The gas giant in the room

A week ago, the Estonian Prime Minister, Kaja Kallas, said she believed gas should be included in the seventh package of sanctions the EU, which for now hypothetical but likely to become an actual package soon enough.

“I think that gas has to be in the seventh package but I am realistic as well,” Kallas said, as quoted by Reuters. “I don’t think it will be there.”

It’s always good to see some sign of realism from European politicians and this is no exception. However, while quite endearing, this particular sign of realism is not exactly productive.

The EU wants to sharply reduce its reliance on Russian gas and as a result it has been chugging U.S. LNG — as well as Qatari and, gasp, Russian LNG — for months now. And it is about to plunge the world into an LNG shortage.

"By shunning Russian gas, Europe has destabilized the entire global LNG market that began the year with a precarious balance after a tumultuous 2021," a recent report by Rystad Energy said, as quoted by CNN.

Leaving aside the shock of someone daring to accuse the EU of doing anything destabilising, the Rystad report paints a quite unpleasant picture: if the EU continues to pursue its plans to reduce reliance on Russian gas by shifting to LNG instead, this would create a global LNG deficit of some 26 million tonnes by the end of the year.

This amount is equal to 7% of current global supply or about 25 days of consumption. It is also about 2 million tonnes more than what the EU imported between February and April.

"The stage is set for a sustained supply deficit, high prices, extreme volatility, bullish markets and heightened LNG geopolitics," said the author of the unpleasant report, senior gas and LNG analyst Kaushal Ramesh. And on this stage we’re about to see a gas match between Europe and Asia.

“There’s no surplus capacity across the global gas complex, leaving Europe and Asia in a tug-of-war for available supply,” Michael Stoppard, global gas strategy lead at S&P Global Commodity Insights, told Bloomberg last month.

The tug-of-war will take the shape of who can afford to pay more and analysts seem to believe this would be Europe. Indeed, EU countries, for the most part, are wealthier than most Asian countries. Some analysts are already warning that the poorer Asian economies will suffer the biggest blow from Europe’s newfound thirst for LNG. But things won’t be too rosy for Europeans, either.

Industrial producer prices in the EU soared by 37% in the 12 months to this April. The increase in energy prices was particularly marked. I think if I asked my fourth-grader what happens if the price of gas, a commodity used in quite massive amounts in industrial activity, goes further up, she’d answer pretty quickly. And the answer won’t be a happy one.

A further increase in the price of gas is a certainty and I won’t even modify this statement with “all but a”. Because the EU looks dead set on dropping Russian gas, the way it looks dead set on dropping Russian crude.

What the EU does not appear to be interested in is the finite amount of LNG available globally. Also, it doesn’t appear to be interested in methane emissions any longer, which is certainly an amusing turn of events.

The third thing the EU doesn’t appear to be interested in, but it should, is the fact that the U.S. is not producing enough natural gas to liquefy for Europe. It needs to boost output but that’s risky because the two biggest fields responsible for U.S. gas production may soon peak and what follows a peak is a decline.

The fourth and, for now, final thing the EU appears to be uninterested in, and it shouldn’t be, is the availability of LNG carriers. There are not enough LNG tankers to go around.

In the words of one LNG industry executive, “The market has exploded. It’s very hard to find any ships with length [of availability] in the market. It’s going through the roof.” Sounds cheap, right?

The more I read about the LNG market, the more everything begins to look like a very bad joke. If it was, it would probably go like this:

Did you hear the EU is quitting Russian gas? Yep, after decades of importing it on the cheap, even during the Cold War, now it’s suddenly immoral, so they’re dropping it. You’re asking where else they’ll get gas from? That’s simple, the U.S. stands ready to help. It will have to seriously boost its own gas production to do that but where there’s profits, there’s a will, am I right?

But wait, there’s more. Even if the U.S. pumps enough gas to cover EU demand, which it can’t do so quickly, there are not enough LNG tankers to carry the gas. So, there’s not enough gas, there aren’t enough tankers but Europe wants its LNG. Guess where prices are going! End of joke that’s not a joke.

Perhaps the most hilarious part of the situation is that the EU seems to be afraid of Gazprom turning the taps off. Gazprom has probably got tired of repeating they have no such plans — and why would they as long as buyers are paying — but the fear remains. I don’t know, maybe there’s some rudimentary awareness among the high European ranks that they have overdone that thing with the sanctions and some retaliation might be in order.

The other hilarious thing is the Estonian PM’s statement from the beginning of this post. The three Baltic states earlier this year proudly declared they will immediately suspend all imports of gas from Russia and will instead import from Poland and from Latvia.

Unfortunately for them I came across a highly fascinating press release by Latvia’s state gas company from about the same time, in which it said it had just closed an eight-year gas delivery contract with Gazprom, with the gas to be paid for in rubles, per Gazprom’s new requirement. Amazingly, the press release has not yet been taken down.

Empty pride seems to be going around like herpes in Europe. Bulgaria’s Finance Minister just last week, also proudly, said “Bulgaria will never again negotiate with Gazprom for supplies.” I’ll wait until you stop laughing.

It’s a rule in nature, I think, that the smaller and more insignificant you are, the louder you are when you want to impress someone big and strong. It’s a question of defence, I imagine.

Unfortunately, sometimes the big and strong someone turns out to be a rotting corpse, which, for obvious reasons such as lack of vitals, cannot provide the defence needed by the small and insignificant creature. Things don’t end well for small and insignificant creatures that made themselves small and insignificant in the first place.

Take a look at those industrial production prices again and tell me I’m exaggerating, after you recall that industrial price inflation inevitably passes on to consumer price inflation.

And gas prices are not going down, not in the directly observable future, which I’d say is about year-endish. Right when all the EU’s oil sanctions against Russia should kicked in. Hypothetically, it will be an interesting winter. Also hypothetically, it will be a very interesting winter.