MariTrace, 14 July 2022
Just a few short years ago, demand for LNG in Europe was declining; at the same time, emerging markets were securing long term contracts. By 2020-21, LNG made up about a quarter of Europe’s gas imports. The picture in 2022 looks very different. In the winter of 2020-21, Europe used up reserves held in store during the pandemic, while cargoes destined for Europe diverted to Asia [1]. In January 2021, Panama Canal achieved a new monthly record for LNG transits and wait times for vessels without reservations almost halved [2]. As gas prices surged in September 2021, Europe’s outlook looked less secure. The suspension of Nord Stream 2 [3] in February invited threats from Russia that gas prices may double. Russia’s hostile actions in Ukraine have pushed countries and energy companies toward LNG [4]. Even given the cost and challenges in increasing transmission capacity and securing contracts, in the coming years LNG is among the diminishing options for sustaining Europe’s energy security – at the risk of tipping an efficiency calculus to meet the IMO’s regulations on ship emissions [5]. Stabilising supply will rely on complex networks of suppliers and ships.
Key to competing in the global LNG supply chain are floating storage and regasification units (FSRUs). Across Europe, countries are racing to build or lease them, while also reactivating [6] or building the supporting onshore infrastructure. Using similar technology [7] to onshore terminals, FSRUs offer the operational advantage that they can be relocated if needed. Tracking [8] these specialised vessels via MariTrace [9], we can readily identify some of the challenges of incorporating these specialised vessels into a country’s energy security strategy. First, they stretch the boundaries of national energy infrastructure. Some are moored permanently within the EEZ of their flag state, for example FSRU Toscana (off the coast of Pisa. Italy) and Nusantara (Jakarta, Indonesia), others cross oceans to deliver their valuable cargoes.
Second, their high cost (build or lease) limits the number of companies and countries that can afford to build them and influences their ownership configuration: for example, a project [10] for Cote d’Ivoire is led by France’s Total; Japan’s Mitsui owns a 49% stake in BW Integrity, supplying Pakistan [11]. For some countries FSRUs offer an advantage over the sunk cost of an onshore plant (which can cost around $1billion to build) by providing a way for countries to augment the onshore facilities they already have, or securely import LNG to within easy reach when they have no LNG terminals. Building FSRU into the supply chain also requires that the onshore network can balance the additional supply: the UK, for example, may be limited [12] in onshore transmission capacity to handle a rapid increase in deliveries of LNG. Germany’s first FRSU may not be operational until 2024. Governments and LNG shipping companies are competing to secure FSRU ahead of the 2022-2023 winter season. Germany signed four charter agreements in May of 2022. Greece has commissioned an FSRU to site on a fixed mooring southwest of Alexandroupolis, from where they plan to send gas to the wider region; similarly Italy will locate an FSRU in one of Sardinia’s port areas. Finland and Estonia agreed a joint lease on an FSRU, to be sited at an Estonian port if infrastructure is not yet ready in Finland. Netherlands have fixed a five year lease on an FSRU charter as the Dutch pledge [13] to completely cease importing supply from Russia by the end of 2022. Europe’s import terminals – running at about 45% capacity in 2021 – could be expanded, but take time to build. Most are located in Spain, Germany plans [14] to build more and has signed an agreement [15] with Qatar to secure long term supply of LNG. The risk calculus for countries and companies siting FSRU offshore or connecting FSRU with onshore terminals must take account of physical risks [16] to maritime critical infrastructure - including in areas where infrastructure [17] investments may be suddenly vulnerable to new threats - and increasingly, the balance of accountability between state and private sector for mitigating cyber risks [18] in a supply chain that relies increasingly on digital infrastructure. In the short-term, the challenge is where and how to source more LNG. FSRU charter rates are at their highest [19] in a decade and have increased by 50% since the onset of conflict in Ukraine. The world’s major exporters (America, Australia and Qatar) are already fully booked. Demand in China is rising rapidly. In the past, Europe has generally relied on spot markets and short-term contracts. Competing in the new world [20] of gas supply demands an integrated approach to supply chain infrastructure: a supply chain is only ever as strong as its weakest link. In the rush to secure LNG supply, governments, vessel owners and operators may need to renew their attention to vessel security [21]. The future will require longer term commitments and increased capacity to track valuable offshore infrastructure that is becoming more complex and distributed. Europe’s future energy security may rely increasingly on ships, not pipelines.
