The Dark Horse that Could Save the EU this Winter
FSR-who?
FSRU!
It’s no secret that the EU is facing disaster as lack of energy supplies sends prices beyond affordable levels, with citizens at risk of rolling blackouts this winter. As natural gas flows from Russia are reduced to near-zero, countries heavily reliant on the gas-giant are scrambling to replace supplies. This includes firing up coal and oil plants and importing ever-increasing amounts of LNG, primarily from the US. The issue is, the ability to regasify this LNG is hitting maximum utilization.
An underestimated solution in the works since the start of 2022 that’ll skirt these constraints is FSRU vessel chartering.
A Floating Storage Regasification Unit is essentially a *mobile* re-gasifier, taking LNG from a tanker then sending it through pipelines into the country it moored itself onto.
Europe has been making moves to secure these units for months now in an attempt to wean itself off Russia natural gas in the midst of this energy crisis. We go through the causes of the energy crisis in detail here, and the long-term impacts it will have (and has had) on our livelihoods here
Continue reading to find out more about the FSRU solution being pursued and its implications for this winter and beyond.
Why would a country want an FSRU?
Countries lacking domestic natural gas resources often opt to import it through a typical regasification (LNG import) terminal if pipeline transportation is not an option. An FSRU is a substitute for a regasification terminal.
In 2021 global regasification capacity reached 974 mtpa, 136 of which were FSRUs.
In other words, FSRUs made up just 14% of global regasification capacity. This shows countries historical preference of the land-based regas terminals.
So why would someone use an FSRU instead of a land-based regas terminal?
Problems with land-based terminals:
It takes 5 years to build vs. an FSRU vessel that could arrive at the destination in just 1 month
It’s capital intensive – you’ll be paying all the money upfront to build a land-based terminal, which would need willing lenders to underwrite the massive project.
For FSRU’s, depending on the contract structure, payments are made based on daily charter rates to the vessel-owner.
You can think of this as renting vs. owning
It’s permanent - if in 10 years you realize you no longer need to import gas into the region, you’re stuck with a potential stranded asset (you can convert it to another import terminal to avoid a 100% loss)
This is certainly an issue - global regasification utilization is at 37%
Who uses FSRUs?
For these reasons you often see FSRU’s being utilized by (mostly developing) countries that:
don’t have the upfront capital to invest in a regas terminal
only need gas on a seasonal basis
want to ease into the transition from coal to natural gas
Europe’s aggressive FSRU procurements
The EU has been highly active in the FSRU market, particularly Germany which has no LNG import terminals. They secured 5 FSRU charter agreements since this summer of 2022. The global FSRU fleet stands at about 50 vessels.
The 5 FSRUs will have the ability to import 25 bcm/yr. In August 2022 the EU imported an annualized 43 bcm/yr of gas from Russia. (Though in 2021 it was closer to 140.) Meaning these vessels will go a long way in securing future energy supplies.
2 of these FSRUs will be online regasifying molecules towards the end of 2022. They’ll cover about 1/5th of German gas consumption. The federal gov’t looks to spend $3.25bn on this LNG import program.
Companies with stakes in the FSRUs are committed to building and establishing the infrastructure needed to support these increased flows.
In the medium-term this will help alleviate imbalances within the EU’s gas supply/demand disposition as they work on developing more sustainable gas infrastructure to reach its goals of slashing Russia gas imports entirely.
LNG supply issues still remain. Unless a substantial portion of Russia gas is redirected towards Asia, which would free up LNG vessels to be re-routed to Europe, supply procurement could be constrained in the near-term. International gas prices are expected to remain elevated as a result, perhaps even increase further with the added buy pressure from the previously underutilized FSRUs.
Regardless, Germany will continue to buidl. On top of the 2 FSRUs flowing gas this year plus 3 more in 2023, another import terminal is being built at the location of the Nordstream 1 pipeline connection in Lubmin. The terminal will be ready by December, and can accommodate *another* 2 FSRUs.
Putting it all together
Although some pain will be alleviated through the FSRU strategy, elevated prices and LNG supply restraints will continue to place pressure on the energy-starved continent in the near-term. The longer-term focus of capital spending towards gas infrastructure however is likely to avoid another crisis next winter. We can expect the gas infrastructure system throughout most of the EU is set to shift substantially due to severing gas flows from Russia. New pipelines, gas terminals and storage facilities, gas flow reversals and conversions are some things we can expect from the continent. We can also expect interest in FSRU vessel owners like Excelerate Energy to increase as contracts and cash flows start to kick in.
As always thanks for reading! We’re always looking to learn and are up to discuss all things energy. The pendulum has swung too far in favor of delusional and unsustainable policy inorganically driving an energy transition. We have only begun to bear its consequences. We must use our outlets to educate others, and encourage them to help promote a responsible transition to environmentally friendly energy sources.