Opportunities for Ukraine from EU’s efforts to lower dependence on Russian gas

11 February 2022, 09:27 AM

The EU is expanding its infrastructure to absorb more liquid natural gas (LNG) from the United States, Qatar, and other countries, which would allow the bloc to reduce its reliance on Russian state-owned natural gas company Gazprom. Could Ukraine leverage these new LNG terminals to its benefit?

On Jan. 29, the LNG carrier ship Global Sea Spirit left Freeport, TX, bound for Swinoujscie in Poland. It’s carrying a shipment of LNG for Polish company PGNiG, purchased on behalf of Ukrainian conglomerate ERU. And this is but one link in a long chain of events that could herald the end of giant Russian state gas company Gazprom’s European dominance.

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NV Business has done a deep dive into the EU’s efforts to reduce its dependence on Russian energy supplies by pivoting towards LNG. More importantly, could this be to Kyiv’s benefit?

Late last year, when European gas prices were sky-high, a couple dozen LNG carriers sailed out from the United States to the EU. Some of them were initially heading for Asia, but diverted to Europe, in a bid to make the most of record-high gas prices.

While this did not reverse market trends, it did coincide with a temporary halt in price hikes on energy markets. Despite the festivities of the holiday season, this signal was well-received: U.S. ships diverting to Europe’s shores were plastered on the front pages of global business media outlets. This signified that the EU is looking for ways to diversify its energy supply, and major exporters are open to exploring new supply routes.

Nord Stream-2 pipeline facilities (Фото: Gazprom)
Nord Stream-2 pipeline facilities / Photo: Gazprom

According to the European Commission data, over the first three quarters of 2021, the EU increased its gas consumption by 6%, to 291 billion cubic meters.

Even during the pandemic year of 2020, the EU consumed around 394 billion cubic meters of natural gas. Domestic production is at 55 billion cubic meters, and declining – everything else has to be imported. Russia and Norway are the EU’s largest gas suppliers, covering 70% of total European gas imports between them. Russia’s share usually is around 45-50%, although it dipped by a couple percentage points in 2021 after Gazprom tapered off shipments somewhat.

Why is Gazprom so dominant?

Russia’s Gazprom plays a crucial role in setting the price dynamic on European markets, especially in Central and Eastern Europe. How did this happen?

Until recently, pipelines were the chief delivery method for international gas sales. The Soviet Union invested in a great number of these pipelines, connecting Russian gas fields with European consumers. Other major gas-rich regions are too far from the EU.

Relatively recently, major strides in the development of maritime LNG transportation have been made.

To ship LNG, the country of origin will first need to construct an LNG terminal. The gas is then loaded into a properly fitted tanker ship, which makes its way to consumers by sea. On the receiving end, another LNG terminal converts the liquid back into its gaseous form, in a process called regasification, and it is then distributed through the usual gas pipelines. And while this process is somewhat more costly than simply receiving piped natural gas, it increases market competition. Thanks to LNG, Europe can tap into U.S. and Middle-Eastern natural gas reserves.

Liquid Natural Gas carrier pictured near an LNG sea port terminal (Фото: krohne.com)
Liquid Natural Gas carrier pictured near an LNG sea port terminal / Photo: krohne.com

The share of LNG in EU gas imports was at 18% in 2020, and at 17% over the first three quarters of 2021, according to the commission’s data. The largest LNG suppliers to the EU are Norway, Russia and Algeria, who sell LNG in addition to their traditional pipeline-based shipments.

There are 29 large LNG regasification terminals in Europe, with about ten more under construction. Their total annual output will be around 50-55 billion cubic meters.

Ukraine-focused projects

Due to strict regulations on LNG carriers passing through the Bosporus to enter the Black Sea, it is extremely unlikely that Ukraine will ever get an LNG terminal at one of its ports.

The EU, meanwhile, is actively working to expand its LNG capacities, with more and more focus on Ukraine.

Greece has recently green-lit a new EUR 166.7 million ($191 million) LNG terminal with an annual capacity of 5.5 billion cubic meters. A part of the Greek government’s Competitiveness, Entrepreneurship and Innovation 2014−2020 economic development program, it is scheduled to become operational in late 2023.

This project has not been unnoticed by the United States.

“Big step forward for energy security and climate in southeastern Europe, congratulations,” said Geoffrey Pyatt, U.S. ambassador to Greece, who previously served as the U.S. envoy in Ukraine. His interest is likely caused by the United States expecting to use the new terminal to sell its gas, along with Qatar and Egypt.

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The Alexandroupoli Independent Natural Gas System could be used to serve the energy needs of southern Europe: Greece, Bulgaria, Romania, Serbia, North Macedonia and Moldova. Gastrade SA, the operator of the new terminal, also mentioned Ukraine as a potential customer. Alexandroupoli will be able to compete with TurkStream, an undersea natural gas pipeline connecting Russia and Turkey. However, TurkStream’s annual capacity is much greater than that of the LNG terminal under construction: 31.5 billion cubic meters.

Greece is also working on another terminal near Corinth, costing around $336 million, with a capacity of 2.5 billion cubic meters.

Questionable logistics

As it happens, Ukraine has experience buying U.S. LNG through European terminals. For example, in 2020, ERU delivered a shipment of U.S. natural gas to Ukraine by way of Revithoussa, another Greek LNG terminal. This gas was piped from Greece to Ukraine in the so-called “reverse” mode, going west to east, via Bulgaria, Romania and Moldova.

Importing gas through Croatian and Polish ports is also becoming a possibility. In December 2021, Ukraine and Hungary laid the groundwork for transporting up to 2.9 billion cubic meters of gas from Hungary to Ukraine, annually. According to the operator of Ukraine’s natural gas pipelines, this gives the country access to the Croatian LNG terminal on the island of Krk, with an annual capacity of 2.6 billion cubic meters.

The Polish terminal in Swinoujscie, with a capacity of 5 billion cubic meters that could be be upgraded to 7.5 billion cubic meters per year, while it shows some potential, is not yet connected to Ukrainian gas pipelines. Ukraine’s Prime Minister Denys Shmyhal said the corresponding connector pipeline will be constructed after discussing the project with his Polish counterpart, Mateusz Morawiecki, in early February 2022.

“We think there is potential in Polish and European companies making use of Ukraine’s natural gas silos, as well as in importing gas from Poland to Ukraine, including via LNG terminals,” said Shmyhal.

Two experts familiar with the gas pipelines of Eastern Europe, told NV Business that gas delivered by Global Sea Spirit will arrive to Ukraine “virtually.” It means that the shipment of U.S. gas will be physically delivered to Polish consumers connected to the Swinoujscie terminal, while Ukraine will get a corresponding amount of gas – but delivered through the existing network of pipelines across the Polish border. LNG shipments from the United States or Qatar to Ukraine are essentially test beds for new natural gas logistics.

The Ukrainian gas pipeline operator is adamant, however, that it’s viable to pipe gas in the unusual, “reverse” mode – west to east.

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