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EU-US council to counter Russia with focus on joint gas, net-zero goals

02 February 2022 Cristina Brooks

The EU and US plan to seek more natural gas supplies for European consumers following fresh tensions along the Russia-Ukraine border.

In a 28 January joint statement, the European Commission (EC) and the US said they would work with oil and gas producer states to find alternative natural gas sources to Russia, which now supplies 1,700 TWh or about 38% of EU natural gas.

This builds on the 2009 creation of an US-EU Energy Council that sought to boost EU energy security following that year's Ukraine-Russia dispute. The parties pledged to diversify their energy sources through the use of LNG, solar power, wind, biofuel and nuclear, as well as to cooperate on carbon capture and storage.

The aim is "to avoid supply shocks, including those that could result from a further Russian invasion of Ukraine." Such a dispute could lead to the "worst-case scenario" in which Russia cuts all pipeline gas supplies to the EU, Brussels-based think tank Bruegel said in a 27 January blog.

Asia's high demand for natural gas in the form of LNG and a shift away from long-term gas contracts in Europe contributed to Europe's surging gas and electricity prices from October through December.

The latest US-EU announcement is a "largely symbolic" one, according to an energy security policy expert at the Institute for Advanced Sustainability Studies.

"If at all, the agreement has long-term implications, for example when it comes to decarbonization and regarding the coordination of policies linking trade and climate which could turn into trans-Atlantic friction, such as the Carbon Border Adjustment Mechanism (CBAM)," Professor Andreas Goldthau told Net-Zero Business Daily.

The EU's controversial emissions-linked border tariff is set to impose new costs for steel and cement importers to spur domestic greening, and the US is mulling something similar. Already, the EU and US have agreed to jointly remove tariffs and cooperate on trade in "green steel" produced using new hydrogen-enabled production methods.

The EU's carbon neutrality proposals last July, banded together under the Fit for 55 policy package, showed that despite efforts to reduce fossil fuel use, gas and oil would remain at current levels within the EU energy mix until 2030.

However, their share is set to rapidly decrease after that, said Goldthau.

The EU has recently proposed steps away from natural gas dependency: a gas decarbonization policy, and the exclusion of unabated gas-fired power after 2030 under proposed green finance criteria, the EU Taxonomy.

"This means the EU has to bridge the next 10 years or so, find ways to add more LNG to its gas import balance, and hedge against supply disruptions, [be they] politically induced or economic in nature," Goldthau said.

US LNG not enough

Most EU gas comes via pipeline from Russia, Algeria, Norway, and Azerbaijan, but 18% is supplied via LNG. LNG can be supplied at short notice from other states on the spot market.

Europe imported LNG at record levels in January on the back of a wholesale gas price surge, low Russian pipeline supplies, and below-average gas storage levels. Russian pipeline gas supplies fell because it stopped selling on the spot market, while still fulfilling its contractual commitments.

Image credit: Bruegel

LNG delivered to Europe recently has come from swing producers in the US and Nigeria. US LNG deliveries to Europe topped 5.5 million metric tons (mt) in January, a 79% increase from a record level set in December. In the fourth quarter of 2021, rising European prices also played a role in winning more imports from Asian markets, wrote IHS Markit Senior Analyst Joe Matthews in a report on global LNG trade.

The joint statement parties, however, cannot secure more US LNG flows to Europe in the short term, according to Goldthau. "While the US gas industry is private and though the White House may wish to facilitate additional LNG supplies towards Europe, it can neither mandate US companies to re-route cargoes nor can it enhance US gas production capacity running at its limits," he said.

The post-pandemic dash for American gas marks a reversal of fortunes for the sector. "LNG export growth was dominated by the US, reflective of favorable economics meaning that all plants which could operate did so. This was in contrast to much of 2020 when poor global LNG prices meant it was no longer economical to produce LNG at some plants even on a short-run marginal cost basis," found Matthews.

Qatar is the second-biggest exporter of LNG globally after Australia, IHS Markit data shows. However, Qatar's state-owned oil company, QatarEnergy, as Qatar Petroleum is now known, has faced an EU antitrust investigation over LNG contracts since 2018. "As a result of the EC starting the antitrust probe, Qatar ended up pivoting to Asia, where the bulk of their LNG is now sold," said Goldthau.

While the EU could rely more on Qatari gas, Qatar's energy minister, Saad Sherida Al-Kaabi, warned of the dangers this would pose to third-party countries' supplies in a meeting on 1 February.

Reducing gas demand needed for net-zero

The EU has sought to slash reliance on Russian gas imports since Russia cut off supply to Ukraine after a dispute over gas supply contracts in 2006. The risks became even more grave with the 2014 annexation of Ukrainian territory by Russia.

Should Russian gas supplies to the EU be shut off, the EU could "survive" on LNG imports until the summer, albeit with disruptions to industrial consumers, said Bruegel.

Losing Russian gas supplies may bring longer-term risks such as disputes between EU countries with better and worse gas supply situations, industrial shutdowns, and high consumer prices. Gas-fired power plants might be shut down in favor of coal, with knock-on impacts for the EU's net-zero plans.

What's more, Europe's regasification terminals would only be able to handle 1,100 TWh of the LNG required to replace existing Russian gas supplies, wrote Bruegel.

If the Russian pipeline gas supplies are shut off until next winter, "there would also be pricing implications and second-round effects on the poorest countries. The EU would thus need to resort to demand-side measures, which would prove painful for different countries or constituencies," the thinktank found.

While the EU's alternate pipeline gas suppliers have spare capacity, they are unlikely to be able to spare enough gas, owing to counterparties' existing deals with other countries. "All-in-all, this illustrates that the EU cannot simply rely on increasing supply to replace Russian natural gas volumes," according to Bruegel.

Securing new long-term natural gas contracts also contradicts the EU's longer-term goals. By 2050, the EU hopes to replace natural gas with domestically-produced gases like biogas and hydrogen to reach carbon neutrality.

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