The US “attempts to derail Nord Stream 2 are part of unfair competition practices by potential suppliers of LNG, which is more expensive compared with natural gas delivered by pipelines,” Russia’s energy minister Alexander Novak declared following the implementation of new US sanctions against the Russian energy sector in August 2017. The scenario in which US LNG could flood the EU gas market is still far away.
Washington would have to compete with the EU’s top suppliers of LNG, in particular Algeria, Nigeria and Qatar. In 2016 the 3 countries sent 492 LNG cargo ships and accounted for 85 percent of the total shipments Europe imported. Since the US started LNG exports at the end of February 2016, 4 tankers were sent to Spain, 3 to Portugal, 1 to Italy, 1 to the UK, 1 to the Netherlands, 1 to Poland and 1 to Lithuania.
Poland quick to answer Trump’s call for partnership
So as not to extend its long-term import deal with Gazprom – which expires in 2022, Poland is looking to import piped gas from Norway, more LNG from Qatar and signed a new LNG deal with the US in November 2017. Since US LNG costs more than Norwegian piped gas, it is likely to only partly replace Russian gas deliveries.
Well supplied Southern Europe looks westward
Spain represents another potential entrance to the EU market. It has an annual LNG regasification capacity of 59 Bcm/year at its 6 LNG terminals, equivalent to the annual capacity of the Nord Stream. However, when trying to muscle in on Spanish LNG terminals, the US will have to face another gas giant in the region, namely Algeria. Spain receives 55 percent of its gas from its neighbour through pipelines but also via ship. Two other Southern EU member states which received US LNG – Italy and Portugal – also depend on Algerian deliveries, 16 and 15 percent of their national gas needs respectively. After Russia, Algeria is Europe’s second largest natural gas supplier, exporting almost 90 percent of its gas to Europe. As such, state-owned Sonatrach is determined to face competition and keep its market share. In spite of forecasts to the contrary, Algeria has managed to stem its domestic gas demand growth and increased its gas exports from 37 Bcm in 2015 to 49 Bcm in 2016.
Norway likely to defend its market share
The US will also have to compete with Norway, which satisfies 25 percent of EU gas demand. As the largest regional gas supplier, Norway sends more than half of its LNG to the EU, a share it is likely to defend against US attempts to gain a foothold in the EU market. State-controlled Statoil has declared on several occasions that it is not planning on adopting a market share defence strategy. However, the output of its largest field, Troll, has been at high levels, demonstrating the company is ready to defend its market share.
Russian giant plays it cool
As for Gazprom, the Russian behemoth shows no fear of US LNG arriving in its backyard due to the lack of competitiveness US LNG demonstrates when compared to Russian piped gas. Gazprom has one of the lowest production costs in the world, and thus has flexibility on the volumes it can export and on the prices it charges. It can afford to flood the EU market with cheap gas and still make money.
“Tolling fees for liquefaction at US LNG plants should not be considered ‘sunk costs’.”
Indeed someone has to pay for liquefaction and transports, which is exactly what makes US LNG uncompetitive compared with Russian piped gas. By January 2018 Henry Hub spot price amounted to $3.69/MMBtu – and is due to reach $4/MMBtu by 2020 – to which a variable shipping cost as well as a liquefaction and gasification fees need to be added. Taking into account additional variable costs, the full cost of delivering US LNG to the European market for winter 2017-2018 was between 40 and 55 percent higher than prices on European hubs and Russian piped gas.
Gazprom’s bargain basement
Gazprom has also found successful ways to attract its European customers with bargain deals and new sales techniques. Gazprom’s deputy CEO Alexander Medvedev confirmed that the company was “not standing still and in response to changes in the market[:] we are gradually increasing our presence in the segment of short-term deals and spot operations.”
The company provides for about a third of the European gas demand with long term contracts but more recently it began using auctions on an ad hoc basis to sell gas surplus on the European market. It also started reaching out to EU customers it did not supply through pipelines. Since September 2017, Spain has been receiving several Russian LNG cargoes from Gazprom, but also from the Yamal LNG plant operated by Novatek, a private Russian energy supplier. Gazprom attempted to assert its competitiveness in former Soviet republics, in particular Lithuania and Ukraine, which have shown their readiness to pay a higher price to avoid dependence on Russian gas deliveries. Russia’s giant offered its Baltic opponent a 23 percent discount on pipeline gas supplies and brought its price for Ukraine deliveries into line with prices the former Soviet republic is getting from EU states. Following the energy crises and the annexation of Crimea, pipelines between Slovakia and Ukraine have been modified to allow gas to flow in both directions, and thus the EU now supplies Ukraine with gas at a cheaper price than Gazprom’s according to Ukraine.
Gazprom the gas tsar
Besides having an unrivalled competitiveness and the capacity to overflow the EU market with cheap piped gas, Gazprom has several LNG plants, 3 of which are located in Western Russia/Siberia, namely Shtokman and Yamal, in addition to its Baltic LNG plant due to start operations in 2022. This will allow Russia to defend its market shares on both fronts: pipelines and LNG.
In fact, a loophole in US sanctions enables Russia to export LNG everywhere in the world, including the US. Sanctions apply to entities, not to the commodity itself. This is how the first LNG shipment from the Yamal LNG plant ended up delivered amongst LNG from other countries by a French tanker in Boston 28 January 2018. The cold spell that hit the Northeast of the US generated a sudden rise in gas demand, which ironically could not be met by national production due to insufficient pipeline and storage capacity. Russian LNG found its way onto the global market through “delivery of indistinguishable molecules sourced from numerous producers by a non-sanctioned entity,” according to Forbes.
US LNG bankruptcy boom
Not only the US narrative of self-sufficiency in natural gas now appears less credible, but the capacity of the US to overtake Gazprom in Europe has also been tested, without success. In November 2017, a data leak exposed US company Navigator Holdings, which loaded its ships with Russian LNG to deliver it to Antwerp LNG terminal in Belgium. This serves to confirm that the US does not currently have the capacity to fully replace Russian piped gas in Europe. Cheniere’s plans to send 50 percent of its total LNG exports to Europe seem hard to achieve when prices at their current levels are leading to an ever-growing number of US producers to file for bankruptcy. According to a Haynes and Boone report, no less than 116 American gas and oil producers filed for bankruptcy between January 2015 and August 2016.
Diane Pallardy studied an MA in Politics and International Relations at the University of Kent, and MA in World Politics and Fossil Energy at the Higher School of Economics, in Moscow.