Europe’s Green Deal Is Bad News For US LNG

Authored by Irina Slav via OilPrice.com,

U.S. LNG producers have had a tough few months, what with the pandemic and plunging prices because of an oversupplied market. Now, prices have improved substantially as production declines while exports have been rising for three consecutive months.

The future, however, contains some storm clouds. French utility Engie recently pulled out of a major long-term deal with NextDecade that would have seen it import millions of tons of U.S. liquefied natural gas. The Wall Street Journal cited earlier media reports naming the French government as the power behind the decision, which was reportedly motivated by concerns about fracking: according to the reports, Paris considered fracking an emission-heavy way of extracting natural gas.

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The government, which holds a 24-percent stake in Engie, was not the only opponent to the deal. An environmental group called Les Amis de la Terre (Friends of the Earth) France called on the utility to cancel the deal because of its impact on the environment. Taken together, the government and environmentalists may have well pulled the plug on NextDecade’s Rio Grande LNG plant as the company needs long-term paying clients to secure the money it needs to build it.

The Engie deal could be a harbinger for U.S. LNG in Europe. Bloomberg recently reported that environmental legislation in Brussels could throw a wrench in the works of U.S. LNG expansion as it pursues its ambitious net-zero agenda.

The Green Deal formulated by the European Commission is based on three main goals:

1. eliminating net greenhouse gas emissions by 2050;

2. decoupling economic growth from resource use; and

3. leaving no person and no place behind.

Whether the latter two are achievable is arguable. The first goal, however, is what has been drawing the most attention anyway: net-zero greenhouse emissions.

The EU is very serious about it. Member countries are being encouraged to spend heavily on solar and wind generation capacity development, and even Poland, a country heavily dependent on coal, recently announced plans to boost its renewable energy capacity at the expense of the fossil fuel.

In this context, it was only a matter of time before policymakers set their sights on natural gas. Although hailed as a bridge fuel between the fossil fuel era and the future of renewable energy, now natural gas has been attracting not-so-positive attention because of methane leaks. On top of that, there is the issue of hydraulic fracturing, which appears to worry euro-bureaucrats.

“LNG trade and gas will remain the main topic of our cooperation with the U.S. in the years to come,” according to the head of international relations at the European Commission’s energy directorate, as quoted by Bloomberg. “At the same time, you see the direction of EU energy and climate policy. We need to achieve our 2050 ambition of climate neutrality.”

The EU seems to be walking a tightrope here. On the one hand are its green ambitions that, for the time being, unavoidably include gas simply because there is not enough battery storage—or generation capacity—to switch the whole EU to solar and wind, and green hydrogen is prohibitively expensive. On the other hand, it wants to diversify its sources of energy, notably away from Russia. But Russia extracts its natural gas in conventional ways that, although they do not eliminate the risk of methane leaks, are apparently less harmful to the environment than fracking, based on the pointed opposition to U.S. LNG sourced from the shale plays.

It seems that methane leaks are at the center of attention, however, and U.S. producers still have a chance, although they would have to work hard to win the EU market. Several measures to ensure low-emission LNG imports are under discussion, with one option being green certificates awarded to exporters based on the emission “load” of their product, according to the Bloomberg report. For exporters, they mean one thing: additional costs.

The cost aspect of LNG exports is a sensitive one for U.S. producers. Competition in the LNG space is tight and is getting tighter by the year. And the U.S. is not the lowest-cost producer, even for its key Asian markets. Any additional cost would make the job of finding buyers for LNG sourced from cheap shale gas even harder than it already is. 

Of course, these costs would be incurred by all LNG exporters. In the end, lower-cost producers will once again win at the expense of higher-cost ones in what could become the latest illustration of market logic trumping geopolitical factors. Diversification of LNG import sources will likely benefit U.S. LNG producers in Europe, but it is doubtful whether Brussels will give them any free passes for diversification’s sake alone.

Over the long term, things look even bleaker if all goes smoothly with the Green Deal. Based on its end goals, there will be little space for any LNG—or another fossil fuel—on most of the European continent within our children’s lifetimes.