Energy Crisis

EU’s push for Persian Gulf LNG set to worsen energy price inflation

EU’s push for Persian Gulf LNG set to worsen energy price inflation

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Published

March 22, 2022

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Published:

March 22, 2022

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The European Union wants to replace Russian gas with other sources fast, which is certain to put more upward pressure on fuel prices. Germany is in talks with Qatar to buy its LNG, but so are Japan and South Korea.

German Vice-Chancellor and Minister for Economic Affairs and Climate Action Robert Habeck has visited Qatar to try and secure shipments of liquefied natural gas (LNG) that would replace as much Russian gas as possible as quickly as possible. The Persian Gulf emirate said companies from both countries would “re-engage and progress discussions” regarding long-term contracts.

The German official declared it “good news,” but there is a long way to go before the European Union can get the gas volumes it regularly needs to fulfill the goals from its recent U-turn in energy policy, prompted by Russia’s invasion of Ukraine. For instance, Germany doesn’t even have LNG terminals with regasification facilities to get the fossil fuel to its households, heat and power plants, and the industry.

The government in Berlin recently said it would urgently build two terminals, which exemplifies Europe’s woes even better.

Energy keeps fueling inflation

The war in Ukraine worsened an already severe energy crisis and galloping inflation. Gas shortage was one of the initial drivers. In the meantime, costs spread to various segments of the economy.

Fertilizer, steel, electricity, aluminum, diesel, and wheat are all at record highs or testing them, alongside other commodities and energy and food prices. Moreover, Russia is threatening to ban uranium exports, just as Belgium decided to extend the life of its last nuclear power plants by a decade until 2035. The United Kingdom is reportedly considering multiplying the capacity of its nuclear energy fleet.

Russia is threatening to ban uranium exports, adding upward pressure to energy price inflation

The European Commission said it would make it obligatory for member states to refill gas reserves to at least 90% by October 1. The storage level is at 26%, the lowest in four years. When prices are extremely elevated and volatile, restocking will come at an enormous cost to gas buyers, traders, and consumers. Analyst Seb Kennedy said and estimated “a fierce energy bidding war” is coming.

The EU also declared 2030 as its deadline to end dependence on Russian fossil fuels, but just days later, European Commission President Ursula von der Leyen said the date would be pushed forward to 2027. On top of that, there are more than ambitious short-term targets, especially for gas. In the meantime, the EU signaled it could include energy in sanctions against Russia.

Global race for Middle Eastern LNG, oil

Habeck was not the only high-ranking guest in Qatar in the past week. South Korean Prime Minister Kim Boo-kyum traveled to Doha, and so did the representatives of Japan’s government. It earlier let some long-term supply deals expire as it wouldn’t renew them at sky-high prices, landing in what may be an even worse position now.

Qatar and the United States, Europe’s biggest LNG supplier, are the world’s biggest producers of the fuel, which is transported by sea. Russia delivers most of its gas by pipelines. It has a 66% share in Germany’s gas imports.

The government in Berlin and the entire EU are primarily looking for fast solutions, but it implies they would increase the pressure on a tight LNG market, mostly covered by long-term agreements. They must compete with China and other Eastern Asian countries that are used to paying premiums to secure the supply of liquid gas from the Middle East, so another surge in prices is guaranteed.

Qatar has little wiggle room for now

However polite Qatari officials are to foreign dignitaries, the country has little maneuvering space to divert deliveries or boost production in the short term. It has a major LNG investment plan to increase the capacity by half, but the results are not scheduled to be seen until the end of 2025.

Habeck also visited the United Arab Emirates for the same purpose and, additionally, to talk about a deal for liquefied green hydrogen, an alternative for gas. UK Prime Minister Boris Johnson went there, too, and to Saudi Arabia, trying to secure more oil.

The EU is looking to source more gas from Azerbaijan, Algeria, and Norway. Germany and Norway are discussing a hydrogen pipeline project. One solution for the EU could be to get gas from the UK, converting LNG and sending the fuel by pipeline.

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