North America’s natural gas could improve Europe’s energy security

North America’s natural gas could improve Europe’s energy security

North America possesses significant natural gas resources that could combat the linked challenges of energy supply, energy costs, and greenhouse gas emissions, according to a new McKinsey study. The new report, How North American natural gas could help alleviate the energy crisis, explains how gas exports from North America to Europe could tackle high energy prices on both sides of the Atlantic, improve energy security, and decrease GHG emissions by reducing the use of coal globally.

Both the US and Europe face a dual challenge of providing reliable energy supply while reducing emissions. Europe’s energy security in particular has weakened during 2022, due to the war in Ukraine and the reduced supply of Russian pipeline gas. With limited options to meet security of energy supply through LNG in the near-term, countries in Europe and Asia may revert to the use of domestic coal and lignite in power generation, which has a larger carbon footprint.

Europe is now beginning to act to strengthen its energy security, building infrastructure to import greater quantities of LNG – which may result in an additional 80 billion cu m of natural gas demand. Europe’s new focus on LNG infrastructure therefore opens the door wide for North American LNG exports to increase in the next 3-5 years. But that will require infrastructure investment in the US and Canada, as well, such as strategic natural gas pipelines that link up low-cost gas basins to high-demand areas. This could bring gas prices back to about US$3/MMBtu Henry Hub, which we have seen over the last decade, and potentially reduce inflation. However, investment in export capacity alone without further development of the pipeline infrastructure in North America could result in a price increase of more than US$1/MMbtu for US and European consumers.

But to justify the multi-billion-dollar up-front expense for capital projects that would benefit both Europe and North America, buyers in Europe and other LNG importing regions would need to commit to long-term offtake agreements, typically for 20 years or longer. However, McKinsey’s recently released 2022 LNG Buyer Survey indicates that buyers in Europe prefer five-year contracts over 15-year contracts, given the uncertainty of demand in the context of energy transition.

Dumitru Dediu, Partner at McKinsey said: “North American gas resources have a lot of potential to address the energy crisis of today, by improving affordability and energy security. Our analysis shows that gas infrastructure development and long-term offtake agreements are fundamental, or there will be higher prices for gas and LNG, which may have spill-over effects for power, fertiliser, and other essential commodities.

“North American gas can also help address the sustainability imperative. Many studies have emphasized the 450 Gt CO2e of remaining emissions budget to maximize the chances of keeping climate change below 2 degrees Celsius. At the current rate of 40 Gt CO2 emissions per year, we will run out of this budget by the early 2030s. The urgency to act on the energy transition could not be higher.

“The abundance of North American natural gas could pave the way to achieving the world’s decarbonization targets. Gas and LNG are proven levers that can be deployed at scale in the near term to reduce the volume of emissions produced by power generation through coal-to-gas switching, as well as enable accelerated roll-out of intermittent renewables and buy us more time to scale up other energy transition solutions over the long-term.

Luciano Di Fiori, Partner at McKinsey said: “North American gas has the potential to provide an affordable, secure, and reliable supply of gas that can improve the energy security of European countries while simultaneously reducing global carbon emissions. To amplify the use of this underused resource, collaboration and commitment is needed across the industry, regulators, and consumers.”

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