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References
[1] Natural-gas prices are spiking around the world https://www.economist.com/finance-and-economics/natural-gas-prices-are-spiking-around-the-world/21804953
[2] Panama Canal sets new monthly record in January for LNG transits: operator https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/natural-gas/020321-panama-canal-sets-new-monthly-record-in-january-for-lng-transits-operator
[3] Germany freezes Nord Stream 2 gas project as Ukraine crisis deepens https://www.reuters.com/business/energy/germanys-scholz-halts-nord-stream-2-certification-2022-02-22/
[4] If the supply of Russian gas to Europe were cut off, could LNG plug the gap? https://www.economist.com/the-economist-explains/2022/02/26/if-the-supply-of-russian-gas-to-europe-were-cut-off-could-lng-plug-the-gap
[5] Greenhouse Gas Emissions https://www.imo.org/en/OurWork/Environment/Pages/GHG-Emissions.aspx
[6] Ukraine war news from March 28: Kyiv-Moscow negotiations set to resume, Abramovich suffered suspected poisoning after peace talks in Kyiv https://www.ft.com/content/46d8de37-5969-4d61-a168-d68085dab224#post-7b28d479-1803-48ba-898a-dc47dd912007
[7] UK's Predator urges Ireland to embrace LNG, halt key pipeline decommissioning https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/natural-gas/052522-uks-predator-urges-ireland-to-embrace-lng-halt-key-pipeline-decommissioning
[8] The Outlook for Floating Storage and Regasification Units (FSRUs) https://www.oxfordenergy.org/publications/outlook-floating-storage-regasification-units-fsrus/
[9] Ship Tracking https://www.ww3.maritrace.com/tracking
[10] Global LNG giants turn to poor countries for new markets https://www.economist.com/business/2017/09/14/global-lng-giants-turn-to-poor-countries-for-new-markets
[11] Japan's Mitsui to buy stake in FSRU project in Pakistan https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/natural-gas/111517-japans-mitsui-to-buy-stake-in-fsru-project-in-pakistan
[12] National Grid defends move to limit UK LNG imports https://www.ft.com/content/790d248e-959c-4384-bae8-448c428790b8
[13] Demand for FSRUs Soars as Europe Works to Cut Reliance on Russian Gas https://www.oedigital.com/news/497481-demand-for-fsrus-soars-as-europe-works-to-cut-reliance-on-russian-gas
[14] LNG revolution: Germany’s plan to wean itself off Russian gas takes shape https://www.ft.com/content/6c6352c3-cb60-48e5-aa5e-7cf02328f544
[15] Germany, Qatar eye cooperation in LNG trade, sign declaration of intent https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/natural-gas/052022-germany-qatar-eye-cooperation-in-lng-trade-sign-declaration-of-intent
[16] Israel shoots down Hezbollah drones heading for gas rig https://www.bbc.co.uk/news/world-europe-62022452
[17] LNG regasification terminal launched in the Baltic Sea https://safety4sea.com/lng-regasification-terminal-launched-in-the-baltic-sea/
[18] Perspectives on Cyber Security for Offshore Oil and Gas Assets https://www.mdpi.com/2077-1312/9/2/112/htm
[19] Gas traders rush to secure LNG tankers https://www.ft.com/content/bc66773f-b1fb-4105-83c6-582a2c7735cb
[20] Between the Old and New Worlds of Natural Gas Demand https://link.springer.com/chapter/10.1007/978-3-030-59983-6_5
[21] Piracy Data and Maritime Risk Assessment https://www.ww3.maritrace.com/security
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