Dismantling the EU’s flawed equity LNG plan
HOT TAKE: The EU wants to gamble taxpayer money on US LNG at the worst possible moment
* I dissected the EU’s plan to invest in LNG projects on the podcast this weekend. This Hot Take distils the main message.
In an era defined by rapid energy transitions and volatile global markets, the EU is flirting with a risky strategy: underwriting foreign LNG export terminals — primarily in the US — with “preferential loans”.
The idea was included in the EU Commission’s forthcoming ‘Action Plan for Affordable Energy’ — a slate of measures designed to lower Europe’s perennially high retail energy prices.
There’s lots to like in there (e.g. accelerate energy efficiency & renewables permitting, cutting taxes, and supporting PPAs for industrial consumers). But there are a few stinkers. Chief among these is the idea of subsidising equity LNG.
Ostensibly aimed at securing cheaper methane imports, this approach smacks of desperation, raising serious questions about both fiscal prudence and the EU’s longstanding commitment to climate leadership.
At its core, the plan seeks to prop up private investors by offering state-subsidised loans, a move intended to unlock discounted LNG import deals. This is less a strategic energy move and more of a half-baked mess of contradictions, propelled as it is by geopolitical rather than economic considerations.
If it’s about to become a buyer’s market for LNG, why become a seller?
By stepping into the role of a backstop financier for American LNG projects, the EU risks trading in its international credibility on climate change for zero gain whatsoever. Rather than retaining the flexibility to manage declining fossil fuel dependency, it appears ready to entangle public funds in long-term contracts that would bake in multi-decadal offtake obligations.
Read the market, guys
This makes little sense from either a demand or supply perspective. The global LNG market is on the brink of a supply glut that will drive spot prices downward for the rest of this decade. There’s still a lot of uncertainty surrounding the timing and outlook of the glut, as explored in the recent Energy Flux mini-series on this subject (see here and here). But more benign market conditions are definitely coming, in some form or another.
Being overwhelmingly reliant on the spot market, and having paid a painful price for this dependence, European consumers are finally in line for some relief. It’s about to become a buyer’s market for LNG. But the EU wants to turn its back on this opportunity by taking equity positions on the sell side, and wear the risk of being the biggest bag holder on the energy markets rollercoaster.
Teeming with sharks
Recent real-world examples of failed equity LNG investments should give European policymakers pause. Consider the saga of Tellurian, once a promising innovator with its ‘take equity, get cheap LNG’ model for the Driftwood LNG project in Louisiana.
The business model succumbed to market pressures, ultimately collapsing under the weight of unrealistic expectations and a meme-stock frenzy that, unlike Gamestop, will not be turned into a romantic Hollywood story of David versus Goliath.
Tellurian’s fate was sealed when it sold out to Woodside, a major Australian oil and gas player now repositioning Driftwood as just another conventional equity play. That deal sold out its loyal army of retail investors for pennies on the dollar.
Similarly, Venture Global’s IPO serves as a stark warning. With its pre-launch share price being slashed from an initial $46 to $25, and subsequently sinking to a mere $15 upon float, the company’s public debut was nothing short of a debacle. (For chapter and verse on the VG fiasco, check out this scathing takedown.)
Value destruction on this scale highlights not only the volatility of LNG investments but also the risk of Wall Street sharks exploiting vulnerable investors. How do Eurocrats intend to avoid being suckered into similar fiascos? Anyone brandishing a ‘preferential loan’ from Brussels while sightseeing greenfield LNG development sites on the US Gulf Coast will be taken to the cleaners.
All risk, no reward
For large industrial consumers and domestic gas suppliers in the EU, the promise of direct equity stakes in greenfield LNG projects comes with significant downsides.
Unlike seasoned commodity traders who can navigate market fluctuations, these entities are taking on undue market risk. The proposed equity model offers the very disadvantages of ownership — exposure to a potential glut and locked-in long-term liabilities — without the corresponding upside of flexible, market-driven trading.
Unless the likes of chemical giant BASF and fertiliser producer Yara are going to invest big money in a whizzy Singapore-based LNG trading desk and strategic regasification outlets in non-Atlantic growth markets, it is hard to see how they will mitigate losses when the market inevitably softens.
Moreover, the high costs associated with greenfield US LNG sites further compound the problem. These projects are not the most competitive options on the global LNG merit order. Geopolitical pressure to invest taxpayer capital in such marginal infrastructure could undermine the rigorous due diligence typically exercised by private equity investors, leaving public coffers exposed to market whims.
Copying the failed ‘Japanese Model’
The EU draft plan points to the ‘Japanese model’ as a blueprint for success. However, this model is more of a cautionary tale.
Japan, now heavily over-contracted on LNG, finds itself scrambling to offload surplus gas to less lucrative markets in Southeast Asia. With European demand on a similar downward trajectory, there is a real danger that EU offtakers could end up with long-term contracts that mirror Japan’s current predicament — a legacy of overcommitment with little room for manoeuvre.
In sum, the EU’s proposed foray into foreign LNG investments appears to be a high-stakes gamble fraught with pitfalls. By risking public funds on ventures that have already demonstrated turbulent market behaviour, Europe may be setting the stage for future financial misadventures.
Rather than securing affordable energy for its citizens, subsidising equity LNG risks shackling taxpayers to a legacy of costly, underperforming assets at a time when the market is poised for a significant downturn. The otherwise commendable ‘Action Plan for Affordable Energy’ will be nothing of the sort if this part of it is not erased.
Seb Kennedy | Energy Flux | 24 February 2025
