Wed. Oct 5th, 2022

Prof. ST Hsieh

Director, US-China Energy Industry Forum

626-376-7460

[email protected]

February 3, 2022

The US-Russian war crisis over Ukraine eased a bit, the White House dropped the term “imminent” from the previously label “imminent war” on February 2, 2022. It does not mean that there is any real de-escalation on the field, as the US rushed the deployment of 3,000 soldiers to Europe today. This is in addition to the promised 8,500 soldiers and Britain has announced that it will double her deployments in Europe immediately.

The fact is that the US has realized that President Putin has not made the decision to invade or not. US and Russia are still on the diplomatic track to resolve the crisis. Not only the US is engaged, France, Hungarian, Britain, and other European nations are reaching out to Russia. Of course, President Putin is in China now for the 2022 Winter Olympics and he will have face-to-face meetings with President Xi. Russian foreign minister Lavrov is having meeting with Chinese foreign minister Wang. Russia and China are furthering their strategic relationship with a focus on broadening energy trade. There is no expectation that President Putin will take any action against Ukraine till the end of Winter Olympics, which is February 20, 2022.

The core issue in this crisis is energy. Russia supplies about 30% of European energy needs, about 50% of German’s energy need. It was the case even during the first cold war. Everyone can appreciate the fact that Europe’s over-dependence of Russian natural gas. But the European democratic systems and market economy simply do not have any chance of developing collective long term energy policy in the face of Russian’s approach. The Nord Steam II pipeline between Russia and German is an outstanding case: Ukraine and the US oppose this completed project.

The US became a net energy exporter about five years ago and US will have the largest exporting LNG capacity in the world this year. However, the COVID-19 Pandemic has crashed the US economy with inflation. There are proposals from the US congress to ban energy export from the US, especially LNG.

The No. One question is that can US help at all? The following news reports gave the answer: NO! Some facts to recognize:

  1. Ongoing tensions over Ukraine and the threat of a potential conflict interrupting energy flows to Europe have overshadowed the continent’s gas market in recent weeks, causing volatile price swings.

STH: It means that the current Ukraine crisis, even without any military action, is already hurting the European consumers, every day.

  1. On the other hand, in recent years, Russia has structured its federal budget in a manner that has allowed it to stash away US$630 billion in foreign exchange reserves – cash held by the central bank in other currencies for discretionary use, much like individual savings accounts. Russian leaders can use these funds to weather any new sanctions or unexpected changes in the price of oil.

Through this fiscal strategy, Russian President Vladimir Putin has amassed a war chest to withstand any new round of sanctions, or even the complete loss of natural gas export revenues from Europe for a period of time.

  1. The volume of gas the EU needs can’t be replaced by any one supplier unilaterally without disturbing deliveries to other regions, Qatar’s energy minister Saad Al-Kaabi said Tuesday after a call with the bloc’s Commissioner for Energy Kadri Simson.
  2. The U.S. was the biggest LNG supplier to Europe last month and, together with other nations, helped displace Russian gas supply by a few percentage points in January, according to senior European Commission officials.

But that isn’t guaranteed to last. Europe has been the most profitable region to send the super-chilled fuel to since the end of last year but usually it’s Asia, the world’s fastest-growing market. If China’s appetite for gas re-awakens, tankers will be quick to abandon Europe and head eastward.

  1. “This idea that ‘we will fill the gap with LNG’, no, you can’t. It’s physically impossible to do, there’s not enough LNG in the world to do that,” Smith said.

Summary by STH: Everything takes time and money. Europe’s dependence on Russian gas is nothing new but no real action has been planned. Further, the basic question is whether Europe should even consider energy independence from Russia and not other countries? In a globalized economy, supply and demand determine the price with an efficient supply chain.

Can the US find enough natural gas sources to neutralize Russia’s energy leverage over Europe?

Amy Myers Jaffe, Research professor, Fletcher School of Law and Diplomacy, Tufts University Mon, January 31, 2022, 5:01 AM

The prospect of conflict between Russia and NATO countries over Ukraine has raised fears of an energy crisis in Europe. Russia provides nearly half of Europe’s natural gas, and some leaders worry that Moscow could tighten the flow if hostilities break out. To weaken Russia’s leverage, the Biden administration is working to secure additional gas shipments to Europe from other sources. Global energy policy expert Amy Myers Jaffe explains how much gas is available and what’s involved in rerouting it.

