Flurry of new European LNG projects risk underutilization amid muted demand

European LNG regasification projects are set to increase the continent's LNG capacity by 121 million mt/year before the end of the decade, yet with waning European demand and utilization rates at operating terminals below 50%, questions arise to the potential overinvestment and underutilization of the market.

At present, there are 42 projects across Europe with a 2025 start date, including 31 proposed projects with 11 under construction.

Europe's focus on LNG started following Russia's invasion of Ukraine in 2022 and the energy crisis that ensued.

Following decades of energy dependence on Russia, this was the spark that saw European nations turn to alternatives to assure energy security for the region.

Russian gas imports to Europe now stand at 30 million cu m/d due to the ongoing Russia-Ukraine transit deal, GTSOU data showed.

This deal, however, is up for renewal at the beginning of 2025 and S&P Global Commodity Insights analysts have forecast the likely outcome is the cessation of Russian gas into Europe.

Following the outbreak of the war, traders talked about the lack of regasification capacity leading to a wide spread between LNG and natural gas prices.

With large volumes of LNG cargoes floating on water and limited slot availability, this catalyzed record-high LNG-TTF spreads.

Platts, part of Commodity Insights, assessed the Northwest European LNG marker at a record spread of $29.55/MMBtu versus the Dutch TTF gas hub price on Oct. 3, 2022.

Since then, prices have cooled as Europe ramped up regasification capacity. Platts assessed the DES Northwest European marker for August at $10.09/MMBtu on July 12, or an 8.5 cents/MMBtu discount versus the Dutch TTF gas hub price, Commodity Insights data showed.

The loss of 30 million cu m/d will require the continent to find an alternative source of energy to bridge this gap.

However, the current growth rate for LNG projects could exceed the demand dynamics in Europe.

Muted demand

Despite the added investment into LNG projects, the current regasification facilities have been historically underutilized.

The average rate of utilization for 2024 so far stands at 46%, with the figure having remained below 70% since April 2023, Commodity Insights data showed.

Principally, this is because Europe has experienced two mild winters, combined with added Norwegian supply and renewable generation curbing LNG demand.

David Lewis, an analyst at Commodity Insights, said that "Most of Europe's regas capacity is located in markets that have low utilization like Spain and the UK, which account for around 36% of regas capacity but only 25% of delivered volumes in 2023."

"That's even more stark this year with the UK accounting for only 7% of European imports in 2024 and Spanish utilization has not exceeded 50% for almost two decades."

The use of pipeline gas allowed European countries to be flexible in issuing spot deliveries to manage spikes in demand, however, the nature of the LNG market requires forward planning to consider shipping times.

Lewis instead said that the added regasification capacity in Europe is there as an "insurance product to capture peak demand spikes."

A global arena

LNG imports into Europe are down 20% year on year across the first half to 54.89 million mt in 2024 from 68.52 million mt in 2023, Commodity Insights data showed.

Europe's energy market now operates in a global arena with the region in a price competition with Asia for LNG cargoes.

The Platts JKM, the benchmark price reflecting LNG delivered to Northeast Asia, has been assessed at an average premium of $1.26/MMBtu over Northwest Europe across 2024, with the latest assessment July 11 placing it at a $1.971 premium.

One trader pointed to a "new equilibrium," with increased regasification capacity and competition with Asia leading to persistently narrower LNG-TTF spreads.

Despite the strong regas capacity, the current LNG-TTF discounts do not cover the cost of regasification, traders said.

As a result, "stocks are high [and] traders are still preferring pipe-gas," one trader said.

This has depressed LNG demand in the continent and led to lower utilization rates across Europe.

For 2025, traders were already marketing cargoes for Cal-25 in Northwest Europe with expectations of increased supply globally to widen the LNG-TTF discounts.

Demand is expected to rise across 2025 and 2026, with Commodity Insights' analysts forecasting average demand across first-quarter 2025 to be 11.29 million mt, up from 9.97 million mt in 2024.

"We expect demand to increase in 2025-2027 for LNG as industrial demand picks up and gas pushes coal out of the power mix ... Some markets such as the UK are expected to see LNG demand increases up to 2025 as it compensates for the loss of UK Continental Shelf production," said Lewis.