German companies have agreed with Qatar to supply the country with 2 million tons of liquefied natural gas (LNG) over 15 years. These are relatively small volumes, but they reflect the desire of European countries to find a long-term replacement for Russian raw materials. So far, there have been no great successes – for this year we managed to buy the right amount at prices 5-7 times higher than the norm. Correcting this situation in an environment where the cost is dictated by the market is not easy. Long-term contracts like the one concluded with Qatar through the mediation of Conoco Phillips could be the way out. However, they need a complete set of infrastructure, the determination of the Europeans themselves, as well as the availability of stable gas supplies. While there are difficulties with all these components. For more details, see the Izvestia article.
After Western Europe began to opt for natural gas as a key fuel, the countries of the region began to focus primarily on long-term contracts with suppliers. Such agreements were concluded by the EU states with Norway, Algeria, but above all with Russia. At the same time, over 90% of the gas was delivered to the countries of the Union through the pipeline. The scheme operated for decades and did not cause any complaints from any of the participants, despite certain frictions, such as Ukrainian transit.
shale revolution in the United States in the late 2000s – early 10s. The Americans sharply increased gas production using new technologies and fields, and soon not only became self-sufficient in blue fuel, but also got the opportunity to export it, even despite the growth in domestic consumption.
At the same time, the LNG market developed: tankers were built, as well as numerous terminals for liquefaction and regasification – not only in the USA, but also in the countries of the Persian Gulf, as well as in Europe itself. The ability to carry annually billions of cubic meters of raw materials by tankers has led to a sharp change in the structure of the market, which has become closer to oil in terms of flexibility. At some point, it turned out that spot gas prices are lower than the prices of long-term contracts, and even those organized according to the “take or pay” principle.
For many European countries this has become a good lever for putting pressure on suppliers to lower prices or even completely abandon long-term relationships. The EU concluded that in such a situation it is easier to buy everything you need on the open market. Such aspirations were curbed only by the fact that gas prices in East Asia remained high, because of which there was little reason for suppliers to drive additional tankers to the European Union.
By 2021, this difference, however, has practically disappeared. Gas prices on the eve of last winter at the Dutch TTF hub exceeded $500 per thousand cubic meters. The advantage of deliveries to the north-west of Europe instead of Asia became obvious to everyone, especially to the Americans, who in this case also had a much shorter transport arm. Multi-year contracts turned out to be completely useless to anyone.
The year 2022 has come and the situation has turned 180 degrees in a matter of months. Sanctions against Russia, and then the sabotage of the Nord Stream, drove gas prices to mind-boggling levels. At some point, they reached $3,000 per thousand cubic meters on the spot market (as recently as 2019, even before the coronavirus and all subsequent events, a spot price of $150 was considered normal). They were followed by electricity prices, which also soared 10-12 times compared to pre-crisis levels. European industry, which for decades had a clear competitive advantage over Asia thanks to low gas prices (which at the same time allowed to reduce both production costs and carbon dioxide emissions by moving away from coal), found itself in a difficult position.
The threat of closure hung not even over individual enterprises, but over entire industries. Metallurgy and fertilizer production were particularly affected. One way or another, the entire economy was affected by the energy crisis. However, the most difficult trials for the EU are yet to come – this year it will most likely be possible to survive the winter due to accumulated reserves and warm weather, even if it had to pay exorbitant prices for it.
Benefit in terms
In such a situation, the countries remembered the usefulness of long-term agreements on gas supplies. Even if at the moment they were more expensive, one could not always count on a good market situation. Apparently, the European Union has now realized this.
Literally since March, the race for new contracts began, which could solve the problem of energy security for many years . Since there is no place to get new pipeline capacities, we already talked about LNG. The countries of the union, both individually (in particular, Germany), and through the efforts of the European Commission, tried to negotiate with suppliers, but for the time being without much success.
In the US, gas production is mainly carried out by relatively small companies that are not very interested in working on a long-term basis. There are suppliers from the Middle East, but for a long time representatives of the Gulf countries answered that they did not have excess gas for such supplies. Especially since Asia, in the conditions of high prices, hastened to buy gas, including in reserve (China has formed especially significant reserves).
Only in the fall did some movement begin in this direction. In September, the German RWE agreed to import LNG from ADNOC from the emirate of Abu Dhabi through a terminal at Brunsbüttel on the North Sea coast. So far, we are talking about several deliveries (the first of them will come in December in the amount of 137 thousand tons). In parallel, an “agreement of intent” was signed, according to which gas will be supplied from 2023 on a regular basis. However, it must be understood that such an agreement is not binding.
At the end of November, Germany signed an already “firm” agreement with Qatar Energy. The parties agreed on supplies for 15 years starting from 2026. This contract was the first of its kind in a very long time and in this situation it should rather be regarded as a success for the Europeans.
Although there are many but. First of all, the volumes – are only 2 million tons, that is, less than 3 billion cubic meters after regasification per year. On a German scale, this is very small: only from Russia in 2021, Germany received about 50 billion cubic meters. However, other states have not yet been able to achieve such results.
There are several reasons for this. Firstly, the absence of excess volumes for which it would be possible to conclude long-term contracts. In the oil industry, Saudi Arabia has the capacity (up to 2 million barrels per day) that can be quickly released to the market if necessary. With gas, such a maneuver will not work: it is technically quite difficult, and the creation of reserve capacities will require a colossal increase in production. By the way, in the same Qatar there is no particular increase in production in recent years. Over the past 5–7 years, this indicator has bilized in the range of 170–180 billion cubic meters per day.
Secondly, for regular imports, it is necessary to sharply increase the capacity of regasification terminals. They are still lacking: in Germany, for example, new liquefied gas distillation plants with a total volume of 30 billion cubic meters will be built only next year. A temporary solution is floating terminals. One of them stood in the port of Wilhelmshaven in November, and it was built in just 190 days. Such infrastructure has its own problems, mainly with the environment. For regasification, chlorine is used, which is then discharged into the sea. Such terminals are not liked by the “greens”, whose positions in Europe have been strengthening in recent years, so it is difficult to call them a solution for any occasion.
Thirdly, until the Europeans themselves are confident in the need for long-term contracts, because they believe that gas dependence should be eliminated in principle, and contracts for decades do not contribute to this in any way.
While temporary solutions prevail in Europe, which are very expensive for the EU (probably many times more than what could be bought under firm contracts). At the same time as reducing dependence on pipeline gas from Russia, Europe is increasing its dependence on Russian LNG. In the first nine months of this year, the growth in the supply of this resource from Russia to the EU grew by 40% at once, despite the sanctions. Now about half of Russian gas in the Union countries is transported in liquid form by tankers. There are no limits to the growth of this trend on the horizon.