US, EU strike LNG deal as Europe seeks to cut Russian gas

The EU is aiming to cut its dependency on Russian gas by two-thirds this year and end all Russian fossil fuel imports by 2027 due to Russia’s invasion of Ukraine. Russia supplies around 40% of Europe’s gas needs.

Concerns over security of supply were reinforced this week after Russia ordered the switch of gas contract payments to roubles, raising the risk of a supply squeeze and even higher prices.

Senior U.S. administration officials did not specify what amount or percentage of the extra LNG supply would come from the United States.

U.S. LNG plants are producing at full capacity and analysts say most of any additional U.S. gas sent to Europe would have to come from exports that would have gone elsewhere.

“It normally takes two to three years to build a new production facility, so this deal may be more about the re-direction of existing supplies than new capacity,” said Alex Froley, gas and LNG analyst at ICIS.

LNG under contract cannot be easily redirected. Already high European gas prices would have to rise further to attract those cargoes to the 27-nation bloc, analysts said.

Even if the 15 bcm is achievable, “it still falls well short of replacing Russian gas imports, which amounted to around 155 bcm in 2021,” analysts at ING Bank said.

U.S. President Joe Biden and European Commission President Ursula von der Leyen also announced a plan to form a task force to cut Europe’s reliance on Russian fossil fuels.

The Commission will work with EU countries to ensure they are able to receive about 50 bcm of additional U.S. LNG until at least 2030. U.S. LNG exports to the EU last year were about 22 bcm.

The EU has already stepped up efforts to secure more LNG after talks with supplier countries, resulting in record deliveries of 10 bcm of LNG in more than 120 vessels in January.

Meanwhile Germany, the EU’s biggest importer of Russian gas, said it has made “significant progress” towards reducing its exposure to imports of Russian gas, oil and coal.

However, Economy Minister Robert Habeck also said it could take until the summer of 2024 for Europe’s largest economy to wean itself off Russian gas. 

German utilities on Thursday said their country needed an early warning system to tackle gas shortages as companies and EU nations scrambled to understand the ramifications of Russian President Vladimir Putin’s demand for gas payments in roubles.

That demand still needs to be backed by a concrete mechanism. Putin has ordered Russian energy giant Gazprom GAZP.MM to work out how payments for gas can be accepted in roubles in the next four days, the Kremlin said.

However, a German ministry spokesman said utility companies are obliged to comply with contracts with Russia stipulating they pay for oil and gas in dollars and euros. Read full story

“This is a matter of private law, namely of contract compliance. Most supply contracts are in dollars and euros, so ensuring compliance is first of all the duty of energy providers acting as importers,” the economy ministry spokesperson said.

Two sources said on Friday that Gazprom has asked India’s largest gas transmitter GAIL (India) GAIL.NS to pay for gas imports in euros instead of dollars.

REUTERS