Europe Moves to End Russian LNG Imports

Plus challenges for the EU's renewables deployment, oil tanker seizures between the U.S. and Iran, Putin's new authorization for seizing western energy assets, and shifts in the Japanese LNG outlook

Heads of state from nine European countries and the European Commission meeting in Ostend to set new commitments for building offshore wind in the North Seas (Source: Wind Europe)

This week we’re tracking a number of trends, including the EU’s continued push to end reliance on Russian natural gas and its challenges in meeting renewable deployment targets. Tensions between Russia and Europe continue to flame as the former takes president action to seize European energy assets in the country. And Japan’s JERA (one of the world’s largest LNG buyers) shares what they see as the future of LNG in the region.

Europe Ending Russian LNG Imports, Introducing Joint Gas Purchasing

DRIVING THE NEWS: Europe has announced new steps to end seaborne LNG imports from Russia—one of the last remaining energy links between the two entities.

• While most imports of Russian energy have already been banned by European countries, LNG has continued to hold a special carve-out in the current western sanction regime. Russian tanker imports of LNG surged 38% in 2022 after other gas supplies ended, delivering more than 15 million metric tons as Europe desperately searched for supplies last year.¹

• Now European countries are looking to fully cut off Russian LNG going forward. Many EU countries, such as the Netherlands, are no longer signing new Russian LNG supply contracts but are unable to withdraw from current agreements without EU action. (Wall Street Journal)

Figure 1: Monthly EU imports of Russian LNG (Source: Wall Street Journal and Kpler)

WHY IT MATTERS: The key question is whether halting Russian LNG imports will do more economic damage to Russia or to Europe.

• LNG exports to Europe totaled roughly $27 billion in revenue for Russia in 2022, a large sum but small in comparison to the country’s crude oil revenue (which averages around that amount monthly). Eliminating this revenue could have limited financial impacts on Russia, but still provide an important political signal by Europe.

• The EU is already on track to end Russian energy imports by 2027, but is considering the benefits and feasibility of accelerating that phaseout.

THE CONTEXT: Europe is entering the spring with gas storage higher than expected—a record high 55% filled as of March 2023 when typically gas stores are at their annual low (this compares to 26% at the same time last year, European Council).

• The high storage volume has given Europe more breathing room, and allowed them to consider more substantial measures to eliminate dependence on Russian energy.

• The challenge is that any additional EU-wide sanctions to complete restrict Russian LNG would require unanimous agreement among EU members, which would be difficult. Alternative solutions are being considered, such as allowing EU governments to limit upfront bidding for capacity for Russian LNG deliveries.

DIVE DEEPER: Earlier this month Columbia’s Center on Global Energy Policy published a paper exploring the implications of doing away with Russian LNG flowing to Europe. Also interesting is an op ed in Euractive where Andrii Zhupanin, member of Ukraine Parliament and chairman of the subcommittee on Natural Gas Policy, makes the case for eliminating Russian LNG to Europe.

IN RELATED NEWS: The EU also introduced a new plan for joint natural gas purchasing this week, which will allow companies to register a requested volume and match global suppliers with European buyers with the goal to meet 15% of the EU’s November gas storage target (Reuters). The system excludes Russian supplies.

Europe Struggles to Meet Renewable Deployment Goals

DRIVING THE NEWS: Last week leaders from nine European countries and the President of the European Commission² met to renew their commitments to expanding offshore wind and renewables more broadly on the continent. (Wind Europe)

• During the meeting, leaders signed the Ostend Declaration and the Energy Minister Declaration, which together aim to deliver cross-border projects, increase the deployment of offshore wind in Europe (from 7 GW/yr of production today to 20 GW/yr in the near future, Reuters), and develop the “offshore wind grid of the future.”³

• Ahead of the meeting, more than 100 clean energy companies came together to outline ten points of what is needed to deliver on the EU’s offshore wind and renewables targets (Industry Declaration).

WHY IT MATTERS: In the middle of the energy crisis last year, Europe was committed to increasing the deployment of renewables to meet its members’ needs and grow its energy security, but so far there has been little additional progress. (Wall Street Journal)

• A December report from the IEA confirmed that the EU is off track to meet its 2030 climate target, identifying the main issues as 1) lack of policy support and 2) long delays for project permits.

• “It’s becoming almost comical: The gap between what European policy makers are saying and what’s happening on the ground is absurd,” said Morten Dyrholm, SVP at Vestas Wind Systems (Europe’s largest turbine maker). Duncan Clark, head of UK at Ørsted, echoed this perspective, adding: “There has been an extraordinary combination of increased interest rates and supply-chain prices that has seen the estimated capital expenditure on this project rise by around 20%.”

THE GEOPOLITICS: The U.S. Inflation Reduction Act has played a role in shifting developers’ focus, including companies like Geneva-based Vitol, Italy’s Enel SpA, and others are focusing on major clean energy projects in the U.S. rather than Europe. Developers in Europe are putting pressure on the member governments and the EU to step up support for renewables.

Oil Tanker Seizures Between U.S. and Iran

DRIVING THE NEWS: Last week two tanker seizures occurred between the U.S. and Iran.

