Biden Makes a Deal For U.S. LNG to Europe That He

Biden Makes a Deal For U.S. LNG to Europe That He Has Little Power to Fulfill

By: Irina Slav

Unless you’ve already done the smart thing and retired to the wilderness of your choice, you’ve probably heard the news that the European Union struck a deal with the United States to considerably boost its intake of American LNG.

Considerably in this case means an additional 15 billion cubic meters this year, to grow to 50 billion cubic meters annually by 2030. Just for context, Gazprom’s exports to Germany last year hit a record high of 59 billion cubic meters.

The EU has committed to securing the demand for these billions of cubic meters of American LNG. The stipulation might seem surprising given the EU’s recent history of doing everything in its power to discourage fossil fuel consumption but it reflects a reality in which try as hard as Brussels might, business and households need readily available energy. It is in the “readily available” department that the deal with Washington raises some questions.

As David Blackmon put it in a recent post, the deal surprised the U.S. LNG industry because LNG producers were, apparently, never consulted on it. In other words, President Biden made a promise without checking with those in charge of its potential fulfillment.

The questions David posed included: “Does he plan to order his regulators to streamline permitting processes? Does he plan to somehow order banks and ESG investor groups to stop denying capital to companies in the industry, capital needed to fund their $10 billion LNG export facilities?”

Perhaps the president does indeed plan to make it easier for LNG producers to get the necessary permits. This is, after all, within his power. As for the second question, the answer would be trickier.

Just because Europe is short on gas and about to become shorter once Russia shuts off the tap unless it is paid in rubles, doesn’t mean that the environmentalist lobby has taken a nap. On the contrary, the reaction to the U.S/EU deal has been swift.

“There is no way to ramp up U.S. LNG (Liquified Natural Gas) exports and deliver on the imperative climate commitments that the U.S. and the EU have pledged,” said the president of Earthjustice, Abigail Dillen, following the news.

“It will take years and cost billions to build out new LNG infrastructure that will lock in expensive fossil dependence and dangerous pollution for decades to come. Investing in new LNG is not a near-term fix for getting off Russian gas in Europe. It is a diversion of time and resources away from the urgent project of scaling clean energy in the last years we have left to triage in a climate emergency.”

I took the liberty of italicising the beginning of the second quote because it is telling of the state in which the EU and the U.S. are making decisions likely to affect the long-term energy security of, in this case, Europe.

It is also telling of how important it is to take time to consider the implications of a certain decision before you go ahead and make it.

The United States has abundant natural gas resources. Based on these resources alone, it could probably supply Europe with gas for decades to come. Sadly, it’s not only about resources. As Earthjustice’s president noted in the above quote, infrastructure is also necessary and it does not come cheap. Neither does it come quickly.

So, on the supply side, we have U.S. LNG producers caught by surprise — no doubt pleasant — by the White House’s decision to boost trans-Atlantic demand for their product. Specific deals are yet to be inked, by the way, but we have something of a framework agreement. What we don’t have is enough export capacity, yet. And it will take years to build it.

Now, there’s two ways U.S. LNG producers could go about it. They could either reduce shipments to their Asian clients to satisfy urgent European demand, giving up market share in the biggest LNG growth market, or they could supply limited amounts of LNG to Europe until such time as infrastructure allows them to supply more.

It looks like an easy decision to make and is very similar to the decision that Middle Eastern oil producers have made with regard to their stance on Europe’s oil supply. As Reuters’ John Kemp explained it in a recent column, “Breaking long-term contracts and giving up Asia’s lucrative growth markets to supply refiners in declining Europe, possibly only for a few months or years, would make little strategic sense [for Middle Eastern oil producers].”

Europe’s plans for gas are the same as its plans for oil: it wants them out of the EU’s life as soon as possible. Why, then, would U.S. producers invest in new infrastructure just for European customers if ten years from now Brussels slaps some new sort of emission standard that makes

The EU has committed to securing the demand for these billions of cubic meters of American LNG

U.S. LNG prohibitively expensive? And why do this when there’s the whole of Asia, thirsty for all the gas it can get its hands on?

While U.S. LNG producers no doubt mull the pros and cons of a European LNG offensive/rescue mission, on this side of the Atlantic government planners are looking for floating storage and regasification units (FSRU). I know it sounds like a bad joke, but yes, the EU first agreed the additional volumes of LNG and is only now starting to look for ways to get them to consumers.

The Financial Times (FT) recently wrote about it. Germany, Italy, and the Netherlands are in a race to secure FSRUs for their planned LNG imports because building permanent import and regasification terminals takes too much time and, I expect, money, and the EU is eager to cut Russian gas imports by two-thirds within the next nine months.

