The EU’s mysterious Russian gas plan — and what it means for US LNG exports

Hello and welcome to Energy Source, coming to you from New York and Brussels.

Oil prices settled at a two-week high on Monday, amid hopes that a full-scale trade war between China and the US may be averted following a deal between the two nations to cut tariffs, at least temporarily.

Rising optimism among investors about the potential détente between the world’s two biggest economies also pushed up the value of global stock markets and the US dollar.

Staying with China, my FT colleagues published a Big Read on how President Xi Jinping has sparked an electricity revolution that is tackling a crucial vulnerability in the Asian nation: reliance on foreign energy.

China is on its way to becoming the world’s first “electrostate”, with a growing share of its energy coming from electricity and an economy increasingly driven by clean technologies, they write. It offers Beijing a strategic buffer from trade decoupling and rising geopolitical tensions with the US.

The country is not only rapidly advancing towards self-sufficiency in energy from secure domestic sources, but also wields vast power over the markets for the resources and materials that underpin technologies of the future.

For our main item today, Alice Hancock decodes what Brussels’ new Russian gas plan could mean for US LNG exporters.

Thanks for reading, Jamie

What the EU’s mysterious Russian gas plan means for US exporters

The future could go one of two ways for US liquefied natural gas exporters.

If an EU proposal to phase out all Russian gas imports by 2027 goes to plan, final investment decisions on 45.5mn metric tons per year of US LNG capacity could be taken this year and next, according to S&P Global figures published last Thursday.

But if it does not and there was even a “modest” return of Russian pipeline gas to Europe, alongside imports from Russia’s gas facility Arctic LNG 2, which has been subject to US sanctions, S&P warns that $120bn of investment in the US industry would be at risk.

The US accounts for about a fifth of EU LNG imports. Ryan Peay, a US Department of Energy official, said this week that Washington expected US LNG exports to double by the early 2030s.

“The future of Russian gas supplies remains the key uncertainty for US market opening,” S&P said.

The critical issue for the US LNG industry is whether the EU’s plan will actually work.

The bare bones of what the European Commission is branding its “road map” to phase Russian fossil fuels out of the EU system by 2027, published last week, are: enforcing more disclosure of information about contracts with Russian suppliers; requiring all EU member states to submit plans for how they will phase out Russian gas and oil; and prohibitions on spot contracts by the end of this year and long-term contracts by 2027.

The problem with the long-awaited plan is that no one outside the commission is sure that it will safely allow companies to break contracts with Russian suppliers without having to pay heavy compensation. Industry executives and ministries alike are concerned about the legal risk.

“The legally most rock-solid way to ban Russia’s remaining energy imports would be sanctions, but that route is barred due to it requiring unanimous approval by all EU governments,” Elisabetta Cornago, senior research fellow at the Centre for European Reform, told Energy Source, noting that the pro-Russian governments Hungary and Slovakia would block any sanctions.

The commission has suggested that it has found a workaround that would only involve a weighted majority of member states to agree and has promised to present the proposal in June.

In March 2022, EU countries committed to phase out imports of Russian coal, oil and gas “as soon as possible”, following Moscow’s full-scale invasion of Ukraine in February 2022. Since then, according to one EU official, “we’ve not done much else than working on legal possibilities to limit imports on Russia . . . how we can do this in a safe manner, in a manner that is legally solid, that avoids litigation risks, that avoids economic risks for the market participants and suppliers”.

“We know very much what we have in mind,” the official added, declining to give further details.

Member states are mystified. 

“We have been looking into it ourselves for over two years now and we really haven’t found something that could work other than sanctioning or a form of sanctions,” one European official said.

One way might be to argue that since the start of the war, the regulatory framework in the EU has made it harder to continue contractual obligations as per business as usual, so this would justify a “force majeure” interruption of contracts, said Cornago.

But, she added: “This strategy is not without risks, as companies walking out of contracts would be involved in costly arbitration.”

EU diplomats have suggested that the idea of enforcing more transparency in the market will help trace the molecules and put pressure on buyers. But it will not amount to a legal basis for a ban.

Companies, such as Sefe, the German energy company that imports Russian LNG, have said they were analysing the commission’s document. Markets barely responded to its announcement having largely priced in a complete phaseout of Russian gas. Prices moved very slightly higher last Tuesday following the announcement to €36.05 per megawatt hour but have come back down to under €35/MWh. 

The EU plan was announced as discussions are running concurrently about how Brussels could assure the US that EU companies will buy more LNG from across the Atlantic as part of an effort to lower the bloc’s trade deficit and placate President Donald Trump.

Several ideas have been suggested, including using the EU’s joint gas buying programme to collate demand and present it to the White House as an indication of how much gas the bloc could buy.

Marco Alverà, chief executive and co-founder of Tree Energy Solutions, which operates one of Europe’s biggest LNG terminals, has been lobbying several EU commissioners for the bloc to have a “strategic gas reserve” that could “underwrite additional long-term LNG purchases and help trade discussions”.

Chris Treanor, executive director of Page, a coalition of US LNG producers, said that the EU road map should have signalled an acceleration of “efforts to promote low-methane, long-term, flexible LNG contracts, including from the US”.

Dan Jørgensen, the EU’s energy commissioner, told Energy Source that it was “too early” to speculate on how the commission would present its interest.

One EU diplomat observed that the 45.5mn metric tons per year of US capacity that S&P projected could come online might become the victim of its own success: “There are a lot of questions about all the new LNG projects or liquefaction facilities in the United States, because somehow if there are too many of them the investment case is also lower because [more of them] bring the prices down.” (Alice Hancock)

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Energy Source is written and edited by Jamie Smyth, Martha Muir, Alexandra White, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.