Europe’s rush to LNG could turn into ‘world’s most expensive and unnecessary insurance policy’

Environment

A new floating storage and regasification unit considered crucial to Italy’s energy independence arrived in Tuscany on March 19, 2023. The Golar Tundra project is a key part of Italy’s plan to reduce its reliance on Russian gas following the invasion of Ukraine.
Filippo Monteforte | Afp | Getty Images

Europe’s rapid buildout of liquefied natural gas infrastructure is on track to far exceed demand by the end of the decade, according to new research, with more than half of the region’s planned LNG assets seen at risk of becoming idle.

The European Union has pledged to wean itself off Russian fossil fuels by 2027 in response to President Vladimir Putin‘s full-scale invasion of Ukraine, with many member states fast-tracking plans to bring in alternative sources of gas from countries such as the U.S. and Qatar.

Several countries including Germany, Italy, Greece, the Netherlands and France have announced new LNG projects or the expansion to existing ones in response to the shutdown of Russian gas pipelines.

The scramble to cover future energy needs, however, puts European countries at risk of wasting colossal sums of money, according to the Institute for Energy Economics and Financial Analysis.

Europe must carefully balance its gas and LNG systems, and avoid tipping the scale from reliability to redundancy.
Ana Maria Jaller-Makarewicz
energy analyst for IEEFA Europe

IEEFA, a U.S.-based think tank, said in research published Wednesday that Europe’s appetite for new LNG projects could massively outstrip demand in the coming years.

The continent’s LNG terminal capacity is set to exceed 400 billion cubic meters (bcm) by 2030, IEEFA said, citing current infrastructure buildout plans. This is up from 270 bcm at the end of last year. IEEFA included the U.K., Norway and Turkey in its analysis.

By contrast, demand for LNG across Europe is projected to range between 150 bcm, according to IEEFA, and 190 bcm, according to S&P Global Commodity Insights.

IEEFA said the mismatch between Europe’s future LNG demand and import facilities could result in 200 bcm to 250 bcm of unused capacity by 2030 — equivalent to roughly half the EU’s total gas demand in 2021, which was 413 bcm.

“This is the world’s most expensive and unnecessary insurance policy,” said Ana Maria Jaller-Makarewicz, energy analyst for IEEFA Europe and author of the analysis.

“Europe must carefully balance its gas and LNG systems, and avoid tipping the scale from reliability to redundancy. Boosting Europe’s LNG infrastructure will not necessarily increase reliability — there’s a tangible risk that assets could become stranded,” Jaller-Makarewicz said.

Risk of stranded assets

The highest risk of stranded assets was seen in Spain (50 bcm), Turkey (44 bcm) and the U.K. (40 bcm), while IEEFA said it expects a 36% utilization rate of Europe’s LNG terminals by the end of the decade.

A spokesperson for the European Commission, the EU’s executive arm, was not immediately available to comment.

Speaking earlier this month, the EU’s energy policy chief called on EU countries and companies to stop signing new contracts to buy Russian LNG as it seeks to reduce its energy dependence on the Kremlin.

“I encourage all member states and all companies to stop buying Russian LNG, and not to sign any new gas contracts with Russia once the existing contracts have expired,” EU energy commissioner Kadri Simson said on March 9, Reuters reported.

Several European countries including Germany, Italy, Greece, the Netherlands and France have announced new LNG projects or the expansion to existing ones in response to shutdown of Russian gas pipelines.
Michael Sohn | Afp | Getty Images

The EU’s big LNG capacity bet has also sparked environmental concerns, with research published late last year from Global Energy Monitor warning that plans to double the bloc’s LNG import terminal capacity threaten to derail climate goals while also doing little to address the energy crisis.

Analysts at GEM noted at the time that most of the LNG contracts secured by EU buyers were scheduled to start from 2026 and continue for 15 to 20 years.

To be sure, the burning of fossil fuels such as coal, oil and gas, is the chief driver of the climate crisis.

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