“Europe is screaming for FSRUs to get energy in, whatever it costs,” the FT quoted the managing director of one of the very few companies that own such units, Norwegian BW LNG, as saying.

Germany is in talks for three such vessels, which will provide it with regasification capacity of some 27 billion cubic meters annually. This is quite a respectable if a little stretchy amount, given that, as the FT itself notes, a single FRSU typically has an annual capacity of 5 billion cubic meters.

It also notes that although quicker to deploy than import terminals, FRSUs still take several years to install and put into operation. This alone is enough to conclude that the whole “two-thirds less Russian gas by end of 2022” might well be a fantasy.

To be fair, Haram Sivam, former Investment Lead on LNG-related projects at the International Finance Corporation, tells me that not all FSRUs were created equal.

“There are no typical FSRUs as most are bespoke solutions. But most modern FSRU terminals can store and regasify around 4 million tonnes to 5 million tonnes of LNG annually. To go from tonnes to cubic meters you have to divide the tonnes by 44%.

“So most modern FSRUs are capable of annual storage capacity of around 9 to 11 million cubic meters of LNG. I think there is at least one FSRU that is around 12 million cubic meters of LNG per annum, if not a bit larger. Note that supply vessels and delivery frequency can also limit LNG throughput of an FSRU.”

But that’s not all because in addition to the limited fleet of FRSUs and the time it takes to put them into operation (the fastest appears to be 11 months, according to Sivam), there are also the already notorious supply chain breakages that have got a growing number of experts from various industries talking about the end of globalisation.

There are only five available FRSUs in the world today, according to Golar LNG, another FRSU owner. Another three could be released from their contracts this year, Karl Fredrik Staubo also told the FT. However — and I’m afraid this is too funny to not laugh at it — FRSUs are sensitive vessels and cannot operate in cold waters, which are the only available waters in northern Europe.

A way around this challenge, to quote Sivam, is converting a vessel already operating in these waters into one that can be used as an FRSU. Based on the locations of Europe’s LNG import terminals, the only northern, so to speak, terminal that suggests LNG tanker movement in colder waters is the one in the Netherlands.

To top it all off, charter rates for these vessels are naturally soaring, with the annual rate now at $40-60 million, according to Rystad Energy, and likely to continue up as “a bidding war” unfolds for these vessels.

To sum up, the EU committed to maintain demand for at least 50 billion cubic meter of gas in the form of LNG annually despite its green transition plans and despite the fact it lacks the import infrastructure to bring this gas to end consumers.

Granted, if the EU somehow manages to reduce intake of Russian gas without plunging its economies into severe recession, maintaining this demand will be easy. The supply that would theoretically replace Russian pipeline flows would remain an issue until Qatar boosts its production capacity, planned for the end of 2025. And that new boosted capacity will be 110 million tonnes annually, or about 250 billion cubic meters for all gas consumers.

There is a lot to be said about making decisions on the fly, especially when they concern hundreds of millions of people already frustrated after two years of pandemic restrictions and rising inflation. For the purposes of this article, I’ll only mention one of these many things. Life is going to get a lot more expensive.

About the author: Irina Slav has been writing about energy, with a focus on the oil and gas industry, since 2006. Her articles have appeared in Oilprice, Fortune, Insider, and Time magazine, among others.

ENERGY SECURITY? WHAT’S THAT?

By: David Blackmon

In reading through this issue of SHALE Magazine, you will notice a heavy focus on events surrounding Russia’s war on Ukraine. That was not our plan for this issue when the year began, but everyone has a plan and they tend to fall apart as soon as the first punch is thrown, as Mike Tyson would say.

Vladimir Putin threw that first punch in early March, sending a large portion of his country’s army into a neighboring country in pursuit of annexing territory and settling some very old grudges. He was motivated largely by the belief that his country’s energy dominance over Europe would provide him the geopolitical leverage he would need to sustain his war until it reached a successful conclusion.

The consequences to the world — including the United States — have been several and severe, and all have had the effect of highlighting the crucial importance of building and maintaining a nation’s energy security.

We should all remember that Europe’s countries willingly allowed themselves to become client states of Russia where energy is concerned by effectively making hydraulic fracturing and drilling for their own oil and natural gas resources illegal during the first decade of this century. I was lectured by a European oil trader when I pointed that out during a recent panel discussion, who told me that “fracking was not competitive in Europe” during that time.

