What follows from China tariffs and the Juncker-Trump LNG talks?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Coral Energy, the first LNG ship to arrive at the Manga LNG terminal at the port of Tornio and Outokumpu steel mill, Tornio, Finland, 20 November 2017. [Joel Karppanen/EPA/EFE]

It is a bit surprising to see the Commission chief advocating additional imports in the EU of US LNG, a fossil fuel which produces a lot of greenhouse gas emissions, writes Danila Bochkarev.

Danila Bochkarev is a senior fellow, EastWest Institute (Brussels). The opinions expressed in this article solely reflect the views of the author, not of his organisation.

Last month, China – the second largest buyer of US LNG – imposed a 10% tariff on US gas imports as retaliation against a 10% import tax imposed by the US Administration on $200 billion of Chinese goods. This moves as an episode of global trade wars

As the global trade continues, market mechanisms are being caught in the crossfire and politicisation of commercial relations adds inefficiencies to the market, resulting in additional costs for energy consumers.

In China’s case (but also in other similar cases) the result of that is that “prices will have to go up to compensate the market and create a new, efficient solution,” said Katie Bays, head of energy and industrials at Height Capital Markets in an article “Why China may soon regret its tariffs on US natural gas” published by CNBC on 8 October.

“If you’re a seller, that’s a great place to be. If you’re a trader that’s a great place to be,” she said. “But if you’re a buyer, it’s a tough spot.”

In Europe – like in China – energy matters are often influenced by politics. If Beijing uses administrative measures to retaliate against the US (and vice versa), Brussels exploits non-market policy tools to increase the security of supply by bringing additional energy supplies to Europe.

Until the present, the European gas market was able both to deliver security and competitive pricing to the EU customers without any significant interferences from the authorities. The market remained open to any natural gas supplies – both in form of LNG or pipeline gas.

However, in July 2018, the President of the European Commission Jean-Claude Juncker travelled to the US to discuss among other things additional imports of American LNG to Europe and removal of “red tape restrictions on liquefied natural gas exports” from the US to Europe.

This comes as a surprise and makes little sense both from the Commission’s and industry’s point of view. The EC is promoting its low-carbon economy roadmap – suggesting that, by 2050, the EU should cut its emissions to 80% below 1990 levels and almost fully de-carbonise the power sector.

In this context, it is a bit surprising to see the Commission chief advocating additional imports of fossil fuel in the EU. While natural gas is generally the most environmentally-friendly fossil fuel, its full life-cycle carbon footprint can differ drastically depending on the transport mode.

Wood Mackenzie report “LNG versus pipeline gas: how do lifecycle emissions compare?” said that “LNG projects often carry more of emissions burden than pipeline gas projects” as a result of CO2 removal before liquefaction. The GHG emissions are “some of the highest in the upstream oil and gas sector” – often comparable with oil sands.

The report, however, adds that “making a direct comparison between LNG and pipeline gas isn’t entirely fair”. In the liquefaction process, CO2 is being directly released in the atmosphere while it is not always the case with pipeline gas projects where “CO2 is then emitted when the natural gas is burnt in the consuming market and therefore is not considered part of the upstream emissions.”

A study on “Greenhouse Intensity of Natural Gas Transport” produced by a German consultancy Thinkstep presented exact figures. Gas delivered to Germany via the northern gas corridor from the Yamal Peninsula would produce “2.4 to 4.6 times less greenhouse gas emissions than the LNG shipments, depending on the source of the liquefied gas”

This visit does contradict the spirit of (unfounded) scepticism towards natural gas in the EU Institutions and if the Commission is also going down the LNG path, it should change its attitude towards natural gas.

The other question which remains unanswered is what policymakers have to do with LNG trade – a purely commercial process, governed by market rules. In the present conditions – unless free market rules are drastically altered – politicians have little to do with selling natural gas and no real influence on the day-to-day commercial negotiations. Still, their voice is heard everywhere.

However, the loudest voice is not always the right one. It is not the export permits and political decisions which directs LNG flows at a global scale. From the US commercial perspective, LNG export is already a “done deal” as most of the future volumes are already booked by potential and future buyers.

According to the companies and CEDIGAZ data (2018) at least 3/4 of US LNG capacity (for existing terminals and projects under construction) are contracted for take-off by large utilities and global energy companies from Asia and Europe.

All contracts are being concluded on FOB (free on board) basis – the customer is responsible for transporting the LNG and chooses its destination and under a normal commercial behaviour LNG follows the highest price. Thus, regardless of where the gas ends up, US producers have already secured revenue.

Until now, there were relatively small volumes of LNG arriving in Europe due to the higher prices and rapidly growing demand in Asia, rather than political and regulatory constraints.

Availability of flexible pipeline supplies in Europe also played a role. Currently, Gazprom’s supplies come at around $8/MMBtu [MMBtu stands for one million British Thermal Units (BTU). A BTU is a measure of the energy content in fuel, and is used in the power, steam generation, heating and air conditioning industries], while European hub prices average $9/MMBtu.

Asian prices are even higher – on 21 September, Platts reported that the Asian LNG Benchmark JKM for delivery in November was around $11.35/MMBtu. However, the situation is dynamic and there is always a need in competitively-priced natural gas – should it be arriving via pipeline or by boat, in the form of LNG.

To sum up – the purpose of these “talks about talks” is unclear, especially when European customers are already able to easily switch from one source of energy depending on their needs and commercial considerations.

Energy customers and companies – not politicians – should remain in the industry’s driving seat to maintain the energy sector’s efficient functioning. It is unclear why energy consumers should pay additional costs due to the market inefficiencies created by politicians.

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