Emergency gas rush raises question of stranded energy assets

In July, the European Parliament took a remarkable step: it approved a law designating natural gas as a sustainable energy source.

Until a few years ago, the EU wanted to remove gas from the energy mix as quickly as possible. The European Investment Bank had sought to cut funding for natural gas infrastructure projects – from pipelines to liquefied natural gas terminals.

But Russia’s invasion of Ukraine completely changed perceptions. Instead of potentially locking up natural gas assets in the coming decade, policymakers have turned their attention to how they can keep lights on and homes warm this winter. Tens of billions of euros of investments in gas projects will follow.

It’s part of the scramble across Europe – particularly in Germany, Austria and Italy – to find ways to reduce Russia’s dependence on natural gas, which accounts for around a third of the continent’s supply.

Retaining demand is one way. Following this year’s REPowerEU programme, the EU has agreed plans to reduce energy consumption by 15%. For example, Germany has reduced its street lighting and Spain has limited the use of heating and air conditioning in most buildings. Ideally, the overall plan will phase out Russian imports by 2030.

Yet even Europe’s greenest politicians recognize that the political need to replace lost Russian gas will not come from energy conservation alone. Until last year, natural gas powered nearly a fifth of EU electricity generation.

So expect more spending at LNG import terminals to regasify the fuel, which is shipped to Europe on dedicated tankers, including to Germany.

German dependence on Russian piped gas will soon have to end. Flows from Nord Stream 1, a direct pipe from Russia important 113 million tonnes per year, have slowed to a trickle. Its newest sibling, Nord Stream 2, never even opened this year, infuriating Russian leader Vladimir Putin.

Nord Stream itself became a blocked asset. Non-Russian corporate shareholders wrote down the value of the pipeline on their respective balance sheets. Nord Stream 1, a pipeline since November 2011, had a combined declared value on the balance sheets of energy groups of up to €8 billion until last year. Since then, minority shareholders German utility Eon, French Engie and Dutch Gasunie have announced combined write-downs of more than 1.2 billion euros.

Lines to Nord Stream 1 pipeline landing facilities
Nord Stream 1 flows have slowed to a trickle © Hannibal Hanschke/Reuters

As Europe rushes to build new LNG import terminals, will these be blocked for years to come? Probably not in Europe, assuming all goes as planned.

LNG exporters like the United States are also building new terminals. These can have an expected lifetime of up to half a century, well before the forecast period of the fossil fuel transition.

Imports of natural gas – Europe does not produce enough for its needs – arrive on the continent by gas pipeline or LNG carriers. Then, to enter the gas pipeline networks of the countries, this liquefied gas (essentially cooled) must return to its gaseous state.

Onshore-built regasification terminals are costly, however, easily more than $160 million for each tonne of LNG capacity, says analyst Kaushal Ramesh at consultants Rystad Energy. It predicts a sudden change in European LNG demand, from around 72 million tonnes per year in 2021 to over 110 million tonnes per year by 2030.

A different and more flexible solution has therefore become fashionable. Floating storage and regasification units offer a faster and nearly 40% cheaper alternative. Usually these are refitted LNG transport tankers that can quickly deliver LNG into the local pipeline system. “There are few use cases better suited to FSRUs than the current situation in Europe,” Ramesh believes.

At least a few billion euros of investment in FSRUs are expected, with Europe having ordered 14 to date. If available, they may only need a year or less to connect to local pipe networks. Other sustainable energy choices to replace gas – such as wind and solar renewables, hydrogen and battery storage – still require many years of development.

Most of the gas for Europe’s needs will likely come from the United States, although some may come from Asia and the Middle East. Converting gas to supercooled LNG in countries like the United States and Qatar requires much more energy and is usually done onshore.

LNG exports to 2030: US in the lead, but are there problems ahead?

By replacing Russia as a supplier to Europe, the United States could overtake other major exporters, Australia and Qatar, by 2025 and become the first in the world, with a capacity of more than 100 million tonnes per year, says Neil Beveridge of Bernstein Research. This figure could double by 2030.

However, US LNG export terminals, built onshore, are much more expensive propositions given that they liquefy the gas. They would cost at least four times more per ton of capacity than FSRUs to build.

And those already planned U.S. LNG export units alone will require up to $81 billion by 2030, suggests Rystad.

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At least some of these projects could therefore be blocked if Europe and the other major consumer of LNG – Asia – abandon the use of fossil fuels in the decades to come.

Soaring gas prices are also impacting stranded assets.

Global gas prices have risen so much – tripling in Europe this year to more than €230 per MW hour – that they have extended the economic utility of coal as a substitute (and therefore of coal mining), notes the firm’s Trevor Sikorski. Energy Aspects consultancy.

It foresees a tight gas supply until 2025 and that gas will play a role in the EU until 2040.

Few industry experts predict an imminent decline in natural gas demand. Europe and the United States are investing heavily in it.