How the Recoil From Russian Gas Is Scrambling World Markets

Just months ago, Germany’s plans to build a terminal for receiving shiploads of liquefied natural gas were in disarray. Would-be developers were not convinced customers would make enough use of a facility that can cost billions of dollars. And concerns about climate change undermined the future of a fossil fuel like natural gas.

Perceptions have changed. After Russia’s invasion of Ukraine and the Kremlin’s threats to sever fuel supplies, the government in Berlin has decided it needs these massive facilities — as many as four of them — to wean the country off Russian gas and act as a lifeline in case Moscow turns off the taps. The cost to the taxpayer now seems to be a secondary consideration.

Most of the gas that Europe buys from Russia to power its electrical utilities is delivered through pipelines, over land or under the sea. Liquefied natural gas provides another way to move gas great distances when pipelines are not an option. Natural gas is chilled to a liquid and loaded on special tankers. It then can be transported to any port with equipment to turn it back into a gas and pump it into the power grid.

“We are aiming to build L.N.G. terminals in Germany,” Robert Habeck, the country’s economy minister, recently said before talks with potential gas suppliers. Mr. Habeck is a politician from the environmentalist Greens but is finding, somewhat to his dismay, that Germany needs the fossil fuel.

On Saturday, Lithuania said it had stopped stop buying natural gas from Russia. The cutoff won’t cause much pain to the Russian budget because Lithuania is a tiny country. But, as a member of the European Union, its decision held symbolic geopolitical importance. And on Sunday, the German defense minister, Christine Lambrecht, said the European Union should consider banning Russian gas imports.

Much as it is changing attitudes across Europe and in Germany, the continent’s largest economy, Russia’s invasion into Ukraine is reshaping energy markets globally. For years, Europe has imported enormous volumes of gas from Russia to heat homes and power industry, but now that practice, which depends on billions of dollars’ worth of pipelines, faces severe curtailment.

The European Union wants to end what is now deemed an unhealthy entanglement by 2030. Within a year, it wants to slash dependence on Russia, which supplied 40 percent of European gas last year, by two-thirds.

How will these huge volumes of Russian gas be replaced? The E.U. is betting on liquefied natural gas.

Europe’s leaders want to round up 50 billion cubic meters of additional L.N.G. cargoes over the next year, which amounts to about half of the Russian gas it wants to ditch. That’s not all Europe is doing. Officials could get gas via a pipeline from Norway and Azerbaijan. They also want to reduce gas consumption by ramping up wind and solar power projects, and are calling on citizens to turn down thermostats. But analysts say that Europe would struggle to swiftly replace so much gas. That is one reason Germany is preparing for rationing.

These higher volumes of liquefied natural gas, which would most likely need to continue for years, could cost around $50 billion at current prices, but much less if bought on long-term contracts from the United States, where prices are a fraction of those in Europe and Asia.

Europe’s scramble raises the prospect of a global battle over supplies in a market that analysts say has little slack. Asia, not Europe, is usually the prime destination for liquefied natural gas. China, Japan and South Korea were the leading buyers last year.

The additional gas that Europe is targeting would add around 10 percent to global demand, creating a tug of war with other countries for fuel. That prospect could mean that gas prices that have touched record levels in recent months will remain high, prolonging misery for consumers and squeezing industry.

On Friday, for instance, home energy bills for millions of British consumers rose by 54 percent, largely because of soaring wholesale gas costs. Futures prices don’t offer any sign of relief.

“Over the next three years competition for L.N.G. is going to be extremely fierce,” said Massimo Di Odoardo, vice president for gas at Wood Mackenzie, a market research firm. “Europe and Asia are going to be pulling the blanket” to cover their needs, he added.

In theory, high prices should spur investment in more gas fields. But it is far from certain how much new production today’s high prices in Europe will encourage.

“Clearly in the short term you can’t replace that amount of gas,” said James Henderson, chairman of the gas program at the Oxford Institute for Energy Studies, a research institution. But, Mr. Henderson added, Europe is also likely to spend money accelerating its shift to cleaner energy, reducing demand for fossil fuels.

