When Donald Trump warned Germany about the Nord Stream 2 natural gas pipeline and potential dependence on Russia, Germany’s delegation to the U.N. just laughed. Well, the laughing is over, now that the country has skyrocketing energy prices that are putting people into energy poverty and businesses are hurting for reasonably priced energy to survive. The continent has nowhere to go to replace Russian natural gas and other Russian energy commodities despite spending decades pushing wind and solar power on the electricity market. Germany and Europe are still not ready to give up on their green energy transition, touting instead that to gain independence they need homegrown wind and solar power. Knowing that they cannot achieve that overnight, they are turning to America’s LNG, other fossil fuels, hydrogen, as well as energy demand reductions.
Sanctions have started reducing the availability of Russian natural gas for Europe. Russia will no longer sell gas to Poland and Bulgaria because of their refusal to pay in rubles for natural gas deliveries. Ukraine moved the entry point of Russian gas into the country from a Russian forces controlled area to another entry point, halting all Russian gas flows via a route through the Sokhranovka transit point in southern Russia, reducing gas flows from Russia’s Gazprom to Europe via Ukraine by a quarter. In 2021, the amount of Russian gas shipped to Europe via Ukraine totaled 41.6 billion cubic meters. Also, Russia stopped gas flows to Finland due to the country joining NATO and imposed sanctions on the owner of the Polish part of the Yamal pipeline that carries Russian natural gas to Europe, as well as Gazprom’s former German unit. The implications of Moscow’s sanctions are not clear as yet.
Ramifications of Switching Out of Russian Fuels
The European Union has decided to end fossil fuel imports from Russia by 2027; the plan would cost 195 billion euros ($206 billion)—32.5 billion euros ($34 billion) per year until 2027—on top of its continuing investments in renewable energy needed to meet the bloc’s 2030 climate target. However, there are no immediate options for replacing Russian energy commodities. Replacement options include:
- Increasing pipeline gas flows from other sources. However, pipeline gas from Norway is limited due to production capacity constraints, pipeline gas from Algeria is unreliable, and pipeline gas from Azerbaijan has limited capacity.
- Using more coal and oil, but those fuels have more carbon dioxide emissions than natural gas and are subject to a carbon tax from the continent’s cap and trade program, as is natural gas.
- Constructing more wind turbines and solar panels. But, these units suffer from high costs due to the need for battery back-up, energy density limitations, reliability issues due to their intermittency and dependence on China for critical minerals and solar panels. Low wind resources were one of the reasons Europe had energy shortage issues beginning in the fall of 2021 that helped to escalate prices by driving increased demand for natural gas.
- Producing renewable hydrogen, which is not economical as it is still developmental. EU has plans to produce 10 million metric tons of renewable hydrogen by 2030 and import another 10 million metric tons.
- Purchasing more LNG, but the ramp up will be slower than what Europe needs to replace Russian natural gas, and natural gas transport from the United States is being limited by the Biden administration’s opposition to pipelines and its no leasing policies.
- Reducing demand, but with the high energy prices, most reductions probably have already been made.
Turning to LNG
Global LNG imports in 2020 were 487.9 billion cubic meters. The EU accounted for 81.4 billion cubic meters of LNG imports—17 percent. To increase Europe’s LNG imports by 50 billion cubic meters this year would be a 61.4 percent increase. Most of Europe’s terminals do not have capacity to absorb significant additional quantities of imported LNG. Terminals that do – for example, in Spain – are in the wrong place or lack sufficient connections to supply areas of highest demand.
To completely substitute Russian natural gas imports with LNG, the EU would need to nearly triple its import terminal capacity and exporters of LNG will need to increase their export capacity by 150 billion cubic meters—at least 30 percent. The only country that can expand LNG export capacity is the United States, but it would have to increase its capacity by 150 percent. Currently, U.S. export capacity is increasing at a rate of about 40 percent per year. Thus, natural gas imports from Russia cannot be transitioned to LNG anytime soon— it will take years due to cost overruns, construction delays and regulatory red tape. Materials prices increased 20 percent in the past two years while gas compressors are 30 percent more expensive. Metals required for LNG projects are in short supply due to Russia’s invasion of Ukraine and could add another 10 percent to costs. If the funding, regulatory permitting and materials are in hand, it would take 5 years to build an LNG import terminal. In Germany, the first LNG terminal is due to enter operation in 2026.
