Supply Glut Could Help EU Navigate Russian LNG Ban

The upcoming global LNG supply glut will help Europe move away from importing Russian LNG and ease its current competition for LNG volumes with the Asia-Pacific region, industry players said at the Financial Times' Commodities Global Summit held in Lausanne, Switzerland, earlier this month.

Coordinated political action by individual EU member states to ban Russian LNG imports will most likely happen once security of supply is guaranteed in the second half of the decade, according to Anne-Sophie Corbeau, global research scholar at Columbia University's Center on Global Energy Policy. Spain, France and Belgium, Europe’s three-largest LNG importers, could potentially impose unilateral bans on Russian LNG.

However, an EU-wide Russian LNG ban is unlikely. "There is no way we are going to have an EU-wide agreement on banning Russian LNG because of Hungary," Corbeau said at the industry event, suggesting Budapest could veto the ban. Hungary has an ongoing long-term piped gas supply agreement with Russia’s state gas exporter, Gazprom, but does not import Russian LNG.

Spain and France might be reluctant to back a Russian LNG ban, as their governments would be keen to protect the interests of their strategic energy companies Naturgy and TotalEnergies, which both have long-term supply agreements with Russia's Yamal LNG project. "You need to think about a lot of legal implications, you need also to think about transshipments, you need to think about long-term contracts ... but I think it's doable," Corbeau said, adding that governments, operators and lawyers must sit down to find the best solution.

Uncertain EU Demand

Europe’s gas and LNG demand outlook remains bearish given net-zero pledges and the rapid renewable buildout in the continent, which makes contracting difficult for European buyers.

"The really big game is how we are going to plan the next 15 years," Frederic Barnaud, chief commercial officer at Germany’s Securing Energy for Europe (Sefe), told delegates. "Are we going to be able to sell gas in an affordable way? Will our customers still want gas?"

Sefe is trying not to overcontract long-term gas and LNG supplies while also trying to also develop power, hydrogen and energy storage projects, Barnaud said. “Managing that I think is the more critical thing in parallel to obviously short-term supply and demand balance," he noted. Sefe's strategy is “demand-driven” as “the supply pool is there,” he added, considering a potential rise in gas-fired power demand in Northwest Europe in their forecasts.

Sefe is limiting itself from quickly jumping on board with US export projects, the executive said. "It’s cheap gas, it’s expected to stay cheap, but do you really want to do that and take that on your balance sheet without the customer base behind it or the visibility of the customer base?" he added.

"Nobody really anticipates that European LNG imports are going to significantly increase," Corbeau told delegates. "If anything, [imports] are going to stabilize at current levels and potentially decline, if we are good at adding more renewables and heat pumps."

However, demand forecasts are being complicated by the fact that a large part of the new supply was contracted by large portfolio players, making it difficult to foresee where these volumes will be delivered, Corbeau added.

Asia Remains Key Driver

The Asia-Pacific region will remain the main market for LNG, with China in particular looking to replace coal-fired power generation with gas. Xavier Veillard, a partner at consulting firm McKinsey & Co., said that in the Asia-Pacific region alone, his company expects 500 gigawatts of additional gas-fired capacity to be built. "If you take into account the coal-to-gas switch, the people who will build the new CCGTs [combined-cycle gas turbines], even if they are H2 [hydrogen] compatible and even if you have the H2 ramp up, in 2050 a lot of them will run on gas, especially in the Asia-Pacific basin," Veillard said in a panel.

In Germany, meanwhile, Veillard sees an additional 20-25 GW of additional gas-fired power capacity needed to replace coal and nuclear power in the energy mix. "That means that if this capacity gets built, there needs to be supply of LNG at competitive level to make the power system balanced at a competitive price," Veillard said.

China, the world's largest LNG importer, could take the global LNG market balancing role that Europe had before the Russian invasion of Ukraine in February 2022, but it is uncertain in what way given the absence of a liberalized market in the country, Corbeau said.