As Europe shifts to clean energy, does it still need so much US LNG?

Russia’s invasion of Ukraine in February 2022 fundamentally changed the energy landscape in Europe, as Germany, France and their neighbors scrambled to ditch Russian fossil fuels.

The effort showed how quickly a modern economy can change its energy sources when it really tries. Last year, European nations erected wind turbines and solar panels at a faster pace than they had managed previously. Governments passed heat-pump incentives to switch heating processes from fossil gas to electricity, unleashing more heat-pump sales in 2022 than ever before.

But the continent did not cut out gas entirely — far from it. Along with shifting to renewables, European countries worked to swap out Russian gas for other sources, rapidly building import terminals to bring in liquefied natural gas (LNG) from overseas. The lion’s share of Europe’s LNG imports now comes from the United States, which became the biggest LNG exporter in the world last year.

When President Joe Biden paused federal approvals for new LNG export facilities in the U.S. in January of this year, LNG interests were quick to criticize the move, arguing that limiting exports would empower Putin and weaken U.S. allies. Climate advocates, including several dozen green and left-leaning members of the European Union parliament, argued in turn that with Europe’s clean energy transition well underway, the continent does not need expanded exports from the U.S., and that demand for gas will continue to decline in the unstoppable march toward electrification and decarbonization.

So which is it? Does Europe depend on the untrammeled expansion of the American LNG industry to keep its lights on and its homes heated? Or is the clean energy transition moving so fast there that the enormous buildout of U.S. export capacity will prove redundant and unnecessary?

The answer is more nuanced than one might glean from the hard-charging rhetoric for and against further U.S. LNG growth.

Europe is cutting gas use for power, not so much for buildings and industry

Europe’s gas demand last year fell 20% from the levels before the Ukraine invasion began, according to data from BloombergNEF (the research firm tracks the interconnected gas market of Northwest Europe, Italy and Austria). But based on the current policy and economic outlook, European gas use isn’t disappearing anytime soon — rather, it’s currently headed for a ​“very long, gradual decline,” said Emma Champion, head of regional energy transitions at BNEF.

The continent’s gas consumption is roughly evenly split between the power sector, buildings and industry. Electricity production is the bright spot in Europe’s decarbonization journey.

“Power is by far where you’re going to get the biggest and quickest erosion of gas demand,” Champion said. ​“It’s cheaper to build a new wind or solar plant than to run an existing gas plant in pretty much the whole region.”

Market economics alone are working against gas. Super-cheap wind and solar are cutting into the hours that gas plants can run, undermining their business model. The reduced runtimes and dampening of the business case for new gas plants push down the forecasted gas consumption for the power sector. BNEF expects Europe’s gas use for electricity to decrease by half by 2030.

The problem is that gas use in buildings and heavy industry isn’t falling anywhere near as fast. Europe did install record numbers of heat pumps in 2022 in response to the Ukraine war, shifting home heating from gas combustion to electricity. But heat-pump adoption remains highly dependent on supporting policies, Champion said, because the pumps cost three to five times the upfront price of a gas boiler in most European markets.

Case in point: Heat-pump sales fell in 2023 for the first time in a decade, suggesting the wartime surge is not necessarily sustainable. In February, the European Heat Pump Association called out countries for pulling back on the policies that helped spur the record installations in 2022. ​“The dropping sales come as the EU’s Heat Pump Action Plan, due to be published in early 2024 to support the sector, is delayed by the European Commission until ​‘a time to be decided,’” the trade group noted testily in a press release.

Gas is especially sticky for industrial uses, because few, if any, competitive commercial alternatives exist to deliver high heat without carbon emissions. Some industrial users also need gas as a feedstock for their products, such as fertilizer or hydrogen production. Numerous startups are working on technologies to turn renewable energy into high heat. But for now, BNEF anticipates industrial gas demand will remain constant out to 2050.

If European nations are serious about achieving their stated net-zero carbon goals, this pace of gas decline will have to accelerate. BNEF’s net-zero scenario sees gas use cut in half over the next two decades. But the policies in effect so far aren’t accelerating building and industrial decarbonization fast enough for this target.

In short, it’s premature to conclude that Europe’s efforts to reduce gas demand will render new sources of LNG wholly unnecessary. Gas demand has decreased, but not far enough.

Europe still needs LNG for the foreseeable future

The recent renewables buildout still leaves Europe in need of considerable amounts of fossil gas, and it has very little in the way of homegrown resources, besides Norway’s gas fields. That’s why LNG has played such a crucial role in Europe’s gas supply as it turned off the taps on Russia. The U.S. supplied 49% of Europe’s LNG imports in 2023, said BNEF European gas analyst Nnenna Amobi.

