Winter is coming: The LNG crisis Europe cannot afford to ignore

Europe faces a looming LNG crisis as winter approaches, a situation that cannot be ignored. On Friday, Bangladesh paid $28.03 per million British thermal units for four LNG cargoes, equivalent to $163 per barrel of oil. Despite this, Qatar attempted to send an empty tanker into the Gulf but was forced to turn back after a few hours.

Such actions indicate a dangerous yet largely unnoticed gas struggle in the region. The US military has been closely monitoring the situation, escorting oil tankers through the Strait of Hormuz due to Iranian attacks. Meanwhile, Gulf producers have established a complex logistical shuttle scheme, involving third-party tankers in the Gulf of Oman, to ensure oil continues to flow despite the risks.

However, gas presents a more significant challenge. An LNG tanker costs about $240 million and carries approximately $114 million of gas, presenting a higher risk-reward balance compared to crude tankers. In March, a sea drone, possibly launched by Ukraine, disabled Russia’s Arctic Metagaz in the Mediterranean, causing the ship to burn out completely within days.

On July 7, the Qatari LNG tanker Al Rekayyat was hit by a projectile in the Strait of Hormuz, igniting its engine room. The Gaslog Shanghai suffered a similar attack on July 31. Despite the damage, a few LNG tankers are currently waiting to enter or leave the Gulf, signaling the potential seriousness of the situation. Unlike oil, liquefied natural gas (LNG) cannot be transported through bypass pipelines.

Major gas liquefaction plants inside the Gulf, such as Ras Laffan in Qatar, do not have an alternative to the Strait of Hormuz. In fact, Qatar's LNG plants were badly damaged by Iranian attacks early in the war, leaving 17 percent of capacity offline for several years. As a result, the Gulf, primarily led by Qatar, supplies a fifth of global LNG.

Currently, QatarEnergy has extended its force majeure, suspending shipments of LNG to Pakistan, Bangladesh, and Italy's Edison into early November. While crude oil prices have not yet recovered from their early war peaks of $118, East Asian spot LNG prices remain the most expensive since Russia's gas cut-off to Europe four years ago.

EU gas storage levels are critically low, with only 66 percent full by the end of last week, the lowest on record over the past 165 years. Despite assurances that the Strait would return to normal soon, forward prices for winter gas have remained below those for summer, discouraging companies from storing more. European storage levels should be adequate, but the reality is that Europe will likely need to import more LNG this winter than last due to limited storage capacity and limited Russian supplies.

The UK, a major gas importer with falling domestic output and limited storage capacity, is particularly exposed. Winter weather conditions, including potential sharp cold snaps, could further exacerbate the crisis. Europe's hot, dry summer has depleted hydroelectric reservoirs, making it crucial to rely on LNG imports during this period.

Europe's hot, dry summer has depleted its hydroelectric reservoirs, and the strong El Nino phenomenon is expected to bring relatively warm, wet conditions to the continent, including key global gas-consuming zones like Japan, South Korea, and northern China. However, there is always a chance of sharp cold snaps, especially in January and February, adding further risks to the situation.

Technical breakdowns, even potential Russian sabotage, could worsen the crisis. With limited storage, Europe will probably still need to import more LNG this winter than last. If Gulf exports do not revive, Europe will have to compete with Asian countries, which have poorer gas import infrastructure, potentially leaving smaller countries, like Bangladesh, at a disadvantage.

The South Asian state has already paid $2.1 billion for spot LNG since April, far exceeding its contracted Qatari supplies' $1.2 billion. As new LNG supplies come online, particularly from the US, and major expansions in Nigeria and Canada are expected, Europe can look forward to stronger years for new liquefaction capacity by 2028, 2029, and 2030.

However, these developments will not alleviate the current crisis. Europe continues to boost its renewables, with South Korea and Japan gradually restarting or expanding their nuclear power generation, and Pakistan's solar boom alleviating its energy exposure.