How dependent is Europe on natural gas, and who are its main suppliers?

Natural gas represents about one-fifth of all primary energy used across Europe. It accounts for about 20% of electric power generation and also is used for heating and industrial processes.

Russia is the largest supplier of natural gas to Europe, sending about 40% of the continent’s supplies shipped by pipeline. The next-largest suppliers via pipeline are Norway (22%), Algeria (18%) and Azerbaijan 9%. Europe also receives natural gas that is liquefied and delivered by ship.

In recent months, European imports of liquefied natural gas, or LNG, from the U.S. and elsewhere reached record levels at around 400 million cubic meters per day. To put that in perspective, a single LNG cargo ship can hold roughly 125,000-175,000 cubic meters of natural gas – enough energy to warm 17 million British homes for one winter day.

What are the biggest constraints for exporters on sending more gas to Europe?

To receive LNG, an offloading port must have a regasification plant that converts the LNG back to a gaseous form so it can be sent by pipeline to end users. Both liquefaction plants and regasification plants cost billions of dollars and take multiple years to build.

But many of the world’s top suppliers are maxed-out, with little capacity to produce and liquefy more natural gas than they are already moving.

The global LNG market has some flexibility. About two-thirds of all LNG is sold under firm, long-term contracts with fixed destinations. Some major contract holders like South Korea, Japan and China and their suppliers are willing to redirect cargoes to Europe if a further cutback in Russian exports creates a worsening supply crisis.

Have suppliers rerouted shipments this way before?

Today, analysts say that producers or LNG importers may be able to redirect cargoes that could offset about 10%-15% of any shortfall. Still, such shifts would likely be at premium prices, leaving European consumers with an even steeper bill than they face now.

Will increased U.S. LNG shipments to Europe drive up prices for U.S. consumers?

Existing U.S. LNG export facilities have been running at full capacity for several months. About half of U.S. LNG shipments in December 2021 were destined for Europe, spurred by rising prices in European markets. Previously, a larger share of U.S. LNG exports were sailing to China, where drought-related constraints on hydroelectric power had created a surge in demand for natural gas.

In other words, U.S. sellers have been able to supply more gas to Europe by diverting export cargoes, rather than by selling gas that would otherwise have been used domestically. In my view, if U.S. natural gas prices rise in the coming weeks, winter weather is likely to be a bigger driver than LNG exports.

Wouldn’t Russia harm its own economy by cutting off gas exports to Europe and losing those revenues?

In recent years, Russia has structured its federal budget in a manner that has allowed it to stash away US$630 billion in foreign exchange reserves – cash held by the central bank in other currencies for discretionary use, much like individual savings accounts. Russian leaders can use these funds to weather any new sanctions or unexpected changes in the price of oil.

Through this fiscal strategy, Russian President Vladimir Putin has amassed a war chest to withstand any new round of sanctions, or even the complete loss of natural gas export revenues from Europe for a period of time.

Still, any Russian move to cut off gas exports to Europe might have longer-term consequences. Putin may have hoped that his saber-rattling about natural gas, and the high prices it has triggered, would convince Europeans that Russian gas is vital and can’t be easily replaced with renewable energy. But ironically, this tactic may already have created a lasting distaste that fast-tracks Europe’s pivot to offshore windEuro-North African hydrogen hubs and U.S. LNG.

Gazprom, the Russian firm with the largest gas export footprint in Europe, might also find itself adrift in a sea of lawsuits and high penalty charges for breaking its contractual commitments in the wake of a cutoff. That in turn could affect the Russian people, who also rely on Gazprom’s solvency for their winter fuel for heating.

Putin may be willing to bet that an energy pricing crisis in Europe will sow popular discontent, scotch the energy transition and help Russia win concessions on NATO’s positioning of troops and missiles. But there is little evidence that Europe will react that way. While Europe’s shift to renewables will take time, it will still be bad news in the long run for Russia, which has 1,688 trillion cubic feet of natural gas reserves left to be exploited for as much as 100 years of supply.

