Rising tensions on the Russia-Ukraine border have raised fears that Europe’s gas supply crisis could become far more serious. Gas market prices have already surpassed record highs and threaten to saddle European households with a cost of living crisis.
Russia is Europe’s largest supplier of gas, of which a third flows through Ukraine’s gas pipelines to countries across the continent. Russian gas flows have been a quarter lower than usual over the past year, but European leaders now fear that a Russian invasion of Ukraine could spell an energy catastrophe if gas exports are cut.
White House officials said this week that the Biden administration is preparing to finalise a deal to “ensure Europe is able to make it through the winter and spring” by brokering a deal for major gas producing countries to send liquified natural gas (LNG) by tanker to Europe. It is not a plan without challenges.
US officials have described the search for spare gas cargoes as “global”.
But the talks are likely to focus on Qatar, one of the world’s biggest producers of gas and the second largest exporter of liquified natural gas (LNG) behind Australia. Qatar is a strong western ally in the Middle East and has supplied LNG to the UK and other European countries for years, shipped super-chilled via tankers. Libya may also be able to help given its strong gas production and close proximity to the continent.
The US itself could play a direct role in bolstering Europe’s gas supplies too. A record number of LNG cargoes left the US destined for European ports over the last month, and the US has a strong long-term incentive to encourage Europe to give up its reliance on Russia – and the Nord Stream 2 pipeline project – in favour of its own shale gas reserves.
The scale of Europe’s gas supply challenge will depend on how far tensions between Rusland and Ukraine escalate.
Russia sends an estimated 230m cubic metres of gas to Europe every day, of which around a third travels west via Ukraine. But market experts are divided over whether Russia would be likely to disrupt all gas exports to Europe, or only those which rely on Ukraine’s gas pipelines. Others are sceptical over whether the Kremlin would tighten Russia’s gas taps at all.
“If Russia weaponised its energy exports how much energy would they disrupt? It’s hard to scenario plan this,” said Helima Croft, the global head of commodities at RBC Capital. But the question is not whether the US could create a backstop for Russian gas supplies but whether it could source gas to help mitigate any disruption, sy het gese.
The global gas supply crunch which emerged as economies began to rebound following the Covid-19 slump means there is little spare gas to go around, according to analyst Xi Nan from Rystad Energy.
The US has said that its conversations are “really broad, with a lot of companies and countries around the world” so that it wouldn’t need “to ask any one individual company or country to surge exports by significant volumes, but rather smaller volumes from a multitude of sources”.
“The question,” said Croft, “is whether the US can find any slack in the system”.
Qatar currently produces 77m tonnes a year (Mtpa) of LNG, but has contracted around 97Mtpa to buyers in Asia, Europa, Kuwait and major energy companies which can choose where they send each cargo. The US has also committed its 80m tonnes of LNG production to buyers in Asia, Europe and so-called “portfolio players”.
But there is a possibility that some contracted cargoes earmarked for Asia could be diverted to Europe instead thanks to mild winter temperatures in the region which has reduced gas demand, said Croft.
She added that it would take “delicate” discussions between major gas producers and their Asia buyers to negotiate some gas supply flexibility.
There are plenty of examples of emergency supply measures in the global oil market, but not for gas.
During Libya’s civil war Saudi Arabia agreed to increase its oil exports into the global market to make up a shortfall in Libyan crude which drove oil prices to $120 en oorkant Whitehall. More recently Saudi Arabia brokered a deal with members of the Opec oil cartel and its allies to make an unprecedented cut in oil production during the Covid-19 pandemic to avoid oil prices crashing to zero.
The gas market lacks the same global cooperation, which has made responding to the global supply crisis more difficult.
“Mohammed bin Salman [the Saudi crown prince] sees himself as the central bank for oil. There is no equivalent in the gas market,” said Croft. “Even if Qatar wanted to help they’re not sitting on the kind of dry powder that the Saudis could access through their oil reserves.”
Perhaps unprecedented times will call for unprecedented measures.