EU proposes first batch of sanctions on Russian LNG

Brussels: Despite the sanctions on imported natural gas, Europe has continued to import vast quantities of LNG from Russia in 2023.

The proposed sanctions would prevent EU countries from re-exporting Russian LNG after receiving it and also ban EU involvement in upcoming LNG projects in Russia.

The proposal also suggests prohibiting the use of EU ports, finance and services to re-export Russian LNG.

Over the past two years, the U.S. and its Western allies have imposed a raft of sanctions on Russian energy commodities, including a $60-a-barrel cap on Russia’s seaborne exports of crude oil. Europe has, however, shied away from placing limitations on Russian gas, hardly surprising considering that the share of Russia’s pipeline gas in EU imports exceeded 40% before Russia invaded Ukraine.

Since then, the continent has been largely successful in weaning itself off Russian energy, with gas imports from Russia falling dramatically. And, now Europe is getting ready to pull the trigger: Politico has reported that the European Commission has proposed sanctions on Russia’s LNG sector as part of Brussels’ 14th sanctions package against Russia.

The proposed sanctions would prevent EU countries from re-exporting Russian LNG after receiving it and also ban EU involvement in upcoming LNG projects in Russia. However, the measures wouldn’t directly bar Russian LNG imports to the EU.

Similar to previous sanctions, the import ban is intended to disrupt Putin’s ability to continue financing his war in Ukraine. Although Russian LNG accounted for just 5% of the bloc’s energy consumption in 2023, it still netted the Kremlin ~$8 billion in revenues.

The proposal also suggests prohibiting the use of EU ports, finance and services to re-export Russian LNG, essentially meaning that Russia would have to overhaul its LNG export model. Currently, Russia supplies LNG to Asia through Europe, where Spain, Belgium and France are major hubs.

“If they can’t transship in Europe, they might have to take their ice-class tankers on longer journeys,” Laura Page, a gas expert at the Kpler data analytics firm, has told Politico, adding that Russia “may not be able to get out as many loadings from Yamal because their vessels can’t get back as quickly.”

Norway and the U.S. have replaced Russia as Europe’s biggest gas supplier: Last year, Norway supplied 87.8 bcm (billion cubic meters) of gas to Europe, good for 30.3% of total imports while the U.S. supplied 56.2 bcm, accounting for 19.4% of total.

Lately, natural gas has staged a big rally, with Henry Hub prices jumping from $1.61/MMBtu on 26th April to $2.40 on Monday before pulling back to trade at $2.19/MMBtu in Tuesday’s intraday session as markets increasingly price in more risk premium on the heated-up situation in the Middle East and Europe gets ready to ditch more Russian gas. Although ceasefire talks kicked off again in Egypt on Monday, Israel has started its ground offensive in Gaza’s southern city of Rafah with a deal far from certain. Israel has, however, assured the U.S. that its Rafah offensive will be limited and will be focused on blocking weapons and financial support from being smuggled into Gaza. Meanwhile, Australian LNG exports are expected to drop substantially with Chevron Corp’s (NYSE:CVX) Gorgon plant expected to remain offline for at least five weeks after the oil major discovered leaks.

Long-suffering gas producers appear set to enjoy a rare boon if Europe weans itself off more Russian energy commodities. TotalEnergies (NYSE:TTE) CEO Patrick Pouyanne has predicted that natural gas and LNG prices will spike after EU sanctions Russian gas from the Yamal LNG project.

“If the EU sanctions Yamal LNG, the price of LNG will go up quickly and globally our portfolio will benefit. It’s a positive if there were sanctions, not a negative, because the cash from Yamal is quite limited. European leaders understand that their security of supply today relies on LNG and they don’t want to see price rises again… what I understand is that they might have some ideas, but from 2027 on, not before,” Pouyanne said.

TotalEnergies owns a 19.4% stake in private Russian LNG producer Novatek, owner of the Yamal LNG project in eastern Russia.

Meanwhile, U.S. natural gas futures have climbed to their highest since January, driven by rising LNG feedgas demand, a decline in U.S. gas production, and a strong demand outlook thanks to hot weather forecasts for Texas. Gas flows to the seven big U.S. LNG export plants have so far hit 12.4B cf/day in the current month up from 11.9B cf/day in April.

That said, it’s going to be interesting to see whether the natural gas price gains will hold with Europe having exited the winter withdrawal season with record amounts of natural gas in storage. The continent ended the season with more than 70 bcm of natural gas in its stores, the highest on record for this time of the year. The continent’s ongoing injection season was recently interrupted by more than a week of withdrawal due to a surprise cold spell; however, Standard Chartered has predicted that the reversal in trend will only delay the timing of when Europe’s gas stores fill up again by around three weeks.