Europe's mammoth LNG import bill may drain energy transition coffers

(Reuters) - Europe's LNG imports are on track to hit a record in 2022, with inbound volumes through the end of September already 16.5% above 2021's full-year total and 8% over 2019's pre-COVID tally, according to Refinitiv.

The continent's scramble to cut use of Russian natural gas following Russia's invasion of Ukraine all but guaranteed more European LNG demand, and made it just a matter of time before 2022's purchase volumes entered the record books.

What is less clear is just how much this splurge on super-chilled fuel will cost, and how that may affect the region's spending power and ambitions to transition its energy system away from fossil fuels.

With budgets already shredded by the enormous costs associated with fighting COVID-19, European governments face paying out billions more on subsidies and stimulus packages to help industries and households adapt to the severing of trade ties with Russia.

Governments have been under particular pressure to rein in power prices, which have surged as utilities lurched en masse from primarily using cheap pipelined natural gas - mainly from Russia - to a more costly and inefficient mishmash of imported LNG, coal and other power-generating fuels.

And with winter still ahead, ensuring adequate power for heating and industry will become an even greater challenge as competition for power fuels picks up.

SEASONAL PEAK

Europe's brisk pace of LNG imports so far has been with a view toward preparing for winter by replenishing stockpiles.

Gas inventories in key consumers Germany, the Netherlands, France and Italy have been refilled to 90% of capacity or higher from historically low levels earlier this year.

However, with piped supplies from Russia expected to fall further in the months ahead, the region still faces a potential scarcity threat just as the peak heating period sets in.

The fourth quarter traditionally marks the high point for LNG imports into Europe as utilities stock up for winter.

In 2019 - before global demand was disrupted by COVID-19 and when Russian piped supplies still flowed normally - Europe's LNG imports increased by more than 30% in the last three months of the year from the prior quarter, Refinitiv flows data shows.

In 2021, Europe's Q4 LNG imports jumped more than 60% from Q3, although the pace of buying was likely amplified by the recovery in economic activity as COVID lockdowns eased.

This year, the weak economy alongside deliberate cuts to heating demand by cost-conscious consumers should limit the overall climb in gas use during winter.

Even so, a significant rise in LNG use from the levels seen in recent months looks likely as Russian piped gas supplies taper off. LNG import volumes of 128 billion cubic meters (BCM) through September are already at a calendar-year record and are likely surpass the 150 BCM mark for 2022 as a whole.

A more pressing question is how much Europe will need to pay to secure those supplies, given the scarcity of spare supply and the need to accommodate higher consumption in top LNG market Asia over the same period.

CLOUDY COSTS

Many LNG import deals are considered commercially sensitive, so details on the exact costs of each LNG cargo are scant.

Further complicating cost assessments is the fact that European buyers use a mix of long-term contracts and spot purchases to fulfil their LNG needs.

Even so, rough estimates are attainable using published LNG price benchmarks and assessed cargo volumes.

The lowest possible LNG cost tally for European importers would be if all purchases made so far and in the future were transacted at long-term contract prices based on an index using Brent crude oil, a widely used benchmark for the LNG industry.

With Brent-indexed LNG values currently around 60% below spot LNG prices, and several importers known to have made multiple spot market orders, such a scenario is unlikely.

Still, using the import volumes tracked by Refinitiv through September, a record hypothetical bill in excess of $60 B has already come due.

And if purchase volumes climb by 30% in Q4 from Q3 to match the trend seen in 2019, the final figure could easily be $90 B, double the roughly $44.5 B paid in 2019 and nearly triple the 2021 total of around $35 B, again assuming all purchases were made at Brent-indexed prices.

European importers may actually pay even more than that, as spot LNG prices have averaged 170% of contract-based LNG prices so far in 2022, and are expected to stay firm through year-end.

SMALLER PIE, SMALLER SHARE?

The worry for those tracking Europe's energy transition commitments is that these accumulated costs of LNG imports, alongside other expenses already incurred, drain both the funds available for decarbonisation projects and the level of ambition of the governments responsible for them.

There's an irony in that this potential diminished firepower comes when the appetite in society and government for weaning Europe off fossil fuels has likely never been greater.

But funding has always been a critical component of every energy transition plan, and the reality is that if government and commercial budgets have already been drained by imports of fossil fuels to keep the economy going, there may be little left in the kitty to finance the transition to a greener energy system.

(Reporting by Gavin Maguire; editing by Richard Pullin)

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