REFUELING EUROPE
The immediate challenge for the West: replacing the Russian natural gas that powers much of Europe so factories can keep humming and homes can stay warm next winter. By the end of this year, the continent hopes to replace two-thirds of its prewar Russian imports of 155 billion cubic meters (5.4 trillion cubic feet) a year. Half of that will come from new imports of liquefied natural gas (LNG), versus just 20% from renewables. To make LNG, gas is chilled down to –260 degrees Fahrenheit, turning it into a liquid that can be transported across the ocean in giant insulated tankers. The Europeans are gearing up to receive LNG on floating regasification facilities.
Finding enough LNG to buy (and tankers to ship it) will be tough. “I don’t think there’s an LNG operator in the world who’s not producing every molecule they can,” says Michael Smith, the billionaire chairman, CEO and 63% owner of Freeport LNG, a Texas liquefaction complex that is the U.S.’ second-largest. He has sold most of its output to Asia under long-term contracts, though much of that LNG is now being resold to Europe. It’s not enough.
In March, President Joe Biden and European Commission President Ursula von der Leyen announced a deal for the U.S. to send an additional 525 billion cubic feet of LNG to Europe this year and even more in the future. The U.S. can export more LNG. But it will take time and new capital. The nation went from being the world’s biggest fossil fuel importer in 2005 to a net exporter thanks to the rapid adoption of horizontal drilling and hydraulic fracturing techniques (a.k.a. fracking). By 2015, U.S. frackers were drilling so much oil and gas that energy prices tanked. Some players went bankrupt, while survivors came under intense pressure from investors to start paying down debt and from environmental activists to clean up their act. Over the last five years, according to consultants Wood Mackenzie, U.S. investment in fossil fuels averaged just $400 billion a year, down from $750 billion during fracking’s heyday.
Europe has shale formations too, but it never joined the fracking party. On that continent, governments, not private landowners, usually retain mineral rights (see Fact & Comment, page 15). Politicians had no incentive to fight antifracking sentiment when they could just buy Russian gas. Now that is no longer an option.
Billionaire Wesley Edens is one LNG newcomer bringing capital to the game. A co-owner of the NBA’s Milwaukee Bucks, Edens, 60, made his first fortune as a cofounder of Fortress Investment Group, a private equity shop he sold to Softbank in 2017. Now he’s CEO of publicly traded New Fortress Energy, which is developing what it calls Fast LNG. Modular natural gas liquefaction units are built in a shipyard and installed on repurposed offshore oil platforms. “We’re trying to pursue the Model T factory model for LNG,” says Edens, whose 35% stake in New Fortress is worth more than $3 billion.
He plans to put the first Fast LNG plant 16 miles offshore of Grand Isle, Louisiana, and says working that far from the coast should make approvals faster. If the White House follows through on its stated policy of streamlining permits, Edens says, he could ship his first cargoes early next year. The profits are there—Europeans are paying $22 per thousand cubic feet for natural gas, two and a half times the U.S. price. “The only commodity you cannot buy is time,” Edens says.
Lots of time has already been lost. In 2015, billionaire activist investor Carl Icahn forced LNG pioneer Charif Souki out as CEO of Cheniere Energy, a company Souki launched in 1996. His sin? Rather than pay shareholders like Icahn bigger dividends, Souki, who was convinced shortages were coming, wanted to build yet another expensive LNG complex. Seven years later, the 69-yearold Souki’s new company, Tellurian Energy, has finally begun construction of the $12 billion first phase of a similar project on 1,000 acres of coastal Louisiana south of Lake Charles. The earliest he can start shipping: 2026.
Presumably, by then, more natural gas will be available to liquefy. Production is coming back. In mid-May, there were 750 drilling rigs operating in the U.S., up from 453 a year ago but still down two-thirds from the 2,000 running during the fracking boom. Drillers are limited by a lack of skilled fracking crews, shortages in rigs and drilling sand and an overhang of debt.
“Ramping up takes six months,” says oil billionaire Harold Hamm, 76, whose family owns 80% of Continental Resources, one of the nation’s larg
est frackers. With drilling costs rising 15% a year, he’s more interested in using the oil-and-gas price spike to pay down debt. He has time on his side.
The 3 million barrels per day (bpd) of disappearing Russian production won’t be quickly replaced. Bernstein
Research estimates that OPEC has just 1.5 million bpd of extra capacity now. Saudi Aramco plans to add another 1 million—by 2027. Regardless of the timing, history suggests the West would be foolish to become even more reliant on an autocratic regime.