U.S. natural gas shipments keeping Europe aglow

The lights in Europe are being kept on by giant ships sailing from ports in Louisiana and Texas.

The ships are loaded with natural gas, chilled to a liquid. Europe used to be a fickle customer for liquefied natural gas, preferring to rely on often cheaper pipeline gas from Russia, Norway and North Africa. LNG used to go primarily to Asian countries willing to pay more, like China, Japan and South Korea.

All of that has changed over the past year. Europe, responding to cutoffs of natural gas by Russia and trying to fill storage facilities to ward off winter cold, has been willing to pay almost any price to outbid other buyers.

“At the moment we cannot do without LNG,” said Augustin Prate, vice president for energy and commodities at Kayrros, a Paris-based research firm.

The upending of the natural gas market in Europe has been head-spinning, and it isn’t over. Europe’s gas storage facilities, which gorged on LNG all spring and summer, are full; they can barely take any more. The price of a shipload of LNG, which might have sold for $20 million two years ago, soared to perhaps $200 million last summer, and is now about half that, with winter fast approaching. Now, around 40 tankers with chilled gas worth billions have been sitting off the coasts of Europe and Asia, anticipating that if they wait until the weather turns colder before unloading their fuel, they will be paid higher prices.

The year’s tumult has been very profitable for some and costly for many. Consumers and businesses in many countries are paying for this haul of LNG through higher utility bills that have forced some companies to shut down temporarily and prompted street protests. Governments trying to soften the blow through subsidies or nationalization of energy companies have soaring debt levels.

The largest tankers hold enough gas to heat a small city of 70,000 homes for a year, according to an industry estimate, and the parade of LNG tankers heading to Europe has increased more than 50% over last year, compensating for Russia’s cutoffs. The bulk of that increased traffic has come from the United States, which because of shale drilling has grown to be one of the top global exporters of chilled gas, along with Qatar and Australia.

“U.S. LNG has become a foundation for European energy security,” said Daniel Yergin, an energy historian.

In the days when Russia supplied up to 40% of Europe’s gas, the continent was considered a dumping ground for LNG, where shippers would send a tanker if demand elsewhere, especially Asia, was weak. This year, Europe has become a destination for more shippers. American LNG suppliers tend to have more flexible contracts than those in other countries, and so are able to go where the gas is most wanted.

After Russia invaded Ukraine, Europe quickly shifted from what the industry called “the market of last resort” to “the market of most need,” said Anatol Feygin, executive vice president and chief commercial officer of Cheniere Energy, a large American LNG supplier.

This year, shipments to Europe from the United States have more than doubled, according to Kayrros. Cargoes from Qatar have increased about 20%. Russia, which continues to send LNG to Europe despite throttling back pipeline gas, has raised its exports about 10%. Although shipments to Asia have declined around 9% this year, it remains the main destination for the fuel.

Feygin said about 70% of the cargoes loaded at Cheniere this year had gone to Europe, including the roughly 10% that the company reserves for its own energy trading business.

In August, for instance, he dispatched a cargo of gas aboard the Gaslog Georgetown from Cheniere’s terminal at Sabine Pass, in western Louisiana, to a newly opened terminal at Eemshaven in the northern Netherlands that the Dutch authorities set up hastily after Russia’s push into Ukraine.

With overall supplies growing only about 5% this year, Europe’s expansive appetite for LNG is most likely driving up prices around the world and making it unaffordable for many poorer countries.

Buying and selling LNG remains a clubby, secretive business. Pricing benchmarks, especially in Europe, are less firmly established than standards like Brent crude in oil trading.

Still, big money has clearly been made in recent months. Some of the profits stem from the fact that many of the companies shipping cargo from the United States will have bought their fuel based on gas prices there, which are now about one-fifth of European gas prices, said Ciaran Roe, global director for LNG at S&P Global, a financial services firm.

U.S. natural gas is often cheaper than in Europe for a variety of reasons, including abundant domestic production. After costs for processing and transporting are added, the gas suppliers are still likely to be earning very high profits, he said.

This is a boom time for the biggest players in LNG. These are mostly large energy companies with the financial firepower to invest in the multibillion-dollar cost of building liquefaction facilities (the gas must be cooled to –260 degrees to turn it to liquid) and receiving terminals as well as to finance the current high costs of buying and trading cargoes.

The Western company with the largest LNG portfolio last year was Shell, while TotalEnergies, Cheniere and Exxon Mobil were all major forces, according to a presentation by Shell. During the first nine months of this year, Shell’s Integrated Gas business, which includes LNG, earned $10.1 billion, double the profit of the same period in 2021.

In a sense, markets have been working almost too well. European countries like Germany have overachieved in their goals of filling gas storage facilities to near capacity. With warm weather and high prices reducing demand for gas, full tanks at LNG receiving terminals have meant there is no place to put more.

In mid-October, Enagas, the gas grid operator in Spain, the European country with the largest capacity to receive LNG, warned of what it called a “mismatch” of supply and demand that could lead to halts in receiving new supplies.

“The gas system in Europe is full,” Arturo Gonzalo Aizpiri, the company’s CEO, said in an interview. He added that although the overload was symptomatic of bottlenecks in the system, it was also “a reason for a certain optimism indicating that Europe is facing better conditions for the winter from a security of supply standpoint.”

Recent trends in the gas markets also offer cause for optimism. After months of astronomical prices, European benchmark gas futures have eased by about two-thirds in recent weeks, though they remain elevated by historical standards. The price of LNG heading for northwest Europe, which has often closely tracked the Dutch TTF, a European benchmark for natural gas, has lately moved to a substantial discount, according to market participants. Recently, S&P Global’s assessment of LNG in northwest Europe was about $13 per million British thermal units, a gas metric, compared with about $33 per million British thermal units for the benchmark.

Pressure on prices is most likely coming from lower-thanexpected demand, full storage and the fact that terminals for receiving the gas are still under construction in some countries, including Germany.