(Source: Aura Sabadus)
(Source: Aura Sabadus)

Aura Sabadus is an energy and cross-commodity specialist at Independent Commodity Intelligence Services (ICIS). She is based in London.

Russia’s invasion of Ukraine triggered a gas supply crisis of unprecedented magnitude in Europe and introduced a slew of disruptive risk factors that will reshape energy markets for years to come.

Increased geopolitical risk is accelerating the globalization of natural gas flows, while the shift from fossil fuels to renewables is pulling in a deglobalizing direction, prompting the decentralization of infrastructure and the fragmentation of energy markets.

With strong international commitments, the world is set for full decarbonization by the middle of the century. Much less clear is the intermediate term, the transition period when natural gas is still required as a backup fuel to intermittent renewable generation. This transition period, therefore, will have wide-ranging implications for the ways we produce, price and consume energy, and could undo the political alliances and the economic foundations that underpin current arrangements.

In this fast-changing reality, the emergence of the U.S. as the dominant natural gas and renewables producer and exporter would not only provide more stability to energy markets but also guarantee a smoother transition to fossil-free economies.

Here is a look at the factors at play that have presented the U.S. with one of the largest energy opportunities it has seen in decades.

US LNG’s big moment: imports rise 70% in Europe

Up until the start of Russia’s war, natural gas supply disruptions in one corner of the world would have barely reverberated in other parts because flows had been shaped by regional pipeline networks covering limited geographies. But with Russia—a leading exporter of natural gas to Europe—cutting pipeline gas exports to Europe by nearly 80%, all that changed as widespread shortages began to appear around the European market. However, it opened the door for LNG, particularly for U.S. suppliers.

Historically, Russia had exerted a strong energy influence over Europe, supplying one-third of its total imports in recent years with largely dictated prices and contractual terms. Strapped for options, the EU turned to the LNG gas market while also seeking to fast-track the deployment of wind and solar capacity. These efforts have culminated in LNG becoming the primary source of energy supply in less than a year, rising year-on-year close to 70% in 2022, according to internal data.

Meanwhile, the U.S. has emerged as a primary supply partner, particularly thanks to the country’s shale gas revolution.  Simply put, U.S. LNG exports have seen extraordinary growth in recent years since opening its first LNG export terminal in 2016. Moreover, with Europe’s LNG importing capacity set to expand in the short-term by one-third, the market opportunity for the U.S. to become the dominant force in LNG supply for decades to come is massive.

The deglobalizing forces of renewable energy and US opportunity

While geopolitical tensions are making natural gas markets more global, remarkable advances in renewable energy are creating a new localized and decentralized approach to energy markets. European consumers have already demonstrated their influence in rebalancing markets toward renewables by reducing natural gas demand by an estimated 15% below the 2017-2021 average in the face of a severe gas supply shortage.

The U.S. has keenly spotted the parallel energy opportunity that exists here in relation to renewables and has dedicated vast sums of money to become a dominant player in this space. If the U.S. is successful and achieves the preeminent position in the renewable supply chain, the U.S. will be able to rewrite decades of historical market agreements in the years ahead across both LNG and renewables.

US LNG could alleviate geopolitical risks

The emergence of the U.S. as the dominant producer of LNG will also help to promote the U.S. as a foremost provider of LNG, but also a supplier that is insulated from geopolitical risks in the same way that others are not, thus boosting the perception of the U.S.’ export pipeline as one of the most reliable. This is because, unlike heavily-politicized Russian pipeline or LNG exports, the U.S. industry is driven by private enterprise, which responds to global demand and supply signals.

An energy face-off: globalization vs. deglobalization

Deep into the fourth industrial revolution, opposing forces are reshaping the world in this energy transition period: globalization caused by the natural gas market versus deglobalization caused by burgeoning renewable energy markets. Geopolitical strife is simultaneously influencing these forces and being influenced by them. In the long term, the world is heading for greener economies of scale which will entail the full replacement of fossil fuels, decentralized energy systems and real-time markets. The intermediate period, however, will be even more interesting to watch and, as always, the U.S. will be called to play a significant role.