, with both banks and governments footing the bill for the new LNG terminals, admitting failure is not palatable. Like other ill-fated prestige projects – viz., the perennially bankrupt German shipyards along the North and Baltic Seas – avoiding the stink of failure will be politically paramount.
And that is excellent news for LNG exporting countries, and especially for the U.S., which is planning to build 17 more LNG export facilities by 2028 and exported a record 125.8 bcm of LNG in 2023, according to trade publication LNG Industry. Europe, with its high energy prices, is a lucrative, stable market for American LNG, particularly as long as cheap gas from Russia remains marginalized.
Realignment
If both sides of the equation remain committed to the endeavor, with new terminals on either end of the Atlantic that have a financial stake in a continuing relationship, it's possible that even if Russia rejoins the society of civilized nations and even if Russian gas is once again on offer at a reasonable price, politics could override the market.
In such a scenario, Europe remains a loyal American LNG customer both for geopolitical reasons and in order to financially support European banks and their investments in LNG terminals, which will require steady streams of revenue for decades.
The other component of this realignment is the relationship between Russia and China. Russia's commitment to selling LNG to China reached an historic peak in 2024 with 40 bcm finding its way east. That is just the beginning. The new Far East LNG pipeline route being built by Gazprom will serve up 10 bcm/year by 2027 and, eventually, the planned Power of Siberia 2 pipeline will provide a further 50 bcm/year. Such steps move Russia more permanently into China's orbit and away from Europe.
The overbuilding trap
Will Russian LNG still be cheap when pipelines point to either continent?
Drewry notes that strong Asian LNG imports have been supporting LNG tanker spot prices. Russian LNG cargoes, it noted, are avoiding Europe and heading to Asia instead – a long and circuitous route. That would indicate that once the Russian pipelines are built, there will be plenty of demand for product to move through them instead.
While all may be well for the time being, owners would be wise to avoid the European overbuilding trap. In 2023 alone, owners spent $46 billion on LNG newbuilds, according to Clarkson's. The orderbook for LNG tankers stood at 331 vessels in 2023, equivalent to 51 percent of fleet capacity. Then, in early 2024, another 33 LNG tanker contracts were inked.
Shipping isn't baseball. Just because you build it doesn't mean they will come.