• First, the U.S. ordered the Suez Rajan, a tanker accused of evading sanctions by taking at-sea transfers of Iranian crude to China, to redirect toward the U.S. The vessel is owned by U.S.-based Oaktree Capital and operated by a Greek firm, and is not part of the typical “ghost fleet” used by Iran to evade sanctions. The seizure of the vessel was completed with the cooperation of the firms, which do not take responsibility for the ship’s cargo.

• Second, this action led Iran to capture a U.S.-bound tanker filled with Kuwaiti crude and chartered by Chevron, the Advantage Sweet. Iranian state media claims the Advantage Sweet hit another vessel and fled the scene as their justification for seizure, though the other vessel was never identified. (Al Jazeera)

THE CONTEXT: Iran has a history of seizing tanker vessels in retaliation for western crackdowns on their shipments, including in 2019 when the country stopped two British-flagged tankers and 2022 when it halted two Greek-flagged vessels.

• The U.S. 5^th Fleet has said Iran’s action violates international law and that Tehran should immediately release the tanker. U.S. Army General Erik Kurilla, a major U.S. commander for the Middle East, said this was “another in a continuing series of violations by Iran of the international rules-based order.” (AP News)

WHY IT MATTERS: The U.S. action to divert the Suez Rajan demonstrated that the country is cracking down more on its Iranian sanctions. This comes as U.S.-Iran relations continue to be tense, and negotiations to potential restore the JCPOA remain stalled (World Politics Review).

• As the global oil market continues its upheaval through the energy transition, the U.S. may be signaling that its commitment to Iranian sanctions is still strong, and discourage other potential buyers from considering ways to access Iran’s supplies (beyond those buyers such as China that already are known to purchase Iranian crude despite the sanctions).

Putin Authorizes New Authority for Seizing Western Assets in Russia

DRIVING THE NEWS: Russia’s Rosimushchestvo, the government’s property agency, took “temporary” control of power plans owned by Fortum (Finland-based) and Uniper (Germany) this week, placing them under the management of Rosneft.

• The Russian government said the decision was made specifically in response to “aggressive actions of unfriendly countries” and designed to mirror the actions taken by western governments that have seized Russian asset over the last year.

• Both Fortum and Uniper seem to be surprised by the decision, and are still working to understand the implications and shift to their business. (S&P Global)

POLICY SHIFT: Last Tuesday President Putin signed a decree that allows the Russian government to induce “temporary” state control over certain power generation assets owned by “unfriendly” states and being operated in Russia. (Bloomberg)

• According to Dmirty Peskov, Kremlin spokesman, “The main goal of the decree is to create a compensation fund for possible use in tit-for-tat measures in response to the expropriation of Russian assets abroad.”

• Russia authorities claim that the ownership of the assets is not affected, but that the owners will no longer be allowed to make management decisions. The decree can be broadened if needed, but can only be terminated by another presidential decree.

THE CONTEXT: Both Fortum and Uniper had originally sought to divest from their Russian assets at the onset of the war as many other companies did, but were unable to due to financial or legal restrictions.

WHY IT MATTERS: This is the first time that Russia has seized foreign assets in retaliation to the West’s campaign of freeze or nationalizing Russian corporate assets. With the introduction of the decree, it is likely that more seizures will come from the Russian government in the near future.

• For any companies that were unable or unwilling to leave Russia prior to now, this new authority bring substantial risk to their operations and signals a more aggressive response to the parallel economic conflict ongoing between Russia and the West.

DIVE DEEPER: Reuters published a list of energy companies that were taken over by either Western or Russian governments. Also official statements from Uniper and Fortum.

Japanese LNG Buyer Outlines Shifting Trend in Asia

DRIVING THE NEWS: JERA, one of the largest global LNG buyers, said it foresees lower domestic demand in Japan over the long-term and will likely be shifting much of its trade volume to other Asian countries over time.

• Yukio Kani, JERA’s new global CEO, said that the company’s transaction volumes, "may decline or may stay the same.” He added: "Japan may not need LNG for 20 years ... but other Asian countries need to replace coal with something and LNG will play an important role." (Reuters)

WHY IT MATTERS: The announcement provides insight into how the Asia LNG market may shift in the coming decades, particularly as Japan seeks to ramp up domestic energy resources while other Asian countries seek to transition from coal to clean and cheaper natural gas.

• To date JERA has continued to sign longer-term contracts, including one with Oman LNG last December for 800,000 tonnes/yr for 10 years and a more recent deal with Venture Global (World Oil). But the CEO’s statements make clear that these supplies will likely play a larger role for other Asia countries, with JERA acting as a regional purchaser.

• At home in Japan, the company is shifting focus to grow its renewable power assets business and supply chains for ammonia and hydrogen. This move is likely in alignment with the Japanese administration’s efforts to reduced energy dependence on foreign nations, which is particularly acute for Japan.

1. In particular, Belgium, France, the Netherlands, and Spain substantially increased Russian LNG imports during the energy crisis.

2. The meeting includes heads of state from Belgium, Denmark, German, the Netherlands, France, Ireland, Luxemburg, Norway and the UK

3. As described by Wind Europe: “Today offshore wind farms traditionally have point-to-point connections to shore, delivering renewable electricity to one onshore landing point only. In the future hybrid offshore wind farms will serve as interconnectors between countries and deliver their electricity to multiple markets. An interconnected and meshed offshore wind grid will distribute electricity more efficiently, improve supply security, lower the costs for offshore wind and reduce its impact on maritime biodiversity.”