The war in Ukraine is leading Europe to fundamentally reassess its dependence on Russian gas. Across the Atlantic, in the United States, a dozen fully permitted liquefied natural gas (LNG) export projects await investors so they can start construction. This is an obvious trade: Shouldn’t Europe rely on the United States for its gas needs rather than Russia? Having Europeans invest in U.S. export capacity to reduce their medium-term dependence on Russia seems like a no-brainer.
Yet unlocking this trade must overcome one major hurdle: Europe’s climate neutrality goals. Europe is unlikely to use public funds to support an expansion in gas production unless that investment can be made compatible with its long-term aspirations to be climate neutral by 2050. To square this circle, Europe and the United States can make sure that their joint push for gas can support the world’s efforts to lower greenhouse gas emissions. This can happen by targeting the biggest climate prize of all: coal consumption in Asia. Here is how it could work.
First, some context. The United States has around 100 million tons of LNG export capacity, with another 20 million tons under construction and expected to come online by 2025. There are also a dozen or so projects that have export approvals by the Department of Energy and are permitted by the Federal Energy Regulatory Commission. These projects await the final touches to start construction: an equity investor, a financier, or credit-worthy customers (whose presence can help attract investors or finance). Combined, their export capacity is 187 million tons.
There is, in short, big latent demand for U.S. LNG—latent because these projects have struggled to secure finance, investors, or customers. This is where Europe comes in. European customers were critical in enabling the U.S. LNG industry: contracts with European companies unlocked the first and second wave of U.S. LNG projects. Having European customers, especially if supported by public money, could easily create a huge tranche of LNG supply.
But LNG projects are built with a 20-year investment horizon—with firm sale contracts that extend 15 to 20 years and financing that lasts 10 to 15 years. It also takes four to five years to construct a new project. For a European company that wants to be aligned with the continent’s target for climate neutrality by 2050, these time scales present a problem. A European customer might want gas in 2025 or 2030, but not in 2040 and likely not by 2045. This mismatch prevents U.S. LNG projects from moving forward with European help.
There is, however, a way out of this predicament. By the mid-2030s, Europe’s need for gas in general, and for U.S. LNG in particular, should decline. At that point, U.S. LNG could find a new home in Asia. Asia is the largest market for LNG, but it is also, by far, the biggest consumer of coal. If U.S. LNG is produced at the highest environmental specifications—without methane leaks along the production chain—there is a clear benefit to consuming LNG rather than coal. In the 2030s and 2040s, the coal fleet in Asia will also be older and easier to retire if there are alternatives. U.S. LNG could help displace coal in Asia.
Such a trade could be structured in different ways. One option would be for public financing to unlock U.S. LNG supply with an explicit promise to pass the savings to Asian customers who have found LNG to be too expensive relative to coal. In that sense, public money would provide energy security to Europe and, later, decarbonization in Asia. Or projects could have back-to-back contracts—with European customers for, say, 10 years, followed by Asian customers for another 10 years for a lower price. Either way, Europe and the United States would have to relax their policy positions regarding financing fossil fuel infrastructure.
To ensure that emissions are not “locked in” forever, the covenants governing these deals could include decommissioning provisions unless a project can demonstrate a credible path toward climate neutrality (for instance, the LNG could be used to make hydrogen with carbon capture). That way, the world gets a boost in fossil fuel supply without endangering long-term goals on climate change. It’s a win-win—for the Unites States, for Europe, for Asia, and for climate. The only loser is Russia—which makes the proposition especially attractive in today’s world.
Nikos Tsafos is the James R. Schlesinger Chair in Energy and Geopolitics with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.
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