Infrastructure overkill?
Discover more from Energy Flux
Infrastructure overkill?
Rush to build out EU LNG import capacity seems a bit flawed
Europe’s dash to replace Russian gas has triggered a mad rush to build out new LNG import terminals. A surge in LNG imports in January raised concerns around the EU’s capacity to accommodate further major increases envisaged by the EU Commission to offset Russian molecules. A closer look at the utilisation of existing terminals confirms pinch-points are starting to emerge, but as ever in European energy matters the situation is far from simple.
This article takes a look at the limited EU LNG capacity pinch-points and compares these to the growing list of proposed capacity additions. It then considers the spectre of demand uncertainty stemming from the EU’s energy transition, and how this casts a long shadow over gas infrastructure investments. It finishes with links to useful resources and the many articles, papers and studies I’ve been reading this week on related topics.
Article stats: 2,000 words / 8 charts, graphs & tables / 10-min reading time
There’s been marked uptick in European LNG imports since late 2021, when wholesale prices on the European gas benchmark TTF leapt above the Japan-Korea Marker (JKM, the Asian LNG spot price). The higher netback (profit minus transport) offered in Europe pulled spot cargoes and those under long-term contracts with destination flexibility away from Asia and towards European regasification terminals.
The tug-of-war between Europe and Asia pushed gas and LNG prices to extreme highs in the second half of 2021, but strong bidding from buyers in China, Japan, South Korea and other major Asian importing countries kept cargoes flowing east – and European imports depressed.
The JKM-TTF spread was positive throughout most of 2021. When the Asian premium flipped negative, the so-called ‘armada’ of LNG cargoes – mostly from the US – set sail across the Atlantic destined for European shores.
The send-out rate from EU LNG terminals tracks the JKM-TTF spread. When the spread is positive, cargoes flow east and European send-out rates are depressed. This is why EU LNG imports were unseasonably low even as prices climbed to record highs. When the spread flipped, LNG flooded into Europe and send-out rates leapt to record highs:
This is when attention turned to Europe’s capacity to absorb more LNG. Was more capacity needed? Certainly, some terminals were running up against regasification and send-out capacity constraints. EU LNG terminals, which are often maligned for being ‘white elephants’, had never seen this much action. Their moment had arrived.
Or had it? Certainly, utilisation rates leapt to their highest levels ever and some terminals were virtually maxed out. But the average send-out rate across the EU’s 28 regasification terminals was still a long way from 100%:
So, which countries are maxed out, and which have spare send-out capacity? A closer look at the last six months of send-out data shows north-west European terminals are approaching capacity constraints. (Note here that contractual constraints mean Belgium’s Zeebrugge LNG terminal has a much lower annual send-out capacity than its daily send-out, so its utilisation appears much lower than it can in practice accommodate):
It should come as no surprise that north-west Europe is congested. The terminals at Rotterdam (Gate), Zeebrugge and Dunkerque service demand centres across this region and the industrialised northern European hinterland. They also have direct access to the highest concentration of gas storage facilities in Europe. This constraint is starting to be reflected in LNG pricing dynamics:
Moves are already afoot to address this pinch-point. The 12 Bcm Gate LNG terminal in the Netherlands will be expanded by 1.5 Bcm/year in 2024, with future plans for a further potential 5-8 Bcm/year. The 9 Bcm Zeebrugge terminal in Belgium will by expanded by 6.4 Bcm/year in 2024 and possibly by another 1.8 Bcm/year in 2026.
Iberian island
Spain, on the other hand, is disadvantaged. Spain has Europe’s largest LNG regasification capacity, with four terminals totalling 54 Bcm/year (44 million tonnes per annum). But pipeline capacity between Spain and France over the Pyrenees is just 7.5 Bcm/year.
Worse still, flows on this route totalled just 0.5 Bcm in 2021, according to the OIES. Spain is now calling on the EU to pay to build out the long-forgotten Midi-Catalonia (Midcat) pipeline to expand Spanish gas export capacity with France. It is not clear what this would achieve if the existing pipeline capacity gets so little use that it doesn’t even feature on ENTSOG’s map of major EU gas flows:
Build baby, build!
There are plans to expand capacity elsewhere. Russia’s invasion of Ukraine has kick-started a monumental pipeline and LNG terminal development spree. A slew of new projects has emerged and zombie schemes that were previously abandoned or shelved are being revived. Germany is the new LNG terminal development hotspot, with three projects totalling 30 Bcm proposed at an estimated cost of more than €2 billion.
The planned LNG building spree would almost double the EU’s regasification capacity. The 27-member bloc has 28 operational terminals with the capacity to import 150 Bcm/year. The pre-invasion list of planned new terminals and expansions stood at 26 projects with an aggregate capacity of almost 103 Bcm/year at a cost of €11.3 billion.
The line-up looks like this (figures from OIES and Global Energy Monitor’s Europe Gas Tracker Report 2022):
The GEM report estimates the total cost of building out this infrastructure at a cool €12.3 billion.