That potential damper isn’t stopping Germany from building what would be its first liquefied natural gas terminal and a flurry of new and expansion projects elsewhere in Europe. Berlin seems to have settled on a permanent terminal for a port called Brunsbüttel near Hamburg and also has options on three floating structures, which are cheaper. One could be ready in a matter of months.

Even before the latest announcements, L.N.G. volumes for Europe were outpacing Russian pipeline gas. Tankers carrying gas were attracted by the high prices in Europe, which were stoked by tensions over Ukraine; they are now about seven times what they were a year ago. Those prices are a boon to the world’s major liquefied natural gas exporters: Qatar, Australia and, above all, the United States, whose shipments of the fuel, a product of shale drilling, increased by a remarkable 50 percent in 2021 over the year before.

The Russia-Ukraine War and the Global Economy

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Rising concerns. Russia’s invasion on Ukraine has had a ripple effect across the globe, adding to the stock market’s woes. The conflict has already caused​​ dizzying spikes in energy prices and is causing Europe to raise its military spending.

The cost of energy. Oil prices already were the highest since 2014, and they have continued to rise since the invasion.  Russia is the third-largest producer of oil, so more price increases are inevitable.

Gas supplies. Europe gets nearly 40 percent of its natural gas from Russia, and it is likely to be walloped with higher heating bills. Natural gas reserves are running low, and European leaders worry that Moscow could cut flows in response to the region’s support of Ukraine.

Food prices. Russia is the world’s largest supplier of wheat; together, it and Ukraine account for nearly a quarter of total global exports. Countries like Egypt, which relies heavily on Russian wheat imports, are already looking for alternative suppliers.

Shortages of essential metals. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.

Financial turmoil. Global banks are bracing for the effects of sanctions intended to restrict Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.

These energy riches bring political clout. Washington has been offering liquefied natural gas to help Europe break its Russian energy links, a longstanding goal of some American politicians.

On March 25, the Biden administration and the European Union agreed that the United States would “strive to ensure” that at least 15 billion cubic meters in additional L.N.G. this year reaches Europe, an amount comparable to around 10 percent of the gas Europe imports from Russia.

The Cheniere Energy L.N.G. facility under construction in 2020, in the Port of Corpus Christi, Texas.Credit…Tamir Kalifa for The New York Times

Analysts say that this commitment is achievable, but mainly because of market dynamics rather than government policies. In the first three months of 2022, at least 115 cargoes of chilled gas left the facilities of Cheniere Energy, the largest U.S. supplier of liquefied natural gas, and headed to Europe, more than double the total in the same period in 2021, according to the company.

Mr. Di Odoardo figures that L.N.G. flows from the United States to Europe have already reached two-thirds of the bilateral target for this year, and so reaching it should be “easy.”

Washington has also leaned on other countries, including Japan, to give up some of their cargoes, and this has led to a substantial drop in shipments heading to Asia from the United States, according to analysts. Over time, though, such generosity may be a harder sell, especially if the war in Ukraine continues indefinitely and markets tighten further.

“Under the current conditions, I don’t think that Japan has the room to commit to long term, continuous L.N.G. shipments,” said Michitaka Hattori, a director at the Japan Institute for Russian & NIS Economic Studies.

The surest way to bring prices down is to add more supply. High prices will encourage marginal increases in exports, but it usually takes more than two years to build new facilities for processing gas such as the terminal that Germany wants to build. Of course, liquefied natural gas demand, which grew 6 percent in 2021, will most likely continue to grow as China and other countries shift to gas from pollution-spewing coal.

“I think the winter market for gas is going to remain very tight because of Asia’s shift from coal to gas,” said Marco Alverà, chief executive of Snam, a large Italian energy company.

Cheniere Energy is moving ahead with a large expansion of its export facility at Corpus Christi, Texas. Qatar also says it is working on adding an enormous slug of liquefied natural gas in the next five years.

Developers, though, will be wary of whether the current boom in Europe might fade well before the expiration of the new L.N.G. projects, which are generally expected to operate for 20 years or more. And European leaders insist they still view gas as a temporary fix before renewable energy sources like wind and solar and hydrogen take over.

“There is a question mark there about how much new gas will be needed,” said Mr. Henderson of the Oxford Institute.

Ben Dooley and Makiko Inoue contributed reporting from Tokyo, and Melissa Eddy from Berlin.

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