Europe's mad dash to build LNG import terminals could result in an excess number of regasification projects by the end of the decade if the EU manages to continue reducing natural gas consumption and accelerates the rollout of wind and solar power capacity.
Ahead of the 2022/2023 winter season, LNG tankers were queuing to unload at a few of the import facilities. But as the winter progressed, several new terminals became operational, including three in Germany and one in the Netherlands.
While a rush to increase import capacity in the short term is justified, the race to install more terminals could result in an oversupply of LNG import capacity in the long run, considering Europe's pledges to boost renewables rollout and reduce gas demand as part of its energy security policy and climate goals, some analysts say.
Gas Demand Drops
The EU reduced its consumption of natural gas by 17.7% in the period August 2022-March 2023, compared with the average gas consumption for the same months between 2017 and 2022, Eurostat data showed last month. The gas consumption reduction beat the EU's target to cut demand by 15% during those months compared to the five-year average.
The power sector was the only sector in which natural gas demand in Europe rose in 2022 compared to 2021, but a record-high EU capacity installed across solar and wind sources – around 50 GW – avoided the need for around 11 bcm of natural gas in the power sector. This was the single largest structural driver of reduced natural gas demand, analysts with the International Energy Agency (IEA) wrote in an analysis in March.
LNG Import Capacity Grows
Meanwhile, the EU is boosting its LNG import capacity and is ready to welcome even more LNG cargoes this year and in the coming years, Maros Sefcovic, European Commission Vice President for Interinstitutional Relations and Foresight, said earlier this year.
The EU will soon have 35 LNG regasification terminals, up from 27 currently, and the regasification capacity is set to increase to 227 bcm from 178 bcm, Sefcovic said in March. The EU is getting ready for more LNG by reinforcing its import capacity infrastructure, the official added. Related: Saudi Aramco Considers Another Stock Offering In Riyadh
Over the past year, Europe has attracted a lot of LNG supply due to the sky-high prices and lackluster demand in Asia, including in China. Europe continues to attract more than half of all U.S. LNG exports amid weak demand in both Europe and Asia and the lowest benchmark gas prices in nearly two years.
Europe's biggest economy, Germany, plans to have as much as 70.7 million tons per year of LNG import capacity by 2030, which will make it the fourth-largest LNG import capacity holder in the world. Germany plans to have a total of 10 FSRUs, some of which will be removed and replaced by onshore regasification facilities once they are built. The rush to have LNG import terminals as soon as possible will make Germany the fourth largest import capacity holder behind the major Asian LNG buyers South Korea, China, and Japan.
Stranded LNG Import Assets?
However, more than half of Europe's LNG import capacity could become stranded assets by 2030 as current LNG buildout plans are set to vastly exceed projected demand by the end of the decade, the Institute for Energy Economics and Financial Analysis (IEEFA) said in a report earlier this year.
Current infrastructure buildout plans suggest that Europe's LNG terminal capacity could exceed 400 billion cubic meters by 2030, up from 270 billion cubic meters at the end of 2022, IEEFA said.
However, demand for LNG by 2030 will range between 150 bcm according to IEEFA forecast, and 190 bcm according to S&P Global Commodity Insights forecast, the analysis showed.
Energy industry officials admit that Germany could have more import capacity than it could actually use at the end of this decade.
Germany may end up using less LNG import capacity than it has planned to roll out this decade, but better safe than sorry, the chief executive of the top German utility, RWE, said in an interview with German business magazines Der Stern and Capital in March.
"It may be the case that the LNG terminals are not fully utilized. But you need them as an insurance premium," RWE's CEO Markus Krebber said in the interview.
After a flurry of LNG import capacity additions in 2022, the momentum is set to continue this year, Wood Mackenzie said in a report last month.
"We expect project momentum to continue into 2023, and by 2027, we forecast that Europe will have added between 65 bcm/yr (48 mmtpa) and 150 bcm (110 mmtpa) of new regas capacity," WoodMac said.
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Hoegh LNG, which provides floating LNG units, sees strong interest for more capacity in several northwestern European countries, chief commercial officer Thomas Thorkildsen told Bloomberg in a recent interview.
"However, there are opposing viewpoints, and political processes and decisions need to be concluded before commitments are made," Thorkildsen added.
Generally, the European Commission's viewpoint is that the EU should bet big on renewables and on alternatives such as green hydrogen to cut natural gas demand and reduce emissions as it looks to become carbon neutral by 2050.
But until alternatives are able to replace large volumes of natural gas, Europe will need LNG and more regasification capacity to stave off another energy crisis and a threat of gas shortages.
By Tsvetana Paraskova for Oilprice.com
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