The war in Ukraine and the US gas business

The use of hydraulic fracturing ( fracking ), which began in the United States around 2008, has produced spectacular figures for the extraction of natural gas and, even greater, crude oil, but this article only focuses on the former. From that date until 2024, natural gas production increased from 550 billion cubic meters to more than one trillion, causing the United States' long-standing trade deficit to disappear in 2014 and generating a surplus that has grown to 206 billion cubic meters by 2024.

Part of this surplus could be absorbed by increasing exports to the two neighboring countries via pipelines, so that sales to Mexico and especially to Canada —with whom it maintains significant gas exchanges—rose to $90 billion by 2024. But the bulk of the surplus had to find new markets. To that end, the installation of liquefaction plants in the coastal areas of Louisiana and Texas was accelerated to convert gaseous fuel into liquefied natural gas (LNG), which could be transported by LNG tankers over long distances. The handicap was that the price of LNG was considerably higher than that transported by pipeline, as it had to incorporate the double cost of liquefaction and subsequent regasification at the destination, in addition to ocean freight.

Part of the LNG could be directed to Asian countries, such as Japan, South Korea, and Taiwan, with high domestic demand and limited gas supplies, although they already had closer suppliers (Australia) or longer-standing trade history (Qatar). It could also be directed to other countries, such as China and India, which were increasing their modest consumption levels. Countries in Latin America, the Middle East, and Africa either consumed little natural gas or had their own supplies, so their import margin was narrow. Thus, the US strategy achieved an increase in Asian sales to 39 billion cubic meters by 2024, and in other regions to 15 billion. But these expansions only absorbed a portion of the extractive surplus converted into LNG.

Thus, the European continent became an essential target for addressing the growing surplus, although it presented four obstacles. First, European countries were curbing their demand for natural gas. Second, most of their consumption was supplied from Russia through a dense network of pipelines. Third, Russian imports were carried out through long-term contracts signed with the Russian monopoly Gazprom. Fourth, although they allowed for certain price fluctuations, these contracts guaranteed a stability that left no room for the speculative possibilities that come with price volatility and uncertainty.

In 2019, Europe had increased its LNG purchases to 113 billion cubic meters, but only 18 of these came from the United States. Two-thirds of natural gas imports were still carried out through pipelines, and 80% of these were supplied by Russia. It was anticipated that its shipments would increase when the second branch of the Nord Stream pipeline, connecting large Siberian fields with the northern coast of Germany across the Baltic Sea, came into operation. These trends continued in 2021, after European consumption and imports moderated. This was not until February 2022, when the Russian invasion of Ukrainian territory sparked the ongoing military conflict. Closing ranks against Russia, the European Commission decided to break energy dependence on Russia, in addition to other retaliatory economic and diplomatic measures, which were supported by the Biden Administration.

Three years later, the 2024 data reveal four key consequences. First, European pipeline purchases have fallen dramatically, reaching half of those made in 2019, due to the fact that purchases from Russia accounted for a quarter of those made at that time. Second, LNG purchases have grown to surpass those made through pipelines. Third, purchases from the United States have experienced a dramatic increase to 61 billion cubic meters and represent half of European LNG imports. Fourth, the United States has become the world leader in LNG exports (22% of the total), whereas in 2016 it did not even export LNG, and in 2019 it occupied third place, far behind the quotas held by Qatar and Australia.

A complete success for the American strategy and an advantageous scenario for certain European gas transnationals, for large shipping companies and commodity traders, and for banks and funds that hoped to create a broad LNG market that, similar to the oil market, would allow for the development of financial operations. The contracts signed by the major importers are long-term, between 20 and 25 years, but prices are based on the TTF ( Title Transfer Facility ) index. This indicator is formed in a virtual market, managed in the Netherlands, where spot and, above all, futures contracts are traded, with a significant participation of strictly financially motivated agents, who contribute to giving the index intense volatility.

This explains the lack of interest shown by the European Union and the United States in investigating the sabotage of Nord Stream II, the disabling of which had been identified as a major objective by the Biden administration. Europe's disdain for the fact that LNG purchases from its former main partners, Qatar, Algeria, and Nigeria, have been reduced, despite the fact that their prices are significantly lower than those at US prices, is understandable. Finally, the silence of the European Union authorities in the face of the increasing purchase of gas extracted using a technique prohibited by EU regulations ( fracking ) due to its environmental and health effects is understandable.

In addition to a strategic objective, the United States has secured a highly lucrative business with diverse ramifications, with LNG sales generating revenues of around $30 billion, more than half of which comes from European purchases. These figures are set to continue growing given the European Commission's efforts to further disrupt trade relations with Russia, while the Trump Administration publicly demands that European countries increase their purchases of US LNG.