What happens after Europe’s energy crisis?

Good morning and welcome back to Energy Source, coming to you from New York and Brussels today.

After rising modestly in the first week of trading after the new year, oil markets hit the skids yesterday with Brent crude falling 4 per cent to $75.65 a barrel, rebounding only slightly on Tuesday morning.

The sharp decline followed Saudi Arabia’s decision to cut its official selling price for oil exports in February. But it also reflects traders’ concerns that steady growth in oil supplies from countries outside Opec+ and an uncertain economic outlook will keep a lid on prices this year, despite the Israel-Hamas conflict in the Middle East.

But this week our main items come from Brussels, where Alice Hancock analyses the EU’s growing reliance on US liquefied natural gas and what the bloc’s emissions trading system will mean for those imports.

Thanks for reading — Jamie

Brussels’ energy security conversations are subdued, but not yet gone

Despite the January chill, you can already feel the political heat in Brussels as the EU gears up for elections June 6-9 — which overlaps with the date that Belgians go to the polls to elect a new national government.

Energy is notable for its absence as a major campaign issue. Had the votes been run this time last year, or in 2022 when Europe was amid a gas crisis prompted by the war in Ukraine, the picture would have looked very different.

Back then, gas prices were double what they are today.

The EU — a net importer of energy — has undertaken a major overhaul of its sources of gas supplies and boosted its storage, which is now about 85 per cent full despite being midway through winter. Mild weather has helped.

Previously, two-fifths of EU gas came from Russia through pipes running east to west. That fell to 13 per cent last year, according to S&P Global Commodity Insights, while the US became the EU’s biggest supplier of LNG with a 45 per cent share.

Maintaining the new status quo and keeping prices at pre-2022 levels is up to the EU’s allies, Toby Rice, chief executive of the US’s largest natural gas producer EQT, told me on the sidelines of the UN’s COP28 climate summit in December. “We’ve got to get Europe strong so they get back in the game.”

Rice argues EQT could build infrastructure for imports of LNG into Europe that would cover the EU’s gas needs and cost no more than $100mn in upfront construction cost. “And that alone would provide energy security, not just for one year but for the next 30 years.”

But that depends on EQT’s ability to persuade US lawmakers to grant permissions for the necessary production and infrastructure: “That’s where our allies can help signal that we need this,” Rice said.

Another crucial factor will be the EU’s appetite to sign up to long-term fossil fuel contracts while it’s aiming to hit net zero emissions by 2050. “If Europe’s plans get to a place where they don’t need it then that LNG can roll around to other parts of the world to replace coal,” Rice suggested.

The irony of the US position at COP was its determination to back language in the final UN agreement that called for a “phase out” of fossil fuels, despite record levels of oil and gas production. As noted in last week’s newsletter, the US is on track to extend its dominance of the LNG market this year.

In the end, the COP language was much more tepid, but Rice, who (for obvious reasons) markets gas as a future-proof low-carbon fuel when paired with carbon capture technologies, did not mince his words on the impact of “shunning oil and gas companies out of the energy transition”.

“That’s led to a world where we’re where we are today, where you have skyrocketing emissions, energy security is crippled, and energy poverty is increasing. I think it’s time for us to take a little bit of a step back and maybe think about some alternative solutions.” (Alice Hancock)

What the EU’s emissions trading system means for LNG imports

The EU’s emissions trading system, a cap-and-trade mechanism designed to charge polluters for their greenhouse gas emissions, has been extended to shipping as of January 1.

That plan, which will be introduced incrementally and cover all shipping by 2026, has caused a ruckus between Brussels and southern European member states, but could also impact already volatile LNG prices. A cold snap in northern Europe and record LNG imports in Asia will probably raise spot gas prices this month, analysts say.

György Vargha, chief executive of Swiss energy trader MET International, said the measures would “definitely hit the price” of gas as it applies to floating LNG tankers.

Increases in emissions pricing would also affect which containers traders would use to store LNG. “There’s a lot of different types of LNG containers,” he said. “Some are 30-40 years old and some are modern. There’s a massive difference between fuel consumption [of each type].”

MET estimated the carbon price, currently hovering around €78 per tonne of Co2, could add as much as 5 per cent to daily costs of LNG shipping. Analysts said this could lead to slightly higher costs for shippers or cost increases for businesses and consumers already struggling after two years of record high bills.

Graeme Wildgoose from energy brokerage Poten & Partners said while the additional cost was “not material yet”, it was “a sign of where the winds are blowing. It will become more material”.

The risk isn’t going anywhere either — especially in light of recent conversations about a global levy on shipping emissions that could go towards climate finance. However, there was notably still strong opposition to this plan, specifically from Chile and Brazil, when it was raised through the International Maritime Organization last year.

The way the EU has structured the maritime ETS means that ship operators — and not their owners — will bear the cost but it will also earmark revenues generated by the system for innovations to help ships decarbonise, according to the European Community Shipowners’ Associations.

The issue for Europe is one of competitiveness, said James Waddell, gas analyst at Energy Aspects, who calculated that emissions costs could add around 7 per cent to prices by 2027. “If you have production in Europe that tends to go to other places in the world it adds to the incentive to produce closer to those places.” (Ian Johnston and Alice Hancock)

Power Points

• US shale magnate Harold Hamm is trying to sell oil and gas jobs to an increasingly sceptical Generation Z. Can he succeed?

• A Portuguese power plant is trying to show that pumping water 7km up a mountain can be an essential — and commercially viable — renewable energy project.

• Energy supply is critical but business must also reduce energy demand, writes Ana Botín, executive chair of Santander and chair of the International Business CounciI of the World Economic Forum.

• Lex explains why Shell’s downstream weakness is bad news for the global economy.

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and David Sheppard, 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.