Since Russia’s invasion of Ukraine, more projects have been announced in Estonia, Germany, Greece, Italy and the Netherlands to develop floating storage and regasification units, and in Italy to revive two previously shelved LNG terminals. These projects could add a further at least 70 Bcm/year of capacity to those listed above. The GEM report states the following:
“Taken together, this astonishing array of projects has sprung up in the space of six weeks, and could result in yet more import capacity for the EU over and above existing overcapacity… Only a limited number of these projects are deployable in 2022–2023, and the underlying issue which these short-term and longer-term proposals cannot solve is that Europe’s gas crisis is rooted in a shortage of gas on international markets, not a deficiency in Europe’s import capacity. Even if imports from Russian pipelines were removed from the system from 2022 onward, the overall import capacity of the system would remain in excess of projected net imports.”
Pipeline pinch-points
The GEM report also flags up 15,732 km of proposed new gas pipeline projects with an estimated capital cost of €36.3 billion. The pipeline projects are a mixed bag.
Some are designed to import gas into the EU from new supply sources, such as the East Med pipeline to carry gas form Israel and Cyprus into Greece and Italy. This project stands a very low chance of being built even amid a wartime dash for non-Russia gas due to the sheer length, technical challenges (traversing water depths of 3 km!) and cost of construction.
Others are inland network expansions that might be justified on a case-by-case basis. For example, network constraints can prevent gas from being piped from LNG import terminals to where it is needed. In some cases, this could explain low utilisation rates at LNG import terminals even when imports are flooding in to other parts of Europe.
Moving from a gas system predicated on east-to-west gas flows to one based on west-to-east and south-to-north flows presents a systemic infrastructure challenge. Cross-border capacities work against this switch, and bringing LNG to new European countries implies a concurrent buildout of pipelines.
Germany is a case in point. Without Russian gas, Germany would lose 3,515 GWh/d of east-to-west capacity. The capacity to pipe in gas from Belgium, the Netherlands or Switzerland is limited to 1,769 GWh/d, leaving a shortfall of 1,746 GWh/d. But getting LNG from planned new terminals in Rostock or Wilhelmshaven to industrial heartlands means building more pipes.
So there is almost certainly a need for some new gas pipeline capacity within Europe. The tricky part will be identifying the most beneficial projects from the long-list of developers all vying for attention from EU leaders more predisposed to support gas infrastructure projects.
Capacity versus supply
The GEM report flags up numerous constraints to a construction frenzy, not least spiralling costs in labour, steel, aluminium and other essential materials that are likely to result from supply chain bottlenecks and price inflation.
There are also only a clutch of spare floating storage and regasification unit (FSRU) vessels available for charter in the global market. FSRUs are being held aloft as quick-to-deploy solutions that can alleviate import capacity constraints in a matter of months, compared to the multi-year task of building a greenfield onshore terminal.
But the biggest flaw in the ‘build at all costs’ gas infrastructure plan is that Europe’s gas problem is not principally one of capacity. It is one of gas supply, or lack thereof. Even if all 26 new LNG terminals and associated pipelines were to magically appear overnight, they would still take many years to be filled with molecules – regardless of what happens to Russian gas flows.
Remember the energy transition?
This issue, combined with the long lead times on building gas infrastructure, places the problem of replacing Russian gas squarely in the context of demand uncertainty. This problem is manifest over the short, medium and long term due to (respectively): war in Ukraine; affordability of gas in a gas market facing structurally tightness until at least 2026; and sustained policy support for energy efficiency and renewable energy development.
Future scenarios that depict EU gas consumption falling off a cliff seem hard to square with reality. It is possible to imagine the following collapse happening only amidst a deep and prolonged European recession triggered by a cut-off in Russian gas flows (and if it did, demand might never recover). And yet these impossibly ambitious pathways form the basis of high-level energy policymaking:
The policy framework required to make this happen doesn’t yet exist. But it might soon. Against this backdrop, it is hard to imagine investors, asset managers and pension funds rushing to finance the build-out of capital-intensive LNG infrastructure on the hopes that the policy-ambition credibility gap endures. At some point, there will be a reconciliation. Betting on climate policy failure is not risk-free.
Besides, LNG terminals can reach FID only after pre-selling regasification capacity under binding long-term contracts to gas shippers intent on using it, via open seasons — a means of gauging market appetite for regas capacity.
The most recent open seasons on new EU LNG terminal projects have proven lacklustre. An open season for the Croatia LNG terminal on the island of Krk in 2019 saw offtakers commit to take only 20% of the terminal’s 2.6 Bcm capacity. Financiers would not build the project on this basis, so the EU signed off on a generous subsidy package covering 86% of capital costs plus other perks.
Race to build
It is conceivable that war in Ukraine changes matters. The push to cut reliance on Russian gas could translate into heightened interest from gas shippers who take a bullish outlook on EU gas demand and book long-term capacity on some of the proposed new LNG terminals. If there’s a shortfall, EU cash might again bridge the gap.
We shall see; the crop of new and revived terminal projects will need to complete open seasons before securing finance. This means crystallising fears of a shortfall in binding contracts before those fears materialise or are proven to be misplaced.
In the meantime, sustained high and volatile EU wholesale gas prices are starting to filter through to consumer bills, forcing behavioural changes and systemic fuel switching that could avert crisis. If the European gas industry hopes to capitalise on the Ukraine crisis with a ‘last hurrah’ infrastructure building spree, it will have to get its skates on.
Seb Kennedy | Energy Flux | 6th April 2022