Well, certainly, fracking and drilling in Germany in, say, 2005 was not price-competitive with contracting to bring cheap natural gas from Russia into that country when viewed on an isolated monetary basis, without considering other factors. Factors like, for instance, Vladimir Putin deciding he could forcibly annex big chunks of Ukraine 17 years later, safe in the knowledge that Germany and the rest of Europe would help him finance his war because they could not cut off those Russian oil and gas imports without destroying their own economies and throwing the world into an economic depression.

How do we measure the cost of this action, and all the human lives that have been taken and destroyed, and decide whether or not fracking and drilling Germany’s own resources, thus providing Germany with a higher level of energy security, would in hindsight be “competitive” with the cost of becoming a Russian vassal state where energy is concerned?

In Poland on March 25, President Biden stood at a press conference with European Commission leader Ursula von der Leyen and committed America’s liquified natural gas (LNG) industry to quadruple its exports to Europe over the next 8 years. Indeed, during its energy crisis over the winter, Europe relied heavily on LNG imports from the U.S. and Qatar to keep the lights on and homes heated. But the cost of that LNG was often 10 times higher than the price those countries pay for the natural gas coming in from Russia.

Would fracking and drilling for Germany’s own resources be price competitive with $30 per mcf LNG? You bet it would.

So, we see the short-sighted decisions made by European leaders from 10 and 15 and 20 years ago now coming back to haunt the continent, as they provide a madman in the Kremlin the confidence to mount a tragic war on a neighboring country.

What is the value of a nation’s energy security? As Tom Pyle, Karr Ingham and others point out in this issue, America could be about to find out the hard way unless the Biden administration wakes up to reality and decides to change course.

The “Green New Deal” policies that Biden and this Democratdominated Congress have pursued for the last 15 months basically represent a carbon copy of the sad and tragic road traveled by European governments since 2001. The president continued with another move designed to diminish U.S. energy security on March 31.

On March 31, Biden announced a plan to remove 180 million barrels from the SPR over the following 180 days. That’s 30% of the 635 or so million barrels that remain in the Reserve after his previous removal of 50 million barrels began last November.

In the wake of the first Arab Oil Embargo in 1973, the federal government, in its infinite wisdom, realized that having a massive reserve of crude oil to be able to tap in times of national emergency might be a good idea. President Richard Nixon and the Democratdominated Congress at the time thus showed they understood the strategic value of maintaining America’s energy security.

There is no doubt that $4.20 gasoline prices are not pleasant, but do they really represent a national emergency? Please. What high gas prices represent to Biden and his fellow Democrats is a political problem they are desperate to somehow mitigate. They understand that the party in power will be blamed for the price of gasoline at the polls come November by voters who are angry that the low gas prices Donald Trump handed to them have been intentionally surrendered by his successor in office. That’s the motivation for this move, and nothing more.

It is as if this ship of fools in D.C. have learned nothing from Russia’s war on Ukraine. Putin would have never attacked Ukraine were it not for the geopolitical leverage he held over the European continent, thanks to its conscious decision to become client states of Russia where oil and natural gas are concerned. He knew that these subservient nations would help fund his war because they would not be able to do without his energy exports or find adequate replacements for them in short order.

Every action the Biden presidency has taken related to energy has been designed to move the U.S. down the same sorry energy road that Europe has trod in this century. Diminishing the SPR by another 30% only takes us further down the road to energy subservience.

Back to Biden’s committing the U.S. LNG industry to quadruple deliveries to Europe in just eight years. In the days following that announcement, I spoke with an array of contacts in that industry, all of whom told me their companies had absolutely no idea the president was about to make that deal. The administration did not reach out to a single major player in the domestic LNG industry to see if their companies would be able to fulfill such a deal.

It also quickly became obvious after the announcement that the Biden administration has no intention of doing anything to help facilitate the meeting of that goal. In fact, it’s obvious they plan to redouble their efforts to deny permits and capital the industry needs to achieve the major infrastructure expansion that would be required to do so.

What does that tell us? It tells us that Biden’s deal with the EC was just a virtue signal designed to convince the ignorant among us he was doing something to help Europe solve its own energy security crisis. Nothing more.

We know where this all ends. We’re seeing it play out in real-time in Ukraine right now, today. Yet, it is as if the Democrats in Washington see none of it, or if they do, they simply don’t care.

About the author: David Blackmon is the Editor of SHALE Oil & Gas Business Magazine. He previously spent 37 years in the oil and natural gas industry in a variety of roles — the last 22 years engaging in public policy issues at the state and national levels. Contact David Blackmon at editor@shalemag.com.