US Pledges To Strengthen European Energy Security*

*Editor’s Note: On March 4, Russia enacted a law that criminalizes public opposition to, or independent news reporting about, the war in Ukraine. The law makes it a crime to call the war a “war” rather than a “special military operation” on social media or in a news article or broadcast. The law is understood to penalize any language that “discredits” Russia’s use of its military in Ukraine, calls for sanctions or protests Russia’s invasion of Ukraine. It punishes anyone found to spread “false information” about the invasion with up to 15 years in prison.

Economist Aleksandr Frolov explains what Biden meant by promising to sell more natural gas to Europe.

U.S. President Joe Biden and European Commission President Ursula von der Leyen signed an agreement committing the U.S. liquefied natural gas industry to supply an additional 15 billion cubic tons (bcm) of LNG to Europe through the remainder of 2022. The EU intends to implement a centralized approach to LNG purchases. However, this decision doesn’t account for the current global energy crisis.

In 2021, European natural gas demand was noticeably reduced due to high energy prices. This was particularly evident in the second half of the year. For example, natural gas consumption dropped by 6% in Germany.

High energy prices also affected LNG shipments, which were estimated at 104.4 bcm in 2021. However, this was only slightly less than in 2019 and 2020. It could have been worse if Europe had not experienced a sharp increase in LNG imports in December 2021, which was driven by a considerable surge in European stock prices. The consequences of this were also seen in January 2022.

The U.S. Energy Information Administration estimates that Europe’s dependence on natural gas imports has increased from 65% to 80% over the past decade. Last year, LNG accounted for 26% of total natural gas imports and 20% of total consumption in the EU and U.K.

December’s price surge allowed U.S. LNG producers to take the lead among European LNG importers: U.S. LNG shipments accounted for 26% (27.1 bcm) of total European LNG imports. Qatar ranked second with 24%, very moderate export rates by Qatar standards, while Russia accounted for another 20% of total European LNG imports.

To see the whole picture, one should bear in mind that Russian pipeline deliveries are still the largest source of natural gas for Europe, amounting to about 150–155 bсm.

Since the beginning of the sanctions war between the West and Russia, the EU has repeatedly called for measures to reduce its dependence on Russian energy supplies. The International Energy Agency has promptly developed a plan to reduce Russian imports. Meanwhile, EU leaders have started taking symbolic steps to implement this plan: They announced that the European Commission would adopt a centralized approach to natural gas purchases and increase U.S. imports.

The U.S. president and the European Commission president have signed an agreement that seemingly guarantees that the U.S will increase its natural gas shipments to Europe by at least 15 bcm. One can’t help but notice that this volume is quite small compared to Russian imports. It is also worth mentioning that the EU has reduced its natural gas production and now the region is becoming increasingly dependent on foreign supplies. In addition, the agreement does not provide any specific guarantees to Europe: “The United States will work with international partners and strive to ensure additional LNG volumes for the EU market of at least 15 bcm in 2022, with expected increases going forward.” This means that the U.S. “will strive to supply” rather actually “supply” LNG in sufficient quantities.

It begs the question: Why is the U.S. giving such a precise figure of 15 bcm? The answer is pretty simple. U.S. LNG production is projected to grow by about 15 bcm in 2022. According to the U.S. Energy Information Administration, U.S. LNG exports are expected to total about 116.8 bcm this year. This is 16% or 16.1 bcm more than LNG exports last year.

Therefore, Europe is currently faced with two major challenges. First of all, the U.S. admits that its LNG exports are out of the president’s control, because U.S. LNG producers are mainly motivated by the profits they can earn in overseas markets. Second, Asian countries buy American LNG at higher prices than the EU. Moreover, LNG consumption is growing at such an accelerated pace in the region, mainly in China, that an extra 16.1 bcm will be instantaneously absorbed by this market. In fact, this is why the U.S. president gave no substantial guarantees. But he promised to try — he made a grand political gesture.

The European Commission plans to increase U.S. LNG imports by about 50 bcm/year by 2030. However, this should also be viewed as a political gesture rather than a certain fact. This plan looks especially ambitious in view of the EU’s intent to phase out coal-fired power plants in order to increase the demand for natural gas in the power generation sector.

There is also the European Commission’s controversial plan to implement a centralized approach to natural gas purchases in Europe. The idea seems logical because a large consumer can count on more favorable terms. Europeans believe that centralized procurement will eliminate unnecessary competition. Even though energy prices approached $1,000 per 1,000 cubic meters a few months ago, European leaders were still convinced that the free and competitive natural gas market was functioning properly, without any problems. Now they want to de facto reject the principles of the free market. The problem is that the global energy crisis is not going anywhere. There is no oversupply when it comes to LNG.

Regardless of the European Commission’s desire to buy more natural gas, there is again the question of competition with Asia. The EU can compete with the Asian market only if it buys LNG at higher prices. It is impossible to bring down the price for European consumers without abandoning the fundamental principles that underpin the EU energy market. It is a fact that major suppliers prefer long-term contracts. At the same time, Europe is going to give up on its contracts with Russia. Moreover, it is important to remember that energy prices are usually tied to stock exchange prices. Thus it would be wise to link natural gas prices to oil prices, because that could bring LNG prices down by two or three times. However, Europe is not going to choose an easy solution. Instead, it is only pretending that it is looking for the best solution to recover from the energy crisis.

The author is the deputy director-general of the National Energy Institute.