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Dr. Ken Rietz Europe needs a lot of liquid natural gas (LNG) right now. However, it has set up a legal framework that might make it difficult to get enough LNG. How did they get here? Mid-February of this year saw Europe enduring an intense cold snap which drained its natural gas reserves much faster than the usual rate, leaving Europe’s reserves worryingly low. The European Commission has determined that the reserves every year must be back up to 90% of capacity by November 1. This will require a lot of LNG imports. But at the same time, they have also mandated that methane emissions be at minimal levels since methane (which basically is what natural gas is) is a powerful greenhouse gas. Meeting those standards will not be simple, and could make sufficient LNG imports difficult, if not impossible. Fleshing out the details of this is the subject of this commentary. But first, we look at the LNG front-month futures. |
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Figure 1: LNG front-month futures Note that the 2025 futures so far are quite a bit higher than the 5-year average prices. That will be important shortly. Let’s start with the weather problems that Europe has faced. Natural gas reserves normally drop during winter months, and the price of natural gas goes up. In mid-February 2025, the majority of Europe was in a deep freeze, and the natural gas usage went through the roof. Reserves dropped faster than any time in the past seven years. The previous (relatively mild) winter, the reserves dropped to 58% capacity; this year they dropped to 7%. The price of natural gas hit a two-year high in early March due to the reduced supply. The big problem is that the regulators want the reserves to be at or above 90% by November 1. This is not a recommendation; it is a regulation. That means that the EU will need roughly 120 LNG carrier ships to restock. That amount is not the problem; the cost is. And that is a bigger problem than at first appears. To get to 90% storage will require buying so much natural gas, it creates an elevated futures price. This has led to substantial pressure to moderate that 90% figure down to 85% or even 80%. That decision will be addressed by the EU on April 14. But the import of LNG is not the only aspect of the problem. Prior to 2022, Germany (the largest user with biggest reserves of natural gas) would get a very large portion of its natural gas from Russia. The potential for a better relationship with Ukraine has some people hoping that the Ukraine pipeline from Russia might be opened again. That would help, as long as sanctions against Russia were reduced. Getting back to mandated capacity is a multifaceted dilemma. Another facet is the US, the largest exporter of LNG to the world, and to the EU. EU companies are hesitant to sign long-term contracts for LNG from the US, especially since US tariffs are rapidly appearing and disappearing. But even that is a minor problem in comparison to recent EU regulations regarding potential methane (i.e., natural gas) leakage. In August 2024, the US agreed to be part of the EU Methane Regulation including a “methane fee” and there was hope that the new US administration would, at most, revise it some and continue to follow it. It now seems that the new administration will discard it completely. In February, the Senate repealed the “methane fee” but it is having a hard time dealing with the interlocked nature of the Inflation Reduction Act and the EPA rules regarding greenhouse gas emissions. This activity is making US energy producers nervous, and the markets have been hesitant to move much. Where does this lead LNG trading in the future? It is clear that LNG has a long and prosperous pathway into the future. The closer in picture is not as clear. Market turmoil does not look to be settling down as long as tariffs are being wielded at the whim of personal and political goals. There is little hope of that changing, however. But even in the short term, the supply of natural gas, and therefore LNG, looks to be going up, and so prices should be going down, but it will almost certainly be a rocky road. |