European Union’s LNG Strategy
The European Commission released its LNG Strategy today as part of the Commission’s Energy Union initiative. Release of the LNG Strategy was accompanied by several other proposals, all of which can be accessed from the Commission’s website, including:
- Security of Gas Supply
- Intergovernmental Agreements
- LNG and Gas Storage
- Heating and Cooling
Time permitting, I may summarize the three other proposals in a subsequent report. Today, let’s focus on the LNG portion of the LNG and Gas Storage proposal.
The Commission believes that natural gas can be part of a sustainable energy future, along with an emphasis on renewables and greater attention to energy efficiency “as an energy source in its own right.” Specifically with regard to natural gas, the Commission says that “diversification of… supply remains a key objective, since domestic production in the EU will continue to decline in coming decades.” This is where LNG comes in.
The Commission noted that, “the prospect of a dramatic (50%) expansion in global [LNG] supply over the next few years… presents a major opportunity for the EU” and those member states “heavily dependent on a single supplier, and hence vulnerable to supply interruption.” The LNG Strategy recommends that the EU take three specific actions:
- Build the physical infrastructure needed to complete the internal market and allow all member states to benefit from access to international LNG markets.
- Finish the internal EU gas market so that it sends the right price signals (both to attract LNG to where it is needed and to allow the necessary investments in infrastructure to take place).
- Step up cooperation with international partners to promote free, liquid, and transparent global LNG markets.
The Commission recognizes that LNG terminals are not distributed “optimally” across the continent (most are in the North and West) and that additional terminals and interconnecting pipelines must be constructed. While such infrastructure needs to be commercially viable, the Commission suggests that “EU funds can help to make up for the weak commercial viability of terminals that are particularly important for security of supply.”
The “missing infrastructure” identified in the LNG Strategy consists of 14 “key” projects: (1) six in the Baltic region (Poland, Lithuania, Latvia, Estonia, and Finland); (2) six in the Adriatic / Black Sea area (Croatia, Romania, Bulgaria, and Greece); and (3) two on the Iberian Peninsula (Portugal, Spain, and France). These are displayed in the map above.
Internal Market Completion
The LNG Strategy notes that there are no liquid gas hubs in Central, Southeast, or Southwest Europe. To rectify this shortcoming, the Commission plans to continue working with member states and national regulatory authorities in each of the three regions and has requested “ambitious road maps” and “action plans” by mid-2016.
International LNG Markets
The LNG “ramp-up” in the United States and Australia over the next five years will have global consequences, and the Commission wisely recognizes that this market transition will have huge economic and foreign policy implications for the European Union. The Commission states that: “the EU has a keen interest in promoting free, liquid, and transparent LNG markets around the world… [and] needs to work closely with international partners and in international fora to ensure that market participants are not prevented from establishing commercial relationships (for example by territorial restrictions) and that there are no limitations on free trade—either under normal market conditions or in the event of external shocks.” Specific recommendations include working with both LNG-producing nations and major LNG-consuming countries.
Some Initial Thoughts about the EU LNG Strategy
It was my honor to write the guest editorial for this month’s Energy in Europe newsletter by the Commission’s Director General for Energy, Mr. Dominique Ristori. (Reprint attached.) Let me expand on the theme in that piece, namely that we are at the “beginning of the beginning” when it comes to U.S.-EU LNG trade. I will peg my remarks to the three main elements of the LNG Strategy: (1) missing infrastructure; (2) internal market completion; and (3) international LNG markets.
Missing Infrastructure. The LNG business operates under long-term time horizons. Things just do not happen overnight. For better or worse, it takes five to seven years for a U.S. LNG export project to go from concept to completion. (A lot of that time is chewed up by the U.S. regulatory process, sadly.) This is true on the receiving (import) side of the business as well. It may take most of the next five to ten years just to complete the LNG import and distribution infrastructure that must be built in certain portions of the European continent. But, that’s okay.
American LNG exports will ramp up gradually over the coming decade. The first four trains (LNG production lines) at Cheniere’s Sabine Pass project will commence operations at a rate of one about every six months between now and the end of 2017. This will be followed by Dominion Cove Point (2017-2018), and Cameron LNG, Freeport LNG, and Cheniere Corpus Christi (2018-2019). (All of these projects are already under construction, with financing underwritten by 20-year LNG contracts.)
Hundreds of cargoes from these five U.S. LNG export terminals will undoubtedly end up in Europe under long-term or spot contracts. And, the projects behind these first five remain hungry for the long-term agreements necessary to reach FID (final investment decision). This is a buyer’s market for the moment. However, the LNG business is cyclical. The demand /supply balance can shift at any point. Now is an opportune time for EU companies to talk to the many U.S. LNG exporters with gas to sell and an interest in innovative, win-win solutions.
Internal Market Completion. There honestly isn’t a lot that can be done by U.S. interests to help the EU, its member states, and private enterprise create liquid gas hubs where they don’t now exist in Europe. However, the steps identified by the Commission—such as full implementation of the EU’s Third Energy Package—are of course both useful and necessary.
International LNG Markets. The Interwebz have been on fire recently with reports of the efforts by the governments of Iran, Qatar, and Russia to negotiate /renegotiate long-term gas contracts. These state-controlled sellers represent a tired way of thinking (oil-linked contracts, destination restrictions, etc.). Fortunately, the EU and its member states understand the upside and the downside of doing business with these old-timey players. Our advice would be to handle their sales pitches just like most Americans handle unsolicited phone calls at dinnertime : Hang up before they get your credit card data!
For our part, LNG Allies will continue bringing the U.S. LNG export community together with potential buyers in Europe and other key markets. As the Ambassador from the Czech Republic to the United States, H. E. Petr Gandalovič, said last year during our successful effort to lift the U.S. crude oil export ban: “Democracies need to stick together when it comes to energy trade.” We couldn’t agree more!