American LNG producers have stepped in to fill the gap left by Russia’s Gazprom.
As Russia attacks Ukraine, a clear victor is emerging in the energy landscape where commercial alliances have been forged far away from the cries of Ukrainian people suffering the ravages of the war.
Multibillion-dollar oil and gas companies backed by powerful hedge funds and private equities in the United States are poised to book a windfall as they become Europe’s primary natural gas suppliers.
Companies such as Cheniere Energy, Range Resources, Berkshire Hathaway, Japanese-owned Mitsui, and little-known Gail Global - a subsidiary of the Indian government - are among those at the forefront of liquefied natural gas (LNG) trade.
LNG is the super-chilled liquid form of natural gas. Natural gas volume shrinks 600 times when turned into liquid, making it economically viable to ship large vessels over long distances.
In 2021, the US became the single largest LNG supplier to the 27-member European Union and the United Kingdom. Then in January, it accounted for more than half of the LNG imported into Europe.
All about incentives
American companies involved in various stages of the LNG supply chain - gas production, transportation to the ports, storage and liquefaction process - have increased supply to the EU and UK markets because of the higher prices there.
An international price benchmark, the Dutch gas spot futures, averaged $28.52 per million British thermal units (MMBtu) between September 2021 and February 2022. The average price throughout 2020 was $3.28 per MMBtu, according to the US Energy Information Administration (EIA).
The gains made by LNG terminal operators and exporters can be gauged from their price. In December 2021, the average price at the US export terminals was $9.26 per MMBtu in December 2021, compared to $6.14 per MMBtu in December 2020, as per the US Department of Energy data.
Europe imports one-third of its gas from Russia, mainly via a network of pipelines. As the fighting in Ukraine escalates, there are concerns about the interruption in Russian gas, which many European consumers rely on to heat their homes.
Any reduction in supplies from Russia will benefit LNG exporters in the US, which has become the largest producer of natural gas on the back of newer drilling techniques that pump hydrocarbons out of hard-to-crack shale formations.
In a conference call with analysts on February 24, Cheniere’s CEO Jack Fusco was asked to comment on the situation in Eastern Europe.
“I mean, it’s tragic what’s going in Eastern Europe,” he said.
“But if anything, these high prices, the volatility drive even more energy security and long-term contracting. So I would say that the fact that there’s a scarcity of LNG these days is driving more and more conversation on how to increase our infrastructure and secure monthly contracts for our European customers.”
Cheniere Energy is the largest LNG producer in the US. It owns the Sabine Pass export terminal in Louisiana and Christie Corpus in Texas - the terminals from where most LNG was exported.
The Sabine Pass terminal alone has a regasification capacity of 4 billion cubic feet (Bcf) per day - that is equal to Pakistan’s entire gas output.
Like other LNG suppliers, Cheniere Energy sells most of the gas under long-term (10-15 year) contracts, which have a fixed price. But in recent months, suppliers have diverted cargo to Europe, where prices are at a record high.
A Russian roulette
So far, there’s no indication that Russia has breached gas contracts with EU member states.
But a year-on-year comparison shows that Gazprom, the Russian oil and gas monopoly, strictly sticks to the contractual volumes and does not use the pipelines to pump extra supply that European consumers desperately need.
Gazprom has also dragged its feet in replenishing underground gas storage tanks that it maintains in Europe. A decline in these tanks is one of the key reasons behind the shortages, which hit European consumers late last year.
Extremely cold weather and an unexpected surge in factory demand as economies opened up after long pandemic-induced lockdowns also jacked up demand and price.
So far the US and EU have not imposed direct sanctions that undermine Russian gas infrastructure. But Russian supply could stop if Gazprom is unable to receive payments following the expulsion of certain Russian banks from the SWIFT international payment system.
Any reduction in the Russian gas supply will mean more LNG imports from the US.
“American natural gas and oil producers have a critical role to play in supporting our European allies with access to a stable supply of reliable and affordable energy,” said Mike Sommers, the CEO of American Petroleum Institute, in a statement.
While Cheniere Energy is at the forefront of US LNG exports, there are a few other players that haven’t come into the limelight such as ST Cove Point, a subsidiary of Japan’s Sumitomo Corporation.
And it’s not just the companies that process and export LNG that stand to gain when demand for the fuel surges. Terminal operators such as Berkshire Hathaway’s energy arm BHE GT&S, which has a stake in Cove Point terminal in Maryland, will see a rise in revenue as they process more gas.