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The Energy Briefing: Will US gas exports to Europe surge?

The Energy Briefing: Will US gas exports to Europe surge?


As US exports of liquefied pure gas have elevated, policymakers on each side of the Atlantic have seen them as a method to lower Europe’s dependence on Russian pure gas. Nevertheless, whereas US exporters have some benefits as compared to Russian gas firm Gazprom, their final success or failure shall be decided by market dynamics. In the intervening time, these dynamics usually favor Gazprom’s continued dominance.

On 25 July, on the margins of a gathering with European Fee President Jean-Claude Juncker, President Trump introduced that the European Union (EU) will quickly be a “massive buyer” of US liquefied pure gas (LNG), in what was perceived as an try to ease commerce tensions with transatlantic allies. This declaration boosted shares of US LNG exporters, and which was welcomed by a number of high-ranking EU officers, with German Financial system Minister Peter Altmaier hailing it as a “breakthrough.”

As Europe nonetheless largely depends on Russia to meet its gas wants — which have considerably elevated over the previous three years — many see US LNG as a approach to counter Moscow’s power leverage over Europe. Lengthy-standing tensions between the Kremlin and Europe — most notably over the 2014 Russian invasion of Crimea — have put power safety on the middle of the EU’s agenda, and there appears to be robust political will inside the continent to restrain Russian gas provide.

Nevertheless, Washington and Brussels’ joint willingness to increase US LNG exports to Europe may collide with the realities of the worldwide LNG market, the place Europe is in competitors with the Asia-Pacific area, and which is the first vacation spot for US LNG exports. Furthermore, if confronted with the specter of dropping its dominant place in Europe, state-owned Russian firm Gazprom might attempt to protect its market share utilizing quite a lot of totally different methods. Regardless of Trump’s pledge, on the long-term, Europe is probably going to stay a “last resort” marketplace for LNG suppliers.

Are US LNG export contracts versatile sufficient to unseat Gazprom?

Only a decade in the past, forecasters anticipated america to turn out to be a internet importer of LNG to meet its monumental power wants. The extraction of huge unconventional pure gas deposits and the event of shale-gas drilling methods have utterly reversed that view. In accordance to the BP’s Statistical Assessment of World Energy 2017, on the finish of 2016, the US’ confirmed pure gas reserves stood at eight.7trn cubic meters (cbm), equal to four.7% of the world’s confirmed reserves. In 2017 the US turned a internet exporter of pure gas for the primary time, and will grow to be the third largest exporter on the planet (after Australia and Qatar) by 2020, when volumes are forecast to greater than quadruple, from round 14.four million metric ton (mt) in 2017 to 62 million mt, because the Elba Liquefaction Undertaking, Freeport LNG, Cameron LNG and Corpus Christi LNG will come on-line.

US LNG export terminal tasks authorised by the Federal Energy Regulatory Fee (FERC)

Supply: S&P International Platts, US Energy Info Administration, FERC

The surge in US pure gas coincided with a collection of geopolitical occasions and pure disasters — together with the Arab Spring, the Russia-Ukraine disaster and the Fukushima nuclear accident — which led European leaders to interact in a dialogue tackling the continent’s power safety. Because the late 1960s, Gazprom has loved a close to export monopoly on the European gas market, and the Brussels’ political institution noticed US LNG as weapon to improve Europe’s bargaining energy within the mild of Russia’s continued efforts to destabilize Ukraine.

On this vein, in February 2016, the European Fee unveiled a number of proposals to make Europe a extra engaging marketplace for LNG exporters. The Fee emphasised three key actions for the EU’s LNG technique: constructing infrastructure across the Baltics and central and southern Europe to improve entry to the worldwide LNG market, creating an inner gas market to increase competitors over LNG and decrease costs, and intently cooperating with worldwide companions to guarantee a free and clear LNG market.

One distinctive function of US LNG exports is that they’re priced in a different way from Russian exports. Whereas US costs are listed to the US Henry Hub gas spot worth, Gazprom’s costs are listed to the worth of oil. This means that as extra US LNG tasks come on-line within the coming years, an increase in crude oil costs might harm the competitiveness of Russian gas in contrast to US LNG due to greater costs.

US LNG contracts additionally stand out for his or her flexibility. They embrace tolling agreements, which assure the reservation of liquefaction capability for a hard and fast price for durations of 15-20 yr on a use-or-pay foundation. Because of this if a European purchaser opts not to use the LNG, it is going to solely have to pay the fastened reservation payment, as an alternative of masking your complete worth of the LNG, as it will have to in a contract together with take-or-pay clauses. That is notably essential, because the take-or-pay obligations included in long-term gas contracts require consumers to pay for costlier oil-indexed gas than they really want, despite the fact that cheaper spot gas is out there within the international LNG market.

Regardless of political will, Europe stays a “last resort” marketplace for LNG

Thus, US LNG can arguably serve European consumers wanting to numerous their portfolio, and will additionally represent an efficient ceiling on European pure gas costs whereas remaining unaffected by to oil costs. Given that the majority LNG tasks from the US will come on-line by 2020-2022, there was some hypothesis that US gas will conquer the European market and significantly weaken the competitivity of Russian pipelined gas. Proponents of this argument level to Europe’s 28 large-scale LNG import terminals, which may course of up to 227 billion cbm, together with the eight small-scale amenities situated in EU nations, and the 9 extra terminals that would come on-line via 2021. As well as, the current announcement by the European Fee that it might help 14 LNG infrastructure tasks — and which can improve capability by one other 15 billion cbm by 2021 — displays Europe’s willingness to promote itself as a horny marketplace for LNG exporters.

