Natural gas paves the way for the energy transition

In many ways, the European Commission is not in an enviable position. Energy prices are surging across the continent, there are serious concerns regarding continuing gas supplies during the coming winter season all while the urgency of battling climate change is more obvious than ever following a summer of historic droughts from Portugal to Sweden.

It is against this backdrop that on July 6th, 2022, the European Parliament in Strasbourg approved a law that will include natural gas and nuclear power in its taxonomy of sustainable energy sources. The decision aims to increase the interest in the gas sector from institutional investors, many of which are bound by internal ESG rules that often rely on the EU’s sustainability labels. Still set on meeting its target of reducing greenhouse gas emissions to 60% of 1990 levels by 2030, the European Commission was quick to point out that it continues to view natural gas mostly as a transitory fuel towards a renewable energy future.

Germany in particular has long viewed natural gas as a key component of succeeding with its ‘Energiewende’ policy, following the German government’s decision to opt out of nuclear energy and phase out coal-fired power plants. Gas is a vital resource for the country, almost half its homes using gas for heating and its large chemicals industry relying on it as feedstock. BASF’s giant Ludwigshafen chemical plant alone uses as much gas as the entire country of Switzerland. Now this dependency on natural gas has quickly become a serious challenge for Germany due to the large share of Russian energy imports.

Clearly, in 2022 the issue of energy security has been on the minds of politicians, industry leaders and consumers alike. Across European capitals, governments have been rushing to cut their dependence on Russian energy imports following the full-scale invasion of Ukraine. But for many countries finding alternative supplies has proven difficult.

LNG has quickly been singled out as key for the current energy crisis. Sourcing supercooled gas shipped on large ocean tankers would allow Germany to receive gas from regions such as Australia, the US, or the Middle East. However, Germany itself lacks crucial LNG import infrastructure needed to offload the LNG from tankers before feeding it into the regional pipeline system. Therefore, there is currently a strong political and economic drive across many European countries to build new LNG import infrastructure.

In Germany, one of the largest such project being pursued is “German LNG”, to which ING was acting as financial advisor. Located in Brunsbüttel, near Hamburg, the LNG import terminal will be able to handle even the largest LNG tankers, so called Qmax Carriers, and boasts an unloading rate of up to 14,000 m³ per hour. Demand for the terminal certainly is high. Next to the German utilities group RWE other customers have announced to make long-term capacity bookings with German LNG.

The terminal had been facing delays for some time, in part due to slow progress in obtaining necessary permits. However, following the Russian invasion of Ukraine, the project became an important piece in the government’s strategy to increase LNG import capacity. The German state decided to get involved to accelerate the project and provide equity financing. It is the intention that the project will be owned by the development bank KfW on behalf of the German government, Dutch state-owned Gasunie and RWE. It is envisioned that the terminal will initially be fully financed by its shareholders to accelerate the development process. Therefore, German LNG serves as an example of how the current political support is changing the investment dynamics for LNG projects in Europe.

ING’s dedicated Energy Project Advisory (EPA) team has been a longstanding financial advisor to German LNG. The team has been supporting the company with bankability reviews, project structuring advice, and market sounding to prepare for a potential debt refinancing.

“German LNG highly appreciates ING’s long term and ongoing advice which has helped to develop a bankable project structure, align the involved parties and accelerate the implementation process.” – Michael Kleemiss, Managing Director German LNG

Does the push for LNG infrastructure mean that the Germany’s ambitious climate plans are put on hold? Absolutely not. In the same statement announcing the government’s backing of the German LNG project, Robert Habeck, the German Minister for Economic and Climate Affairs, reiterated the goal of ultimately making the German economy climate neutral. The oil and gas industry itself will play a pivotal role in the energy transition by leveraging its technical expertise and significant financial capital while at the same time working on new energy technologies such as carbon capture and storage (CCS) and (green) hydrogen.

CCS is the process in which CO2 is prevented from entering the atmosphere directly at the site of emission and is then subsequently stored at geological underground formation, typically depleted gas fields. Early research suggests that CCS could reduce emissions on sites by as much as 65 to 80%. CSS can be included in new projects or retrofitted at existing sites and can help reduce CO2 emissions for industries which cannot easily decarbonize. Many major CSS projects are part of larger industrial clusters. One of Europe’s most advanced CCS projects is the Porthos development in the Netherlands to which ING has acted as financial advisor. Once completed, Porthos will transport CO2 from industrial sites near the Port of Rotterdam and then store it in an empty gas field beneath the North Sea.

And while natural gas consumption is likely to play a significant role in the German energy mix for many years to come, new gas infrastructure projects today must already look beyond the age of fossil fuels. Hydrogen will likely become a more important commodity, given it uses as both an energy source as well as a chemical feedstock. Because hydrogen can be transported via pipelines, similar to natural gas, new infrastructure projects today can improve their long-term viability by already including an option to become hydrogen ready in the future. One such project is the proposed EUR 1 billion Delta Corridor pipeline development which would transport Liquid Petroleum Gas, Propylene, Hydrogen, and CO2 between the Port of Rotterdam, the Dutch industrial site of Chemelot and the German state of North Rhine Westphalia. The project would be a key step in the Port of Rotterdam’s sustainability strategy.

The oil and gas industry is rapidly changing: Global energy supply chains are being redrawn, economies are faced with historically high costs and societies demand sustainable but also affordable energy. All this forces oil and gas companies to rethink their old business practices. Therefore, the sector is adopting new technologies to meet the various challenges head-on.

ING strives to become a trusted advisor for all matters relating to the Energy Transition, ready to support its energy clients wherever this journey is taking them.