This article is republished from The Conversation, a nonprofit news site dedicated to sharing ideas from academic experts. It was written by: Amy Myers JaffeTufts University.

Europe Faces Harsh Reality of Finding Russian Gas Irreplaceable

Anna Shiryaevskaya and Isis Almeida Wed, February 2, 2022, 1:52 AM

(Bloomberg) — Energy-rich countries from Qatar to Azerbaijan have all pledged emergency gas supplies to Europe, but the region is quickly figuring out it can’t replace top supplier Russia.

Ongoing tensions over Ukraine and the threat of a potential conflict interrupting energy flows to Europe have overshadowed the continent’s gas market in recent weeks, causing volatile price swings. War could interfere with the massive volumes that Russia sends to the continent, about a third of which come through Ukraine.

To mitigate the risk of supply disruption, the European Union is speaking with major producers, seeking partnerships and even potential fuel swaps with Asia, where the market is twice the size of the bloc’s. Recent arrivals of liquefied natural gas have helped to ease tightness, as has mild weather, but Europe relies on Russia for more than a third of the gas it uses, and sourcing that fuel from elsewhere could spread the crisis to other regions.

“Europe has no alternative to Russian gas,” said BCS Global Markets Senior Analyst Ron Smith. “You would have to divert half of the LNG that Asia consumes in order to replace Gazprom PJSC. And what would that mean? That would mean massive energy shortages all across Asia, you would export Europe’s energy crisis to Asia.”

Supply Diversions

The volume of gas the EU needs can’t be replaced by any one supplier unilaterally without disturbing deliveries to other regions, Qatar’s energy minister Saad Al-Kaabi said Tuesday after a call with the bloc’s Commissioner for Energy Kadri Simson.

He added that Doha’s supply contracts are “sacrosanct in Qatar,” and the nation’s priority is to fulfill the needs of its existing customers first. Guaranteeing Europe’s energy security will require a collective effort from a number of different suppliers, he said.

For any prolonged disruption lasting through next two winters, Europe would have to curb demand, researchers at the Brussels-based Bruegel think tank said in a blog. And that uncertainty is likely to keep prices high as competition for LNG intensifies.

“As long as the situation in Ukraine is unclear and unresolved, European buyers will be willing to pay enough to attract flexible LNG cargoes to make sure inventories do not run dry,” said Oystein Kalleklev, chief executive officer of LNG shipowner Flex LNG Ltd.

Because gas infrastructure is expensive, most of the world’s volumes are typically sold under long-term contracts between sellers and buyers. Flexible deliveries from the U.S. could help, but only if the price is right.

The U.S. was the biggest LNG supplier to Europe last month and, together with other nations, helped displace Russian gas supply by a few percentage points in January, according to senior European Commission officials.

But that isn’t guaranteed to last. Europe has been the most profitable region to send the super-chilled fuel to since the end of last year but usually it’s Asia, the world’s fastest-growing market. If China’s appetite for gas re-awakens, tankers will be quick to abandon Europe and head eastward.

Filling the Gap

Meanwhile, Gazprom’s daily gas exports via pipeline plunged to its most important markets in January, to the lowest since early 2015, despite the company producing more of the fuel.

On the EU’s radar is also Azerbaijan, the Caspian nation that started sending gas to Europe at the end of 2020. Its deliveries to Europe, Turkey and Georgia are about a 10th of volumes Gazprom sells to its main export markets, and that supply was pre-sold almost a decade ago to help finance production and pipelines.

“Reality is Azerbaijan is not a competitor to Russian gas simply because of the volumes,” Elin Suleymanov, the nation’s ambassador to the U.K., said in an interview last week. “We could help with some deliveries but Azerbaijan volumes are not equal to the Russian volumes, that’s obvious. That’s something which also needs to be thought of by our Western partners.”

For now, Europe relies on the LNG that’s been arriving at its shores, helping to ease high prices. By May, Asia is set to regain its spot as a premium export market for U.S. cargoes of the fuel, according to BloombergNEF calculations.

“This idea that ‘we will fill the gap with LNG’, no, you can’t. It’s physically impossible to do, there’s not enough LNG in the world to do that,” Smith said.

©2022 Bloomberg L.P.

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