Floating regasification units may be the only realistic option. Floating Storage and Regasification Units are often former supertankers which have been repurposed to regasify significant quantities of LNG. While onshore terminals must follow strict construction regulations, all that is required for floating terminals is a deep water port that can land very large ships. The German government instructed utilities to rent three Floating Storage and Regasification Units from the Greek company Dynagas and the Norwegian subsidiary of Hoegh. Germany’s first floating LNG terminal is expected to be operational before the end of the year, with the rest due by mid-2024.
U.S. LNG Exports and Capacity
U.S. LNG exports increased by 16 percent to a record high in March, Reuters reported. Europe was the top destination, with 65 percent of the total 7.43 million metric tons that U.S. LNG producers exported. In April, Europe took in some 64 percent of U.S. LNG imports, which dropped by 8 percent from March due mostly to scheduled maintenance. Europe will need a lot more gas to fill up its storage caverns ahead of the next heating season and fulfill its target of a 65-percent reduction in dependence on Russian gas.
The United States increased its LNG export capacity from zero in 2012 to almost 100 billion cubic meters in 2021, increasing its LNG exports by 50 percent between 2020 and 2021. In 2021, the United States exported 96.5 billion cubic meters of LNG, exporting 23 percent to the EU—22.2 billion cubic meters. This year, U.S. LNG exports are running at record rates and most of the LNG is going to Europe. President Biden promised to supply an additional 15 billion cubic meters to Europe, which would be a 68 percent increase from last year’s total.
Record LNG exports are driving an increase in U.S. natural gas prices. Since the start of the year, natural gas future prices increased as much as 96 percent to trade above $7 per million British thermal units in May, touching $8.45 per million Btus on May 23.
Increasing Renewable Capacity
The European Union wants to source 45 percent of its energy from renewables by 2030 despite commodity prices soaring and material and equipment shortages. The UK government is raising its 2030 renewable capacity target to 50 gigawatts for offshore wind while it is berating the oil industry for not investing enough at home.
Europe’s energy transition to renewable energy in order to reach net zero carbon was one of the reasons electricity prices in Europe escalated. In the United Kingdom, some households are being forced to take out loans to pay their electricity bills. In the EU, as in the UK, member states are providing direct financial support to their citizens and businesses to help them with higher electricity prices resulting from the governments’ energy policies. And even with government support, people are struggling with their bills. At the same time, many of the governments are providing direct financial support to wind and solar developers, in addition to charging their citizens extra for the privilege of having renewable power in their energy mix.
The outlook for European energy prices remains quite grim. According to economists polled by the Wall Street Journal, energy prices in the EU will remain high and even rise further in the coming months thanks to Western sanctions on Russia that are reducing the availability of Russian energy for Europe. With Europe’s energy shortages and Russia’s invasion of Ukraine, Europeans believe they are not building wind and solar capacity fast enough. Nothing could be farther from the truth. One only has to remember the days when it was politically correct to produce oil and natural gas and mine for coal domestically. Economies thrived, businesses prospered and residents could pay their utility bills.
Russia’s invasion of Ukraine is exacerbating energy shortages that had already existed before February 24, 2022, and escalating energy prices. Those shortages were originally caused by low wind resources, increased demand from COVID lockdowns, and cut backs of natural gas by Russia. Despite putting Europeans in energy poverty, the EU and UK are keeping to their energy transition rushing into wind and solar power, rather than using domestically produced oil, natural gas, and coal.
President Biden is forcing the United States to follow in these footsteps. As a result, gasoline prices are over $4.50 a gallon, natural gas prices have hit over $8 per million Btu and oil prices are over $100 a barrel. Wind and solar power only supply 12 percent of the nation’s power and just 5 percent of the nation’s energy supply despite decades of federal subsidies and state mandates to support their implementation. Following in Europe’s footsteps is not the way to go. Wind and solar power require expensive battery back-up due to their intermittency and continued federal subsidies despite advocates telling Americans that wind and solar power are competitive with fossil fuels. Europe began this problem and the Biden administration seems determined to follow Europe’s lead.