The U.S. government doesn’t control where cargoes of LNG are shipped — that’s decided by private companies. Nonetheless, the Biden administration and the EU announced a high-profile plan Friday to steer more U.S. LNG exports to Europe and partially replace pipeline gas from Russia.
The short-term pledge — to ship at least 15 billion cubic meters (bcm) more U.S. LNG to the EU this year — looks very doable. But that’s just one-tenth of the 155 bcm of natural gas the EU bought from Russia in 2021.
The long-term goal — to lock in another 50 bcm of supply — could pave the way for new export projects and more ships, but it could take a half-decade to translate into new energy supply for Europe.
2022 pledge
Europe (including the U.K.) imported 28.1 bcm of U.S. LNG last year, according to Energy Information Administration (EIA) data. That was 28% of America’s total exports of 100.8 bcm; most went to Asia via the Panama Canal.
The new plan implies volumes to Europe of at least 43.1 bcm in 2022. The EIA expects total U.S. exports to increase 16% this year to 117.1 bcm, meaning Europe would account for at least 37% of U.S. exports.
The U.S. was well on its way to adding the targeted European growth before the new goal was even announced, courtesy of profit motive, not public policy.
There has been a dramatic shift of U.S. LNG toward Europe during the past four months. Europe’s share jumped to 50% in December, and there have been multiple reports that it increased to around 70% during the first quarter of 2022. Ship-positioning data showing cargoes en route from the U.S. on Friday confirms exports are overwhelmingly bound toward Europe.
Economics already redirected LNG
According to Evercore ISI analyst Sean Morgan, more than 80% of U.S. export volumes are on long-term contracts that usually have durations of 15-20 years. Available spot cargoes are limited. Yet U.S. contracts have much more destination flexibility than those for Australian or Qatari LNG. Customers with contracts to supply one destination “can direct the cargoes to any buyers they choose,” explained Morgan in a client note on Friday.
“The invisible hand of the market is helping Europe,” he wrote. “Given the European gas supply crunch, most buyers have elected to divert their own supplies to the EU. Europe has been paying premiums that have encouraged private companies to redirect previously contracted gas to Europe to make money on the wide arbitrage spread.”
Morgan also cited reports that some trading houses with long-term commitments to supply LNG to Asia have opted to pay the penalty fee and redirect some cargoes to Europe instead. They make more money doing so despite the penalty fee.
Longer-term goal
The longer-term goal of 50 bcm more in commitments implies construction of new liquefaction (export) facilities in the U.S. and new regasification (import) facilities in Europe. Germany, which is extremely reliant on Russian pipeline gas, currently has no regas facilities; it’s now planning to build two.
“World-scale-sized LNG export terminals cost billions of dollars and take years to construct,” noted Morgan. The two biggest obstacles to new projects are the need to secure LNG purchase agreements and the need to secure debt and equity financing.
Government intervention could minimize both obstacles. According to the joint U.S.-EU statement, “The European Commission will support long-term contracting mechanisms and partner with the U.S. to encourage relevant contracting to support final investment decisions on both LNG export and import infrastructure.”
Morgan explained: “While this is still very much a theoretical concept, if the EU government backstopped LNG purchase agreements and the U.S. government backstopped LNG construction loans, the two largest impediments would be removed and private project finance could probably be arranged in 60-90 days.
“However, even if Europe and the U.S. acted today with the full might of their collective balance sheets, it would take a minimum of two years for regasification import [facilities] to be built and between 3.5 and 5 years for LNG export terminals to come online.”
That’s a long time away, considering the urgency and the scale of Europe’s demand for natural gas in the near term.
LNG shipping impacts
To the extent that it succeeds, the U.S.-EU plan has several consequences for shipping.
Shipping demand is measured in ton-miles: volume times distance. On one hand, the plan is a negative for ton-miles because Europe is much closer to the U.S. than Asia. That’s bad for the “miles” part of the equation.
On the other hand, the goal is to replace gas that moves via pipeline with gas that moves by ship, so it’s positive for the “tons.”
According to Clarksons Platou Securities, “Some cargoes bound for Asia will now go to Europe. Although not great for ton-miles, in the longer term, it could incentivize more liquefaction plants in the U.S.”
Stocks of LNG shipping, floating production and floating regasification companies jumped on Friday after the U.S.-EU announcement. Shares of Dynagas LNG Partners (NYSE: DLNG) rose 16%, Hoegh LNG Partners (NYSE: HMLP) 14%, Flex LNG (NYSE: FLNG) 10%, GasLog Partners (NYSE: GLOP) 9%, and Golar LNG (NYSE: GLNG) 9%.
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