Nevertheless, a key function of US LNG contracts is that they don’t embrace vacation spot clauses. Given the worldwide LNG market’s liquid nature, cargoes’ endpoints typically differ from their unique locations, which means that what actually issues are business contracts, as opposed to bodily shipments.

Regardless of the elevated availability of US LNG for Europe, Europe has to date constituted a “last resort” marketplace for exporters, the place they will promote their surplus of LNG, whereas Asia represents the core market of US LNG exports. In accordance to the US Division of Energy, between February 2016 and Might 2018, Europe solely acquired 11% of US LNG shipments, whereas Asian markets, the place cargoes promote at larger costs, acquired 47% of all US LNG exports. Europe’s take of US LNG has decreased up to now this yr to lower than three% of complete US LNG quantity. As well as, Europe can also be in competitors with South America, whose share of the US LNG market at present stands at 32%, up from 31% in 2017, in accordance to knowledge from S&P International Platts.

Larger gas demand in Asia has largely been pushed by China’s pivot away from coal-fired energy crops. The Chinese language authorities has launched a variety of initiatives aiming at changing coal with pure gas in factories and for residential heating, that are the primary sources of air air pollution. In its Nationwide Energy Technique unveiled in 2016, China introduced that it’ll improve the share of pure gas in its power combine to 15% by 2030, making it some of the engaging marketplace for US LNG exports.

Alongside China, nations reminiscent of Indonesia (which is predicted to develop into an LNG internet importer by 2019-2020), Thailand and the Philippines have additionally positioned using LNG on the middle of their financial improvement.

In South Asia, Bangladesh is about to be a part of India and Pakistan as a serious LNG importer, whereas Myanmar additionally has an enormous potential to turn into an LNG importer. Subsequently, within the coming years, LNG demand fluctuations in Asia may have a decisive influence on the share of US LNG within the EU power combine. If demand in China and different Asian rising economies was to expertise a serious drop, giant quantities of US LNG can be avaliable to compete with Russian pipeline gas in Europe. However, if demand in Asia stays regular as some forecasts recommend — particularly within the big markets of China and India — the prospect of a surge of US LNG in Europe will probably be considerably diminished.

Gazprom nonetheless standing agency

In addition to rising gas demand in Asia, one other hurdle for US LNG Europe is Gazprom’s traditionally dominant place within the continent. The Russian state-run firm delivered document gas volumes to EU nations in 2016 and 2017. After a decline of roughly 100 bcm between 2010 and 2014 — primarily due to a drop in electrical energy consumption, competitors with coal, and the emergence of renewable energies — gas demand in Europe rebounded in 2015 and elevated quickly in 2016 and 2017, with year-on-year demand progress of 6% and seven% respectively.

A collection of chilly winters mixed with elevated coal-to-gas switching, and the resumption of financial progress throughout Europe have been the primary elements behind this boosted gas demand, which pushed Gazprom gas exports to an all-time excessive of 193.three billion cbm in 2017. Within the present state of affairs, Gazprom, which provides greater than a 3rd of the EU’s gas, is the one participant which may meet the European corporations’ want for uninterrupted provides of cheap gas, whether or not to be used by energy turbines, area heating and cooking, or industrial shoppers.

In 2016, Gazprom introduced that it’ll search to keep a share of no less than 30% of the European market within the medium and long run, suggesting that the corporate might depend on technique comparable to that of Saudi Arabia on the oil market if confronted with the specter of US LNG. In accordance to its 2017 export figures, the corporate is consistent with its said aim, as Gazprom’s share of the European gas market elevated to greater than 35%, from about 33% in 2016, making it the indeniable chief in Europe.

This displays Gazprom’s current technique modifications, particularly the adjustment of its pricing system in response to complaints from importing nations, in addition to strain from the European Fee. At its 2018 Investor Day in London, Gazprom’s Deputy CEO Alexander Medvedev revealed that solely a 3rd of contracts are nonetheless linked to oil costs (the method most popular by the Russians), whereas one third at the moment are linked to hub costs (the market-based pricing that’s now prevalent in Europe), and one other third are hybrid contracts. Within the long-term, this shift in pricing phrases will make Russian gas extra aggressive when it comes to worth, permitting Gazprom to compete with virtually any various supply of provide.

Lastly, though the political dangers over the way forward for gas transit by means of Ukraine might create alternatives for US LNG to seize further market share in Europe within the first half of the 2020s, the Nord Stream 2 and Turkish Stream pipelines tasks have the potential to bolster Gazprom’s dominant position on the European gas market. The two pipelines have a respective capability of 55 billion cbm and 31.5 billion cbm, and would considerably scale back gas transit by way of Ukraine. Presently, neither the specter of US sanctions nor authorized efforts by the European Fee have succeeded in derailing the 2 tasks, particularly Nord Stream 2, which can make sure the transit of 80% of Russian gas exports by means of one route. These tasks will be sure that Russian gas will probably be available in Europe, whereas modifications to Gazprom’s pricing will improve its desirability, even because the continent stays solely of secondary significance for US exports.


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