The open question for American policymakers is whether Europe’s future energy security requires ongoing expansion of U.S. LNG export capacity or if the status quo will suffice. The EU parliamentarians who defended Biden’s LNG pause wrote in their January letter that current imports are meeting demand and that gas demand is set to continue declining.

“Europe should not be used as an excuse to expand LNG exports that threaten our shared climate and have dire impacts on U.S. communities,” they wrote, affirming Biden’s decision to pause new LNG approvals pending an updated analysis of their costs and benefits.

But several factors could alter the current balance of supply and demand. For one thing, Europe still bought a significant quantity of gas from Russia in 2023 — Russian imports fell to one-third of their prewar levels, but not to zero.

The Netherlands, Belgium and France in particular purchased a lot of Russian LNG last year, Amobi noted. In January and February of 2024, Russian LNG imports to Europe actually increased year-over-year. European nations face a geopolitical imperative to stop these imports, which supply valuable cash to Russia’s war effort, even as Europe sends billions of dollars to Ukraine to counter that war effort. But Europe still needs to kick the habit.

Another key variable at play is the pace of economic recovery in Europe and in Asia after the pandemic slump and the 2022 energy crisis. Europe is still using less gas than it did before the Ukraine invasion, when high prices prompted a pullback in industrial consumption and consumer behavior. Ongoing low prices could lure consumers to burn more gas like they did before the energy price spikes of two years ago; BNEF anticipates 3% growth in European gas demand this year, rather than an ongoing decline.

If European industrial resurgence were to coincide with an uptick in China’s economic activity, it could stretch the current LNG market thin. 

“If more volume elsewhere is going to China, the need for U.S. LNG into Europe could increase,” Amobi said.

Then there’s always the risk of unexpected setbacks that put a dent in available supplies, like the massive explosion that knocked out the Freeport LNG terminal in Texas for many months back in summer 2022.

If things go according to plan, though, two new U.S. export terminals will begin operating this summer: Venture Global’s Plaquemines and Cheniere’s Corpus Christi Stage 3. Further investment decisions are expected to push global LNG production capacity up 38% by 2030, per a recent post by research firm RBN Energy. At the same time, RBN points out the percentage of LNG supply that’s actually contracted to buyers will fall during that period.

The combination of expanding LNG production and increasingly uncertain demand has kicked off considerable industry chatter around the possibility of the LNG market becoming oversupplied in the next few years.

U.S. LNG expansion does not guarantee more gas for Europe

Europe buys nearly 70% of its LNG from the spot market, Amobi noted, rather than through long-term contracts. Global oversupply of LNG would thus be good news there: It would push prices down and alleviate risk of gas shortages. That could happen even without major new LNG approvals from the U.S.

But even if the U.S. were to resume approvals for new terminals, which would arrive after years of construction, there’s no guarantee that this gas would actually reach Europe. That’s because U.S. LNG moves to the rhythms of the market, not of particular foreign-policy directives.

“Whoever pays the most is where the cargo will offload, and at the moment, the premium is to Asia,” Amobi said.

If new terminals follow the pattern of their forebears and commit their output to long-term contracts to Asia, they won’t be adding much gas supply in Europe, though this additional volume could nudge prices down in the spot market, giving European buyers an incrementally better deal. If the specter of LNG oversupply does arise, then the spot market would already be in bargain territory, far removed from the dicey days of 2022.

The U.S. could resume granting permission to LNG projects, potentially bringing gas prices down further in the long term, but it requires a rather strained causal chain to suggest the U.S. faces an urgent obligation to do so.

That somewhat tenuous benefit for Europe must be weighed against very tangible drawbacks, including the environmental and health impacts of the export terminals for neighboring communities, which tend to be disadvantaged to begin with; the carbon emissions involved in the gas supply chain, leaks and all; the immense energy needs of the liquefaction and regasification processes; and the fuel burned to ship this fossil fuel around the world. Recent research has shown the total greenhouse gas emissions of LNG are staggering, undercutting the industry maxim that gas is cleaner than coal and therefore can be marketed as a climate solution.

In short, it’s too early to assume Europe will continue to meet its needs with current levels of U.S. LNG exports; a lot can change in the dynamic global LNG market. But it seems unlikely that Europe’s energy security will be threatened by the ongoing pause in new approvals for future U.S. export facilities. After all, U.S. export capacity is already going to double from today’s record levels based on the fully approved projects that are already under construction, regardless of the pause on new federal approvals.