A new EU partnership could triple U.S. exports of liquified natural gas

On March 25, President Biden and European Commission head Ursula von der Leyen took the stage in Brussels to announce a stunning trans-Atlantic pact to accomplish what many doubted the world would ever see: A firm commitment to dump Russian natural gas. The new plan follows an EU proposal titled REPowerEU, unveiled two weeks earlier, that for the first time advocated a total break with the bloc’s largest foreign energy supplier by far in protest for Putin’s assault on Ukraine. But the new U.S.-EU agreement is a watershed because it specifies where the gigantic volumes needed to replace Russian shipments would come from. The accord effectively marshals the U.S. to supplant Russia as the biggest single exporter of the gas that furnishes 20% of the member nations’ electricity, and almost 40% of home-heating fuel.

The new plan pledges to wean the EU from 50 billion cubic meters (bcm) of Russian gas this year and follow the REPowerEU schedule to dump all Russian imports by 2030. The 2022 goal represents a reduction of around one-third of Europe’s annual Russian imports. The pact tags U.S. liquified natural gas (LNG) as the principal source for filling the gap created by the epic axing. The blueprint calls for the U.S. to fill one-third of the gap by upping its LNG shipments by 15 bcm in 2022. The EU would achieve the additional reduction through a combination of accelerating the transition to renewables and encouraging home energy saving practices such as deploying smart thermostats and heat pumps. But the big surprise was the jaw-dropping, longer-term target for U.S. shipments.

In fact, U.S. producers are already sending record LNG shipments to Europe. Last year, America took first place for the first time by capturing a 26% market share, edging past Russia (19%) and Qatar (22%). In the first three months of 2022, the U.S. has been capturing almost 60% of all LNG shipments, raising its annualized total from around 25 billion cubic meters (bcm) last year to almost 50 million. The joint announcement calls for an increase in non-Russian imports of 15 million bcm in 2022 and sets a target for the U.S. to supply an additional 50 million bcm annually (bcm/y) in the years ahead.

It’s unclear if the EU is using last year’s exports of 25 bcm or the current number closer to double that figure as the baseline. But at the least, U.S. producers would be supplying three times 2021 volumes, and by Fortune‘s estimates, possibly quadrupling shipments to 100 bcm/y. The communique doesn’t say how fast U.S. imports would ramp to the full extra 50 million bcm/y, but it strongly implies the shift would happen fast. A note from research firm Rystad Energy commenting on the announcement predicts that all that new, virtually guaranteed, long-term business will “encourage” the “final investment decisions” for expanding LNG output in the U.S.

Russia was already pressuring Europe by squeezing its gas supplies before the invasion

The U.S.-EU deal was desperately needed for two immediate reasons. First, in late February, Germany suspended approval of the Nord Stream 2 pipeline that was slated to fill around 10% of EU consumption by 2024. So suddenly big shortages were looming. Second, Russia started lowering its shipments well before the invasion to demonstrate its power over Europe’s economies and warn the member states of pain to come if they imposed tough sanctions. Around 80% of Russian supplies flow through three pipelines. Nord Stream 1 running across the Baltic from Russia to Germany is the largest conduit. But two others, the Velke Kapusany stretching from the Ukraine-Slovakia border to Germany and the Yamal-Europe linking Russia with Germany and Poland, typically furnished 40% of Russia gas dispatched by pipeline. Starting in mid-2021, Russia lowered the flows through Velke and Yamal, a move that slashed pipeline deliveries by around 20% by early 2022. By March, gas stocks in Northern Europe fell to just 60% of their average levels of the previous five years. The Russian squeeze helped send the European natural gas prices soaring to around $30 per million btu, six times the figure in the U.S.

Shortly before the accord was announced, Amos Hochstein, senior advisor on energy at the U.S. State Department, gave clues to the deal’s origins. Hochstein declared in a CNBC interview that “we saw that Russia was undersupplying Europe with gas last year. Those pipelines [that gave Russia so much power] were a legacy of the Cold War. So Putin’s goal was to put Europe in a major energy crisis before he started his invasion. We worked hard in January and February to ensure that we had a surge in LNG from the U.S. and other places.” The goal, he added: “breaking Putin’s grip over Europe.”

Russia also reduced LNG shipments to Europe, but by a much slighter amount. In fact, less than one-fifth of Russia’s gas exports to the EU flow go via LNG. Hence, the U.S. will mainly supplant the much greater quantities that Russia’s been long sending by pipeline.

The new pact is great news for the future growth of U.S. LNG

In its comments on the agreement, Rystad notes that “the U.S. can easily increase” LNG shipments to Europe by the 15 bcm goal. That would already represent a 60% jump over the record volumes shipped across the Atlantic last year. The extra demand from Europe, however, will not immediately increase U.S. LNG output. The big U.S. producers, a group that includes Cheniere, private project manager Venture Global, and giant utility Sempra, are already selling all of their supplies, chiefly on longterm contracts. In fact, Asia’s traditionally led Europe as the top market for U.S. LNG. But because European prices now far exceed levels in Asia, along with the new EU commitments, Europe is poised to take the lead, probably by a wide margin. In fact, the added shipments to Europe will come from diverting supplies to big customers such as Japan and South Korea. How will that happen? U.S. producers typically secure flexible but riskier contracts that give them wide latitude in shifting volumes to markets where demand is hottest.

The importance of Europe’s rise as a gigantic market: It ensures that LNG producers will clinch sundry new contracts from oil companies and traders that supply the big utilities and manufacturers in Germany, France, or Poland. With those agreements in hand, they can raise the cash for the multi-billion terminals that can take four years to build. The industry was already growing rapidly before the news from Brussels. Last year, major expansions at the Cheniere facilities in Louisiana and Texas and the Venture Global site in Louisiana expanded the industry’s capacity by around one-quarter. Venture Global is constructing another Louisiana LNG giant called Plaquemines that will be operational in 2024, which will add the equivalent of one-fifth of today’s capacity. In a sign of the times, Shell just signed a 20-year deal to purchase a big share of its future output. And Cheniere just secured a major deal for additional shipments to French utility Engie. Sempra is pondering no fewer than four major investments for two new facilities and two expansions of existing projects.

Hence, the prospects of big, assured sales to Europe will help make LNG one of the big growth energy businesses of the next decade, and probably beyond. It’s one of the few positive stories to emerge from the tragic invasion that shook the world.