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energy reporter Daniel Mercer

Europe looks to US 'freedom gas' as the continent seeks energy independence from Russia

Europe is pinning its hopes on imports of US liquid gas partly replacing Russian supplies. (Supplied: Woodside Energy)

Moves by Europe to wean itself of Russian gas in the wake of Vladimir Putin's invasion of Ukraine are likely to unleash a wave of investment in so-called freedom gas from the United States, observers say.

But experts caution European efforts to shake Russian dependency will be "extremely challenging" given the country delivers 50 per cent more natural gas to the continent than Australia exports in the form of liquefied natural gas a year.

Australia's is the world's biggest producer of liquefied natural gas, which unlike conventional supplies has to be chilled to minus 160 degrees Celsius to be loaded on to ships.

As the fallout from the war in Ukraine intensifies, there have been growing calls for countries led by the US to replace Russian supplies of gas to Europe.

This week, German Chancellor Olaf Scholz announced plans to build two LNG import terminals as part of a host of measures to break his nation's dependence on Russian gas.

The upheaval in Europe has also prompted Germany to consider pushing back its plans to phase out nuclear power while potentially increasing its use of coal-fired electricity in the short term.

At the same time, Berlin has also flagged its intention to speed up spending on renewable energy.

German Chancellor Olaf Scholz says his country will turn away from Russian energy supplies. (AP: Michael Sohn)

Weaning 'not possible' overnight

Massimo Di Odoardo, who heads gas analysis at global consultancy Wood Mackenzie, said Europe would "inevitably" turn away from Russian energy but said the Bloc would need gas for some time yet.

To that end, Mr Di Odoardo said the crisis was likely to spur tens of billions of dollars in spending on new LNG projects including in the US, as other suppliers looked to fill the vacuum left by Russia.

However, he said it would take up to five years for much of that capacity to come on stream, and it was unlikely to be enough to cover all of Russia's supplies.

"And that's without considering LNG demand growth in Asia.

"That's the scale of the challenge.

"It's not a response that could help this year and perhaps not even next year, but certainly over the next five years, you could see the industry responding pretty quickly."

Europe's reliance on gas from Russia, which supplies about 40 per cent of the continent's needs via a network of pipelines, has been thrust into the spotlight by the events in Ukraine.

Some countries such as Austria get 100 per cent of their gas supplies from Russia.

Next northern winter crucial

While the trade has so far continued and escaped sanctions, there are growing expectations supplies could be disrupted as the war becomes uglier.

Prices for gas in Europe have been touching record highs set late last year when gas was trading at more than $US40 per million metric British thermal units compared with a historical average of about $US5 an MMBtu.

Mr Di Odoardo said the market had everyone on edge.

He said even though Europe may be able to scrape through the tail end of winter without Russian gas, the continent would struggle in the absence of those supplies next winter.

"If all Russians flows were stopped today, Europe could still go through the winter because now the gas in storage… it's low, but it would be enough to get through the winter without a drop of Russian gas," he said.

"But what would happen at the end of the summer is because you haven't imported Russian gas, then the amount of gas you've put into storage would be extremely low, if positive at all.

Energy Market Strategies director Mark Hanna said Europe faced higher prices no matter what happened.

Energy switch to come at cost

Mr Hanna said Europe's dependence on Russian gas had grown over the decades because its supplies were among the cheapest available.

Last year, Russia supplied Europe about 40 per cent of its gas through a network of pipelines. (AP: Dmitry Lovetsky/File)

He said Europe had recently reduced its reliance on Russia, but cutting further would come with a cost.

"Historically, we used to have Continent prices of $US5 to $US7 (per MMBtu), and these were lower than Asian LNG prices," Mr Hanna said.

"The diversification away results in an increase in price because LNG and spot prices become more of the mix, and that, on average, increases the price.

"And then you've got the additional infrastructure costs associated with billions of dollars spent on LNG receiving terminals."

Credit Suisse analyst Saul Kavonic said Russia's actions were likely to fast-track Europe's adoption of renewable energy, but they also underscored the importance of reliable gas supplies.

Supply security 'to be key'

Mr Kavonic said the crisis was, therefore, likely to trigger a wave of new deals as gas buyers sought more secure partners.

"However, it plays out from here, even if we don't see any material disruption in gas flows beyond where we are, this has potentially provided a real shock to gas buyers, not just in Europe but globally," Mr Kavonic said.

"It could provide a renewed impetus by gas buyers at a global level to secure more long-term contracts for gas and make sure they have a greater diversity of supply sources, so they're never subject to such individually powerful pinch-points in their gas supply in future years."

Tanks lie ruined as the human and economic toll from Russia's invasion of Ukraine mounts. (AP Photo/Serhii Nuzhnenko)

Mr Hanna, a Perth-based former oil and gas executive, said there was little scope for Australia to boost its LNG sales to Europe because nearly all of the country's production was sold via long-term take-or-pay contracts.

However, he said other producers led by the US were better placed.

"We're already providing the world 70 to 80 million tonnes of LNG," he said.

"There are other places that are perhaps more well-positioned to take advantage of the diversification away from Russia than Australia."

Environmental downsides

Mr Di Odoardo said the scale of Russia's gas exports meant it would be all but impossible to replace its supplies with LNG.

More likely, he said, was a combination of measures including boosted LNG imports, new pipelines to places including the eastern Mediterranean and the Norwegian Arctic and a reduction in the use of gas.

Happier times: Russian Prime Minister Vladimir Putin (R) meets then US Vice President Joe Biden in 2011.  (Reuters: Alexander Natruskin/File photo)

He also acknowledged there would be consequences for the environmental, social and governance aspects of Europe's energy supplies, noting US shale gas was dirtier than much of the gas coming from Russia.

"High prices and the crisis that's happening in gas doesn't do any favours to the gas business longer-term," Mr Di Odoardo said.

"But obviously, ESG is not just about environmental issues."

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