US Plans to Replace Russian Gas in Europe Crash Against High Costs, EU Climate Concerns

Washington was eager to offer its liquefied natural gas to the EU after the European countries announced their plans to ditch the Russian natural gas over Moscow's decision to launch the special military operation in Ukraine. However, recent reality checks suggest that the switching to US LNG might take longer than expected, if it is even possible.

The US plans to expand its Liquefied Natural Gas (LNG) sales to the EU as the latter seeks to do away with the Russian natural gas are facing unexpected hurdles.

Those range from soaring costs of construction of LNG export terminals to fears that these costs will never be covered by EU's possibly short term fling with the American gas.

Right now, the US export LNG capacity stands at around 120 billion cubic metres (bcm) per year, and around 70 per cent of it will be going to Europe this year following European Commission President Ursula von der Leyen's announcement that the EU is ready to pledge 50bcm a year in demand. That is still a far cry from 155bcm of gas the bloc imported from Russia alone in 2021.

Several Obstacles to LNG Export Boom in US

Seeing the shifting political tides that led the EU to promise to do away with Russian gas over the special military operation in Ukraine, developers and investors saw opportunity to increase American LNG exports. The latter, however, requires more export capacity in the form of new and refurbished LNG plants.

Several plants with a total capacity of 276bcm have been approved for construction. Not all of them might be built however, experts and officials in the industry told the FT, citing various difficulties.

Building an LNG plant is not cheap, more so now as the prices for steel have doubled over the past two years, Michael Smith, chief executive of Freeport LNG explained. Possible chain disruptions and issues at the labour market also complicate the implementation of the new LNG projects, several developers told the FT.

Due to the high costs of building an LNG terminal the decision for their construction always depends on long-term assessments of their workload and signed purchase agreements that last at least two decades, utilising at least 80 per cent of plant capacity. And while the March "RePowerEU" policy statement by Brussels indicates plans to ditch the dependence from Russian gas supplies, it also exposes the main risk to the American LNG export boom – the EU's willingness to do away with fossil fuels in general sooner than previously planned, including natural gas.

"There’s a big customer out there that wants LNG, but you’re not quite sure for how long", Nikos Tsafos, an LNG expert at the Centre for Strategic and International Studies in Washington, US, said.

Natural gas is widely considered as a greener alternative to coal due tolower emissions. While true, there are additional environmental costs associated with liquefying and restoring gas. Hence the EU considers gas only a temporary tool for its planned transition to renewable sources of energy scheduled for the middle of this century.

Some US LNG project developers told the FT they are taking steps to reduce the carbon footprint of LNG production, via carbon capture facilities and electric drives among other means. But there are no guarantees that will get around the problem of the EU planning to ditch natural gas in the near future.

Added to the list of problems is that, despite currently costing less than natural gas on the European markets, US LNG has also been increasing in price recently. The latest price-hike happened in no small part due to expectations for the demand from the European market.

All these hurdles slow down the development of new LNG plants. SomeEU countries might not be able to fulfil their promise of ditching Russian gas in the near future, Jack Fusco, chief executive of Houston-based Cheniere Energy, which exports LNG, told the newspaper.

"I wish I had better news for Europe but it’s going to take […] at least five-plus years to get anything of size done", Fusco said.