Wave of Long-Term European LNG Contracts Seem Likely This Year
Natural Gas Intelligence
January 6, 2023
European LNG offtakers in 2023 are expected to continue the flurry of contracting activity that closed out 2022, as more import infrastructure comes online, larger buyers recapitalize and policies become clearer.
The International Energy Agency has warned that the continent could face a roughly 1 Tcf gap in supplies this year, meaning more work is ahead to secure additional volumes. At the same time, EU climate law requires emissions to be cut by 55% by 2030, while the bloc is ultimately targeting climate neutrality by 2050.
“Europe definitely has to continue to adjust its policies and regulations in order to take substantially more long-term LNG and replace Russian gas,” said Poten & Partners LNG consultant Majed Limam.
“The long-term environmental impact is one of the drivers – policy limiting long-term natural gas usage can only complicate buyers’ lives as they compete for long-term LNG commitments, and potentially muddle financing of supply projects,” he told NGI.
The deep-seated reluctance to sign long-term LNG deals in Europe because of broader environmental goals is beginning to ease. The 10-year supply deals that would be ideal for Europe to meet net-zero targets in 2050 are not viable for U.S. project developers grappling with cost inflation and weak financial markets, something sellers are making clear during negotiations.
Furthermore, as contract talks continue to evolve, both buyers and sellers are finding ways to accommodate one another. Some of the deals signed late last year with European offtakers included provisions to use certified natural gas or frameworks to lower the carbon intensity of U.S. liquefaction plants.
Senior visiting research fellow Agnieszka Ason at the Oxford Institute for Energy Studies said she expects some European contracts to include renegotiation mechanisms as parties search for a balance between locking in long-term volumes now and meeting future decarbonization goals.
“These contracts should serve parties well in a low-carbon future,” Ason told NGI. With that in mind, she said, sales and purchase agreements “will either already incorporate greenhouse gas emissions mitigation objectives, such as LNG sourced from certified gas or offset-paired cargoes, or, taking a long-term outlook, contain mechanisms to recalibrate contract terms in response to the emerging decarbonization requirements.”